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Fed Officials Promise More Action, See Trouble Ahead

On the same day that ""Federal Reserve"":http://www.federalreserve.gov/ ""Chairman Ben Bernanke"":http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm cautioned lawmakers about their fiscal behavior and hinted at more stimulus measures, one of the Fed's governors, ""Sarah Bloom Raskin"":http://www.federalreserve.gov/aboutthefed/bios/board/raskin.htm, outlined potential peril in the mortgage servicing industry.

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The Fed chief noted ailing health in the economy while the other official sketched a need for change in servicing standards.

Addressing the Joint Economic Committee, a panel comprised by bipartisan lawmakers, Bernanke said in a ""prepared statement"":http://www.federalreserve.gov/newsevents/testimony/bernanke20111004a.htm that ""it is clear that, overall, the recovery from the crisis has been much less robust than we had hoped.""

The central banker described the housing economy as a laggard for the broader recovery, fingering a high volume of foreclosures, restrictive lending conditions, and consumers made wary by the weak jobs market as reasons why spending and household formation remain behind schedule.

Bernanke prescribed a string of policies that policymakers should toe closely, including the need to hammer in a more stable federal deficit, avoid behavior likely to imperil confidence, shore up long-term growth, and make the budgeting process more predictable.

Failing these steps, and pending trouble in the wider economy, the Fed chief pledged to buttress faltering mortgage markets with the more recently announced decision to buy up $400 billion in short-term Treasury debt.

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""By helping to support mortgage markets, this action too should contribute to a stronger economic recovery,"" Bernanke said.

He added that the Federal Open Market Committee, which made billions in buy-ups possible, will continue to ""closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability.""

By midday, ""_Bloomberg News_"":http://www.sfgate.com/cgi-bin/article.cgi?f=/g/a/2011/10/04/bloomberg_articlesLSJUYR1A74E9.DTL reported that 30-year Treasury bond yields leapt forward from an unprecedented dearth on the promise of action by the central banker, with the 10-year note on an uptick after eight weeks in rock-bottom territory.

Meanwhile, not far from the Washington, D.C.-based hearing, in Roanoke, Virginia, Raskin offered up a gloomy overhead look at the mortgage servicing industry and housing economy, which she said in her ""text"":http://www.federalreserve.gov/newsevents/speech/raskin20111004a.htm had shrunk by some $7 trillion since the financial crisis.

She described ""critical weaknesses"" in the mortgage servicing industry, with a high tide of foreclosures the consequence of ""unsafe and unsound banking practices and violations of federal and state laws.""

Her prescription?

""Given that failure, 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,"" Raskin said.

She called for a reconsideration of the compensation structure and incentives currently in place for mortgage servicers, with emphasis in particular on mitigation strategies and flat fees for performing loans.

""Requiring servicers to take mitigative actions that are net-present-value positive to the investor could encourage the fair and consistent treatment of borrowers,"" she said.

About Author: Ryan Schuette

Ryan Schuette is a journalist, cartoonist, and social entrepreneur with several years of experience in real-estate news, international reporting, and business management. He currently lives in the Washington, D.C., area, where he freelances for DS News and MReport.
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