The process of mortgages only being restructured after becoming delinquent creates “perverse incentives” for loan servicers, according to Federal Deposit Insurance Corp. Chairman Shelia Bair. She outlined the rationale for the numerous financial reforms that are taking shape in Washington at a Consumer Federation of America conference Friday in the nation’s capital. Bair said servicing agreements need to give servicers the authority to attempt to mitigate losses in a timely manner and modify loans to address reasonably foreseeable defaults before putting the mortgage into the foreclosure process. “The agreements must require the servicer to act for the benefit of all investors, not for any particular class of investors,” according to Bair. The FDIC has updated rules for its safe harbor protection of securitized assets that Bair thinks should help lessen the burden on servicers to continue funding payments to mortgage-backed securities investors when homeowners default. But the agency’s rule only applies to banks, and Bair wants to see a more level playing field between banks and nonbank financial institutions and consumers alike, particularly in mortgage finance. “The lack of sensible, consistent mortgage lending standards and consumer protections in the run-up to the crisis ended up destabilizing housing markets and the entire financial system,” she said. “This ‘race to the bottom’ mentality imposed large losses on banks and nonbanks alike, and imposed long-term damage on household balance sheets and consumer confidence.” Bair has repeatedly touted the benefits of the Consumer Financial Protection Bureau and believes the new federal agency will simplify consumer rules. She also expects new rules included in the Dodd-Frank legislation for banks and nonbanks alike to result “stronger underwriting standards for nontraditional and subprime mortgage products.” Write to Jason Philyaw.

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