servicer does not properly carry out its primary duty of collecting and appropriately allocating mortgage payments, it can cost homeowners money and, in the most extreme cases, cause a homeowner to be pushed into premature default. some servicers obtain unwarranted or unauthorized fees from borrowers after engaging in unfair collection practices, or through other conduct that causes borrower default, such as misapplied payments, padded costs, erroneous charges, late fees, and so on. too many accounts of shoddy operating procedures – lost paperwork, slow response times, and sloppy recordkeeping – cast a dark shadow on this part of the industry that links mortgage borrowers and lenders. the broad grant of delegated authority that servicers enjoy under pooling and servicing agreements ( psas ), combined with an effective lack of choice on the part of consumers, creates an environment ripe for abuse. moreover, the inability of some servicers to maintain complete and accurate records, and to transfer servicing rights cleanly, causes additional uncertainties and vulnerabilities. the impact of poor business practices can linger on even after the foreclosure sale. in managing foreclosed properties in lenders ’ inventories, servicers may be motivated by timeliness measures in psas to induce the former homeowner or bona fide tenant to vacate before they are legally required to do so, sometimes under the threat of eviction. once the properties are vacant, servicers exercise great discretion in deciding whether or not to repair foreclosed property based on the likelihood that the servicer ’ s advances are recoverable from the sale proceeds. with real estate owned ( reo ) inventories projected to reach one million by the end of 2010, servicer actions will heavily influence the effectiveness of neighborhood stabilization efforts at a time of persistent decline in home values and in fragile markets already weakened by a glut of vacant and abandoned properties, particularly in lowwealth communities. finally, we face a cluster of problems surrounding loan modification. servicers ’ significant concerns about the u. s. treasury ’ s home affordable modification program ( hamp ) are wellknown. that said, we do not know enough about how well servicers are complying with the requirements of that program, or whether all of the hamp modifications that should be made are indeed being made. many servicers, in fact, currently report that the bulk of their loan modifications are being done outside of ham

labor costs is quite elevated, further encouraging firms to reach for market share as well as providing scope for workers ’ real wages to rise without pushing up inflation. overall, the tenor of the inflation outlook has shifted over recent quarters. solid growth in economic activity, higher prices in some sectors, and hints of the stabilization of overall inflation, along with perceptions by businesses that “ pricing power ” may be returning, are marking a transition from asymmetric risks of additional disinflation to more nearly balanced risks of rising and falling inflation. this transition is another key piece of the backdrop for monetary policy. monetary policy strategy as i noted at the outset of my talk, the federal funds rate is quite low : it is low relative to interest rates associated in the past with sustained high employment and stable prices ; and it is low relative to recent rates of economic growth - a disparity that has attracted increasing attention from some observers. in fact, the low funds rate has been necessary to promote growth that, to date, has been just sufficient to begin reducing substantial margins of slack in resource utilization. still, as my analysis indicates, the unusual shocks that have impinged on demand and bolstered potential supply over the past several years are abating, or should soon do so. as the output gap closes, economic stability will require that interest rates eventually move up from unusually low levels if we are to preserve price stability. the fomc stated again last week that it believes it can be patient in removing its policy accommodation. one set of reasons for patience in my view can be found in the levels of inflation and resource utilization likely to prevail for a while. as i have already noted, a considerable gap exists today between actual and potential output, and consumer price inflation is very low. in addition, the transitions i have discussed in aggregate demand, potential aggregate supply, and inflation are gradual processes. the move to solid growth of demand and some easing in the growth of potential supply are unlikely to lead to a rapid closing of the gaps in resource utilization or a marked rise in inflation. the risks around the likely course of the economy, and the costs and benefits of erring to one side or the other of the anticipated outcomes, also support a strategy of patience. given our uncertainty about the rate of growth of potential supply, actually observing a closing output gap will be particularly important for policymakers. given our uncertainty about the level of potential supply and thus the level of the output gap, observing stable inflation