Fed’s Raskin Urges Mortgage Companies to Help Housing

Federal Reserve Governor Sarah Bloom Raskin called on mortgage companies and investors to look past their own profits and help revive the housing market to strengthen an “agonizingly slow” economic recovery.

“The government can only do so much, and relevant private sector actors need to think beyond their bottom line and focus on how their firms’ actions are or are not contributing to the economic recovery,” Raskin, the newest Fed policy maker, said today at a mortgage conference in Park City, Utah.

The comments by Raskin, appointed by President Barack Obama in October, strike a tougher tone than her central bank colleagues toward the industry and show less optimism for an economy where job growth is failing to reach its prerecession pace. She urged changes to the way mortgage servicers and investors set prices and payment flows.

“This isn’t easy, and time is of the essence because the drag on our recovery is palpable,” Raskin said in remarks at the 2011 Midwinter Housing Finance Conference. “Yes, our economy has started to rebound, but we need a strong housing market in order to ensure a complete, stable, and sustainable recovery.”

Raskin, 49, the former Maryland commissioner of financial regulation, didn’t discuss monetary policy in her speech. She has voted to support the Fed’s $600 billion expansion of record monetary stimulus at her first three Federal Open Market Committee meetings.

Income Losses

“Today, demand for housing is weighted down by the enormous losses in income and net worth that households suffered in the recession,” Raskin said. “In addition, the persistent high rate of unemployment is further depressing housing demand, creating uncertainty about housing prices, and impeding that robust recovery in the housing sector that we generally see.”

Housing prices may face “more downward pressure” because of “a pipeline full of distressed properties,” Raskin said.

Preliminary results from a federal review of the mortgage-servicing industry show that “widespread weaknesses exist,” and agencies will give more-specific findings soon, Raskin said. “These deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.”

In response to audience questions, Raskin said that borrowers have been forgotten in the mortgage agreement. “The consumer is really not part of the contract between the servicer and the set of investors,” she said, adding she hopes to start a dialogue about creating “a market that essentially does take the consumer, the homeowner into effect.”

Three Options

Raskin spoke on the day Treasury Secretary Timothy F. Geithner outlined three options for the future of the $11 trillion mortgage market, which would euthanize the government sponsored enterprises Fannie Mae and Freddie Mac. The transition to a new housing-finance system will likely take five to seven years, Geithner said today.

“Clearly the need for some kind of standardization potentially could be something dealt with as part of the GSE reform,” Raskin said in response to an audience question. “More than 90 percent of these standards are being driven by Fannie and Freddie.”

The world’s largest economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, the most during any recession since the 1930s, according to the U.S. Department of Commerce.

Round Two

To help revive the economy, the Fed purchased $1.7 trillion of assets, including mortgage-backed securities and Federal agency debt, through March 2010. In November, the central bank began a second round of large-scale asset purchases, planning to buy $600 billion in Treasuries by June.

“The financial institutions that have been bolstered directly and indirectly by government subsidy and aid must now seek to support those who have been buffeted and injured by the housing crisis,” Raskin said. “This must go beyond the corrective actions that need to be taken to rectify current deficiencies. It means that financial institutions need to understand the effects their actions will have on consumers and the country as a whole, and factor those considerations into their business decisions.”

State Probes

All 50 U.S. states are investigating the way lenders and loan servicers handle foreclosures after claims some were marred by faulty documentation or by “robo-signing,” the mass processing of paperwork without proper verification. The coordinated probe began in October after the biggest U.S. banks suspended some home repossessions to review their procedures.

Servicers collect monthly mortgage payments and may modify or foreclose on a loan in a default. They often don’t own the loans they are servicing. The four biggest companies by portfolio size -- Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc. --service about half of home loans by value, according to data from news website Mortgagedaily.com.

Foreclosures in the U.S. dropped 17 percent in January from a year earlier, according to data from Irvine, California-based RealtyTrac Inc. The data indicate “lenders have become bogged down” because of the foreclosure-processing accusations, James J. Saccacio, RealtyTrac’s chief executive officer, said in a statement yesterday.

A record 2.87 million properties got notices of default, auction or repossession last year, a 2 percent gain from a year earlier, according to RealtyTrac.


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