The robo-signing controversy points to poorly aligned incentives in the mortgage servicing business that must change, said Sheila Bair, chairman of the Federal Deposit Insurance Corp. “Because the pricing of mortgage securitization deals did not adequately provide for special servicing, servicers were not funded or adequately staffed to address problems,” she said. “Not only that, servicers are often required to advance principal and interest on nonperforming loans to securitization trusts — but are quickly reimbursed for foreclosure costs. These incentives can have the effect of encouraging foreclosures, while discouraging modifications.” Bair made her statements Wednesday in a speech to the Urban Land Institute in Washington. The FDIC recently adopted a new rule on securitizations that requires that servicer incentives be addressed to obtain safe-harbor status. Servicing agreements must provide servicers with the authority to mitigate losses in a timely manner and modify loans to address expected defaults. “The rule also addresses a recurring problem in servicing: the obligation for servicers to continue funding payments missed by borrowers. Under most current servicing agreements, this obligation has the effect of accelerating foreclosures as servicers seek to recover these payments by selling the home. Our new rule strictly limits advances to just three payments unless there is a way to repay the servicer that does not rely on foreclosure.” The new FDIC rule, however, is limited to banks. But Bair said the Dodd-Frank financial reform law provides a chance to improve incentives across the market, whether or not the securitization is issued by a bank. Dodd-Frank requires regulations governing the risk retained by a securitizer, and those regulations may reduce the standard 5% risk-retention where the loan poses a reduced risk of default. “Given the important role that quality servicing plays in mitigating the incidence of default, I believe that the new regulations should address the need for reform of the servicing process,” she said. “We want the securitization market to come back, but in a sustainable manner.” Some 2.4 million mortgages remained in the foreclosure process at the end of June, while another 2.7 million mortgages were at least 60 days past due. As of June, an estimated 11 million homeowners, or nearly one in four of those with mortgages, were underwater, owing more than their homes are worth. JPMorgan Chase (JPM) leads the big banks in residential foreclosure volume. JPMorgan  has $19.5 billion, 7.5% of its residential mortgages, in foreclosure. Write to Kerry Curry.