By Steven K. Beckner
(MNI) – Rampant home foreclosures — elevated by high unemployment
— are slowing the recovery in the housing market and the general
economy, and “shoddy” mortgage servicing practices that aggravate the
problem must be confronted with vigorous enforcement action, Federal
Reserve Governor Sarah Bloom Raskin said Saturday.
Continuing a Fed full court press against the housing slump, Raskin
said falling home prices are hurting vital consumer spending and
impeding Americans’ ability to take advantage of the low interest rates
which the Fed has engineered.
Only about a half of homeowners are able to qualify to refinance,
she estimated in remarks prepared for the Association of American Law
Schools on Responding to Mortgage Servicing and Foreclosure Challenges,
in Washington.
Aside from weak economic fundamentals, such as the “modest” pace of
economic growth and “sustained high unemployment,” Raskin blamed
mortgage servicing companies for “critical weaknesses” in foreclosure
procedures.
Citing “a wide range of troubling issues” and the slow pace of
judicial response to those issues, she said the Fed and fellow financial
regulators are having to act to resolve them. And she said monetary
penalties will be forthcoming.
It was Raskin’s second speech in as many days. On Friday, the
former Maryland banking regulator said the “deployment of unconventional
policy tools has been completely appropriate to help promote the Federal
Reserve’s statutory mandate of maximum employment and price stability.”
Despite a better than expected December employment report Friday,
Raskin commented “although the pace of employment growth has picked up
in recent months and the unemployment rate has fallen some, the labor
market remains quite weak,” and unemployment is “stubbornly high.”
Raskin did not touch directly on monetary policy in her speech
Saturday, but her comments indicate a high level of concern about the
economy, despite the improved jobs numbers.
She linked economic weakness, the housing depression and a poorly
managed foreclosure process.
The main focus of her remarks to a group of law professors was on
“how home mortgage foreclosures hurt the pace of an economic recovery,
and how important it is that the severe misconduct that has been
uncovered in the mortgage servicing sector be addressed through
intensified public enforcement of the law as part of the overarching
effort to rebuild our damaged communities and neighborhoods.”
Although the economy has officially been recovering for more than
two years, “the pace of recovery has been modest, resulting in an
unemployment rate that has remained at or above 8.5% since mid-2009,”
said Raskin, who added that “this sustained high unemployment rate …
has contributed to an unprecedented number of mortgage foreclosures
throughout the nation.”
Hypothesizing what economists call “a negative feed back loop,”
Raskin said “this wave of foreclosures is one of the factors hindering a
rapid recovery in the economy.”
By contrast to past experience, when low interest rates have
fueled home buying and construction and in turn purchases of appliances
and other durable goods, housing has not led this recovery, she said. On
the contrary, “six years after house prices first began to fall, the
pace of the economic recovery remains slow.”
With house prices down nearly one-third since their peak in 2006,
and with homeowners’ equity down by more than $7 trillion, she said
there have been “far-reaching effects on families, neighborhoods, small
businesses, and the economy … . The fall in house prices has caused
families to cut back on their spending and has prevented them from using
their home equity to fund education expenses or start small businesses.”
“The decline in house prices has also impeded families from
benefiting from the historically low level of interest rates, as perhaps
only half of homeowners who could profitably refinance have the equity
and creditworthiness needed to qualify for traditional refinancing,” she
added.
These problems Raskin in turn traced partially to problems in
mortgage servicing.
“These problems have included critical weaknesses in mortgage
servicers’ foreclosure governance processes, foreclosure document
preparation processes, and oversight and monitoring of third-party law
firms and other vendors,” she said. “Collectively, these problems have
hampered the ability of the courts and the markets to work through the
foreclosure inventory in an efficient manner.”
Raskin listed “a wide range of troubling issues, such as claims of
missing or forged promissory notes; claims that mortgage servicers have
foreclosed on the houses of active-duty U.S. soldiers who are legally
eligible to have foreclosures halted; sworn affidavits containing false
facts that homeowners were in arrears for amounts not yet due; claims
of falsifications of documents required to transfer ownership of the
mortgage; allegations of false affidavits claiming homeowners owe fees
for services never rendered; and claims of false affidavits overstating
how much homeowners are behind on their payments.”
What’s more, she said “there is another galaxy of vexing issues
surrounding recordation and title issues and claims related to an entity
called the Mortgage Electronic Registration System, or MERS.”
Litigation has not solved the problem, according to Raskin.
“Significantly, the necessarily slow pace of a judicial response to
these legal issues hinders the ability of the housing market to regain
function and become a driver of a more-robust economic recovery.”
Because of “profound and pervasive misconduct in mortgage
servicing” and the sluggish judicial response, Raskin said the Fed and
other regulators “must create, implement, and complete an enforcement
response.”
Already, she noted the Fed and other regulators have targeted 14
large, federally regulated financial institutions where she said
“significant problems with the mortgage servicing and foreclosure
processing” were found. In April of last year, the Fed and others issued
cease and desist orders against the 14 in an effort to “improve a
homeowner’s ability to readily obtain information and assistance from
the mortgage servicer and to decrease errors made by mortgage servicers
when modifying loans or pursuing foreclosures.”
But Raskin said “the enforcement actions against these 14
institutions and the associated corrective action plans are only a start
in a comprehensive enforcement response to the foreclosure crisis.”
“Monetary penalties for the deficient practices in mortgage loan
servicing and foreclosure processing also must be imposed against the 14
institutions,” she said, adding that the Fed and other federal
regulators “must impose penalties for deficiencies that resulted in
unsafe and unsound practices or violations of federal law…”
“The Federal Reserve believes monetary sanctions in these cases are
appropriate and plans to announce monetary penalties,” Raskin said.
** Market News International **
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