##p. again, we do not know enough about what those modifications look like or how they are being structured. prior to hamp, many servicers were creating modifications that themselves were problematic. for example, high percentages of the pre - hamp modifications provided no payment relief to borrowers and, not surprisingly, then exhibited high re - default rates. servicers may not be doing everything they can do to ensure that loss mitigation activities, including hamp and non - hamp modifications, are responsible and sustainable and subject to strong internal controls. so the problems that have been grabbing headlines in recent weeks are neither new nor amenable to quick fixes. while there may be some specific practices – “ robo - signing ” among them – that are possible to isolate and eliminate, chronic, uncured problems continue to plague this industry. there is a long track record of actions and cases brought by attorneys general, which some of you in this room have no doubt litigated, demonstrating the harm done to consumers by sloppy or unscrupulous practices. because consumers cannot choose to hire or fire their servicers ( other than by paying off the loan ), the industry lacks the level of market discipline imposed in other industries by the working of consumer choice. for this reason, if servicers do not actively maintain adequate and trained staff and do not establish and heed internal controls, if investors do not monitor their servicers ’ behavior, if regulators do not conduct meaningful examinations, if courts do not stand guard against unfair practices, both substantive and procedural, then it will be much less likely that a wellfunctioning housing market will reemerge from this crisis. because the very structure of the loan servicing industry as it currently operates inevitably leads to misaligned incentives and a propensity to defer costly investments, a more significant re - thinking of the basic business model must also be undertaken if we are to avoid repeating prior mistakes. i realize that i ’ m painting a rather gloomy picture. but be assured that i do believe that we can make real progress on the ground through coordinated public and private action. let me conclude by talking a little bit about what the federal reserve and others are doing to address these issues. although foreclosure practices have traditionally been – and rightfully should remain – a domain of the states, the federal reserve has been expanding its expertise in working with the industry – first, in a review of non - bank subsidiaries in conjunction with other state

arm of the federal government is taking the underlying dynamics of the mortgage foreclosure crisis very seriously. i also hold out hope that the multi - state work engaged in by the 50 state attorneys general will prove to be a vehicle for resolving the underlying problems. the coordination and expertise at the state level in these matters is an essential corrective. to the extent that legal settlements are structured in such a way as to generate a broader underlying reform of servicing processes, it will be more likely that we can assure consumers that they will not encounter other mortgage harms moving forward. the complex challenges faced by the loan servicing industry right now are emblematic of the problems that emerge in any industry when incentives are fundamentally misaligned, and when the race for short - term profit overwhelms sustainable, long - term goals and practices. responsible parties within the industry are no doubt already scrambling to fix some of the problems that have surfaced. however, because so much is riding on getting these systems right, and because consumers have such little measure of individual choice or recourse, reliance on pledges from market participants will not be enough. many of you have been doing your part for years to point out problems in the industry and to give consumers some protection and redress when wronged. the public sector too is stepping up its efforts to monitor firms ’ actions and systems. until a better business model is developed that eliminates the business incentives that can potentially harm consumers, there will be a need for close regulatory scrutiny of these issues and for appropriate enforcement action that addresses them. thank you.