The Subprime Shakeout

But the most surprising moment in the conference came with Fed Gov. Raskin's speech, the full text of which is available here. Striking a decidedly more direct tone than her Fed counterparts, Raskin noted that "widespread weaknesses exist in the servicing industry... [T]hese deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners." She also called out the servicers that are affiliates of the larger banks, saying: For those in the housing and mortgage fields, making needed changes will not be easy. In particular, for those in the mortgage servicing industry, it means difficult changes and significant investments to rectify broken systems. For those servicers who are subsidiaries or affiliates of a broader parent financial institution, the responsibility for change and further investment absolutely extends up to that parent company, many of which have enjoyed substantial profits while their servicing arms have been run on the cheap. While Raskin's speech was short on aggressive proposals to fix these problems, such as legislating a divestment of servicing arms by the major banks to avoid conflicts of interest, she can be commended for attacking head-on the current problems with default servicing and suggesting a variety of alternative business models that might ease some of the problems with this industry. And though the Midwinter Conference participants could have had a lively debate about the merits of these various models, I think almost all of us could agree with Raskin's statement that, "Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish."

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The Subprime Shakeout