Magazine article American Banker

Current Contracts Are Drag on Real Estate Recovery

Magazine article American Banker

Current Contracts Are Drag on Real Estate Recovery

Article excerpt

Byline: Donna Borak

WASHINGTON - A top Federal Reserve Board official on Tuesday pressed for changes in mortgage servicing agreements to encourage more workouts of troubled loans.

"The standard servicing contract provides disincentives for servicers to act in the best interests of investors and borrowers," Sarah Bloom Raskin, a Fed governor, said in prepared remarks to the Maryland State Bar Association. "This misalignment of incentives has more profound consequences when defaults are high."

Raskin said the current standards for servicing loans have slowed a real estate recovery. The compensation structure for servicers is not suited to the high volume of nonperforming mortgages; servicers lack incentives to prevent foreclosures; their internal controls need improvement to handle the workload, she said.

"The imperative for servicers to fix their systems, review past decisions, and put in place the internal systems and controls that they should have had all along has impeded the repair of the overall housing market," said Raskin, a former Maryland banking commissioner.

She called for serious changes in how mortgage servicing firms are compensated.

"It is imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently on performing mortgages, and to perform effective loss mitigation on delinquent loans," she said.

Servicers typically receive a flat fee for each loan serviced, usually 0. …

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