On the heels of the first anniversary of the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) released its 2011 Annual Report, the first of its kind issued by the U.S. government. The report was produced collaboratively by the members of the FSOC and their staff, and unanimously approved by the Council. One of the major recommendations of the FSOC in its report was continued progress on the U.S. housing finance system and the overall mortgage servicing industry. The FSOC believes that Congress should pass responsible legislation to reform the housing finance system, legislation that would not further destabilize an already fragile U.S. housing market. The FSOC 2011 Annual Report suggests that the FSOC's member agencies and the U.S. Department of Housing & Urban Development (HUD) set forth standards and guidelines for participants in the housing finance system, and other actions that strengthen mortgage underwriting.
Under the Dodd-Frank Act, the FSOC must report annually to Congress on a range of issues, including the activities of the Council; significant financial market and regulatory developments; and potential emerging threats to the financial stability of the United States. The report must also make recommendations for promoting market discipline; maintaining investor confidence; and enhancing the integrity, efficiency, competitiveness, and stability of U.S. financial markets.
“The most important thing we can do right now to safeguard financial stability is lift the cloud of default hanging over our economy,” said Treasury Secretary Tim Geithner. “As we move forward, however, we must also work to ensure that our regulatory framework keeps pace with the evolving global financial system. This report provides key recommendations that will build on the progress we’ve made through the Dodd-Frank Act and further strengthen the resilience of the financial markets and our economy.”
In its first annual report, the FSOC describes the current state of the U.S. financial system and some of the major forces that will shape its development going forward. The FSOC and its members will continue to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act on a coordinated basis to enhance the integrity, efficiency, transparency, competitiveness, and stability of U.S. financial markets.
Mortgage servicing was another reform the FSOC focused on in its inaugural report. The FSOC recommended an improvement of the overall quality of mortgage servicing through the establishment of national mortgage servicing standards and servicer compensation reform.
"The mortgage servicing industry was unprepared and poorly structured to address the rapid increase in defaults and foreclosures," said the report. "To address this structural vulnerability, regulators should establish national mortgage servicing standards and promote alternative servicer compensation models."
The FSOC recommends that mortgage servicing standards should provide clarity to both borrowers and investors, and that servicers should be held to the same quality and responsiveness standards, regardless of whether the loans being serviced are held on the originator’s books, have been sold, or have been securitized. The FSOC believes that these standards, if established, would provide clarity and consistency to borrowers and investors, especially in the case of delinquency, while enhancing the integrity and efficiency of the servicing industry and help re-establish investor confidence in the housing finance market.