mortgage lending, servicing, and securitization did not account for a potential collapse of this magnitude in the housing sector. as the bubble expanded, securitization contracts did not provide enough incentive to discourage shoddy underwriting practices. in the aftermath, the inadequacies of servicing contracts have contributed to the agonizingly slow pace of mortgage modifications and repeated breakdowns in the foreclosure process. prior to the crisis, the nation ’ s mortgage finance system developed into an extensive set of specialized industry players with a complex set of linkages operating not just at the lender and borrower level, but also with an extensive secondary market that was intended to diffuse risk. all of these relationships were governed by contracts. the promissory note, for example, lays out the terms under which the borrower will repay the loan, while the mortgage reflects the lender ’ s security interest in the property. but there are also contracts between the borrower and third parties and between the lender and third parties. for example, the borrower likely will enter agreements for title, flood, or private mortgage insurance, while the lender may enter an agreement with another institution to service the loan. add mortgage securitization to the mix, and the number of contractual relationships snowballs. for a private - label securitization, a crucial contract is the pooling and servicing agreement, or psa, which specifies matters such as the characteristics of the mortgages in the pool, how these mortgages will be serviced, and how the money generated from the loans will be distributed to investors. at nearly every linkage of our mortgage finance system there is a contractual relationship, and at nearly every contractual linkage there has been legal challenge and litigation. for example, let ’ s just zero in on one such contractual relationship and examine how the legal structure set forth in this relationship has held up. first, let ’ s look at the provisions that govern mortgage servicing, and second, the provisions that lay out the representations and warranties about the features and underwriting quality of the loans included in the securitization. both sets of provisions exist in the contract that governs the securitization, the psa. see brian k. bucks, arthur b. kennickell, traci l. mach, and kevin b. moore ( 2009 ), “ changes in u. s. family finances from 2004 to 2007 : evidence from the survey of consumer finances

require not just economic talent – but, significantly, legal talent – to address. i want to talk this morning about a couple of those legal challenges. of course, these remarks are intended to express my own views, and they do not necessarily reflect the opinions of my colleagues on the federal reserve board or the federal open market committee. housing market conditions six years after house prices first began to fall, we are still dealing with the aftermath of the housing bubble. nationally, house prices have fallen by nearly one - third since their peak in the first quarter of 2006, and total homeowners ’ equity in the united states has shrunk by more than one - half – a loss of more than $ 7 trillion. this is a shocking and enormous decline. the drop in house prices has had far - reaching effects on families and the economy, in part because so many american families – nearly 70 percent – own their homes. 1 in contrast, see u. s. census bureau, “ housing vacancies and homeownership ( cps / hvs ). ” bis central bankers ’ speeches only about one - half of american families hold any stocks, either directly or through accounts such as individual retirement accounts, 401 ( k ) s, or mutual funds. 2 the fall in house prices has caused families to cut back on their spending and has prevented families from using their home equity to fund education expenses or start small businesses. an estimated 3 million families are not able to refinance their mortgages at today ’ s historically low interest rates because they are underwater on their mortgages. 3 and many borrowers have lost their homes to foreclosure : more than 4 percent of all mortgages in the united states were in foreclosure, and an additional 3 percent or so were delinquent by 90 days or more in the second quarter of this year. initially, when i was commissioner of financial regulation, foreclosures were concentrated among borrowers with subprime mortgages. but today, because of the magnitude of the economic downturn and the high level of unemployment, the typical borrower in foreclosure has a prime or federal housing administration mortgage. as all of you know, the drop in house prices has put considerable pressure on the legal system. of course, the huge wave of foreclosures has strained and sometimes overwhelmed the courts, particularly in states with judicial foreclosure processes. but in a deeper sense, the standard contracts that govern