–Strong Case for Broader Steps to Address Mortgage Servicing Problems
–Prevalence of Foreclosures Over Modifications Raises Macro Concerns

By Heather Scott

WASHINGTON (MNI) – Federal Reserve Gov. Dan Tarullo said Wednesday
the “hangover” from the housing bubble continues to trouble the U.S.
economy, including the overhang of homes awaiting foreclosure, which
makes a “strong case” for action in the mortgage servicing industry.

In testimony to the Senate Banking Committee, Tarullo said the Fed
has found “significant weaknesses in risk-management, quality control,
audit, and compliance practices,” and will use many of its supervisory
tools, including referring some cases to law enforcement.

Those flaws also could cause the Fed to lower the examination
ratings on bank holding companies, he said.

“I regret to say that the hangover from the housing bubble of this
past decade is still very much with us, as revealed both in the
inadequate capacity of mortgage servicers and the continued impact of
foreclosed homes on the housing market,” Tarullo told the committee.

And, he noted, “While bank regulatory agencies can and should
respond to specific failings that are being identified in our
interagency examination, there is a strong case to be made that broader
solutions are needed both to address structural problems in the mortgage
servicing industry and to accelerate the pace of mortgage modifications
or other loss mitigation efforts.”

Steps needed includes renewed attention on the “lagging incidence
of modifications,” and “it seems reasonable at least to consider whether
a national set of standards for mortgage servicers may be warranted,”
Tarullo said.

Citing the huge numbers of foreclosures — 2.8 million last year —
compared to just 520,000 permanent loan modifications, he cautioned that
“the dominance of foreclosures over modifications raises macroeconomic
concerns.”

“In the end, an overhang of homes awaiting foreclosure is unhealthy
for the housing market and can delay a recovery in housing markets and
the broader economy.”

Another danger that could be more significant than the well-known
documentation flaws in the foreclosure process, is the put-back risk,
Tarullo said.

In the third quarter, Fannie Mae had $7.7 billion in unpaid
principal balance on outstanding repurchase requests from mortgage
originators, Freddie Mac had $5.6 billion, and the four largest banks
held $9.7 billion in repurchase reserves, mostly intended for GSE put
backs, he said.

“While the full extent of put back exposure is … hard to specify
with precision, the risk has been known for some time and has been an
ongoing focus of supervisory oversight at some institutions,” he said.

** Market News International Washington Bureau: 202-371-2121 **

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