Federal Reserve Governor Sarah Bloom Raskin said Friday the residential mortgage market will not rebound until loan servicing practices at large financial institutions are improved. Speaking at the 2011 Midwinter Housing Finance Conference in Utah, Raskin said, “Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry.” Raskin said deficiencies in how loans are serviced are impairing the mortgage markets and diminishing “overall accountability to homeowners,” based on the findings of the report. She said the first step is to work with troubled borrowers, making sure each distressed loan is carefully considered for a loss mitigation procedure. “We need to make certain that foreclosures take place only when there is no option available that would be preferable to both the borrower and the investor,” Raskin said. As for loans that do not qualify for modifications under the Treasury Deaprtment‘s Home Affordable Mortgage Program, Raskin said servicers should consider proprietary modifications, short sales and deeds-in-lieu-of-foreclosure to help end some of the bleeding in the anemic housing market. “These actions will have a far-reaching positive impact: A lower inventory of distressed properties for sale results in higher house prices, which leads to a healthier pace of recovery in the housing market and the broader economy,” she said. At the same time, Raskin recognized a shift towards servicing-focused business models will be difficult for large financial institutions that have run their servicing divisions on lean budgets. “I’m sure this has been said, but I’ll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007: Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish,” Raskin concluded. In November, Raskin said the problems in the servicing industry started upon the switch from being an “originate-to-hold” system to an “originate-to-distribute” system. Write to Kerri Panchuk.