Roubini, Galbraith Say Regulators Should Rush Servicing Rules

A group of analysts, investors and economists is urging federal regulators to write rules by early next year governing how mortgage servicers handle foreclosures, loan modifications and other activities.

The group cited an “urgent need” to develop national standards to fight servicing fraud, which they said is slowing the housing recovery.

“The house is burning down,” Christopher Whalen, one of the signers and the co-founder of Institutional Risk Analytics, said in a telephone interview. “What we’re saying to all the regulators is you have the legal authority to act now.”

In a letter sent today, Whalen and 51 others asked regulators to draft rules as part of ongoing work on risk retention, a Dodd-Frank Act measure that requires loan originators to keep a stake in the debt they sell. The Obama administration has until mid-April to finalize that rule.

The letter was signed by economists Nouriel Roubini and James K. Galbraith and Allan I. Mendelowitz, former chairman of the Federal Housing Finance Board. It was sent to U.S. Treasury Secretary Timothy Geithner, Federal Deposit Insurance Corp. Chairman Sheila Bair, and four other regulators.

The FDIC is pushing to include servicing standards in rules about risk retention. In Dec. 1 testimony to the Senate Banking Committee, Bair said the rulemaking gives agencies “a unique opportunity to better align the incentives of servicers with those of mortgage pool investors.”

Geithner and others also have called for servicer regulation.

Writing rules as part of the risk retention language “would be mixing apples and oranges,” said Tom Deutsch, executive director of the American Securitization Forum, a New York Trade group.

“We’re not opposed to servicing standards,” Deutsch said in an interview. Drafting them, however, will take time. “If we’re going to have a debate around servicing standards, we should have that on its own merits.”

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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