Fed's Raskin: Need reforms in mortgage practices (Reuters)

COLUMBIA, Maryland (Reuters) – The U.S. economy is still suffering from a "shocking" drop in homeowners' equity and reforms are needed in how mortgage loans are originated and handled, Federal Reserve Governor Sarah Bloom Raskin said on Tuesday.

"To my dismay, here we are in 2011, with a recovery that is still being dragged down by serious housing problems that will require not just economic talent -- but significantly, legal talent -- to address," she told a Maryland State Bar Association group.

Raskin did not mention monetary policy specifically.

She said some $7 trillion has been wiped out in homeowners' equity since early 2006 as a result of falling house prices.

"This is a shocking and enormous decline," Raskin added.

She noted that there were well documented problems with mortgage servicing, including those turned up by federal banking regulators examining 14 federally regulated mortgage servicing companies.

Foreclosure operations were halted at large mortgage-servicing companies after discovery a year ago that servicers used so-called robo-signers to handle loan documents without verifying their contents. State laws were broken and many homeowners did not receive any clarity on whether or not they were eligible for federal loan modification programs.

"These problems indicate the existence of unsafe and unsound banking practices and violations of federal and state laws, as well as demonstrated patterns of misconduct and negligence on the part of servicers," Raskin said.

She suggested that, among other issues, the contracts underlying mortgage securitization contained "disincentives" for servicers to act in the best interests of investors and borrowers.

When defaults are low, the fees to servicers keep the interests of borrowers, servicers and investors in line, but the system is less effective when defaults are high, as they are now.

"Servicer compensation is not generally tied to the performance of the loan, and in most cases a servicer receives no extra payment for preventing a default," Raskin noted.

She said it was "imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently in performing mortgages and to perform effective loss mitigation on delinquent loans."

Raskin said the Obama administration should move forward with anti-foreclosure efforts that are under consideration, including finding ways to spur refinancing initiatives. She cautioned that as the administration steps up efforts to keep borrowers in their homes, moral hazard issues linger, especially if directives on housing policy include reductions in loan principal.

(Reporting by Glenn Somerville and Margaret Chadbourn; Editing by Padraic Cassidy)

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Goldman to stop controversial mortgage practices (AP)

NEW YORK – Goldman Sachs' mortgage subsidiary agreed Thursday to stop many of its controversial mortgage-related practices in a settlement with a New York state banking regulator.

The New York's Department of Financial Services and Banking Department said the settlement was a condition to Goldman Sachs Group Inc.'s sale of its Litton Loan Servicing subsidiary to a mortgage company Ocwen Financial Corp.

Also on Thursday the country's chief federal banking regulator, the Federal Reserve Board, announced a formal enforcement action against Goldman to address a pattern of misconduct and negligence in how it handled mortgage loans and foreclosures via Litton.

The Fed ordered Goldman to retain an independent consultant to review foreclosure proceedings initiated by Litton that were pending in 2009 and 2010. The Fed said the review is intended to provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process. The Fed said it also plans to announce monetary penalties.

As part of the New York deal, the Goldman subsidiary said it will stop the practice of robo-signing mortgage paperwork. Robo-signing came to light last fall when it was revealed that the largest banks had outsourced mortgage paperwork to processing companies that, in turn, hired unqualified people to sign thousands of mortgage affidavits without reviewing loan documents. The practice is illegal. Many documents were also notarized them in a way that violates state law. The findings led to a temporary halt to most mortgage foreclosures in the fall of 2010.

Benjamin Lawsky, who took over as the Superintendent of the Department of Financial Services in May, was in charge of approving Goldman's $264 million deal in June to sell Litton to Ocwen.

Lawsky used his approval power to address shoddy mortgage practices at Litton. The agreement does not impact other large banks and mortgage companies.

Goldman, Litton and Ocwen also agreed to withdraw pending foreclosures if affidavits were robo-signed or inaccurate. The settlement requires the company to either return property that was wrongfully sold back to the original borrowers or provide compensation.

Under Thursday's settlement, Lawsky received a commitment from Goldman Sachs to help troubled homeowners by writing down $53 million in unpaid principal of home mortgages.

The deal also prevents Litton or Ocwen from adding late fees and other servicer fees that make it more difficult for delinquent borrowers to pay back what they owe.

The agreement doesn't preclude future investigations of past practices or release any future claims.

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Report critical of pay practices at Fannie Mae, Freddie Mac (Reuters)

(Reuters) – The heads of bailed-out mortgage finance giants Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB) were paid fat salaries without proper written procedures or analysis, according to a report published by the Inspector General of the Federal Housing Finance Agency (FHFA-OIG).

Also, the housing regulator Federal Housing Finance Agency (FHFA) has not considered the factors that might have possibly resulted in reduced executive compensation costs, the review report said.

The heads of Fannie Mae and Freddie Mac were paid a total of $17.1 million in 2009 and 2010 -- the two full years of government ownership.

The top six executives at the housing giants were paid $35.4 million over the two years, according to the report that was posted on the agency's website.

The Inspector General said FHFA has not developed written procedures to evaluate the recommended executive compensation levels each year.

"FHFA also does not provide sufficient transparency to the public of the Enterprises' executive compensation program," the Office of Inspector General said in the evaluation report.

The report recommended that FHFA should establish ongoing review and analysis process to determine the compensation levels for the top executives of mortgage finance giants.

The mortgage firms have taken more than $130 billion in direct taxpayer aid since 2008

and the U.S. government indicated in February that total cost could peak at $169 billion by late next year before beginning to shrink as they slowly repay taxpayers.

Fannie Mae and Freddie Mac could not immediately be reached for comment by Reuters outside regular U.S. business hours.

(Reporting by Sakthi Prasad in Bangalore; Editing by Muralikumar Anantharaman)

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