and processes by which internal operations are assessed. senior executives need to emphasize compliance and qualitative measures over short - run cost efficiency, and need to articulate the presence of adequate quality controls and audit processes to identify risks and take timely, corrective actions where needed. corporate leadership needs to communicate performance expectations that hold all business lines accountable to strong procedural controls. bis central bankers ’ speeches if errors occur or internal processes become challenged, servicers must act swiftly and responsibly to contain the damage to consumers and markets. going forward, the servicing industry must foster an operational environment that reflects safe and sound banking principles and compliance with applicable state and federal law. this is a primary responsibility of the servicing industry, but regulators now have to be prepared to monitor servicing functions on an ongoing basis to ensure confidence is restored and take enforcement actions, when necessary, to address significant failures. i ’ m not going to outline for you the consequences of these failures. you know them all too well. suffice it to say that when servicers misapply payments, lose paperwork, file incorrect foreclosure affidavits, or simply do not answer the phone or make available knowledgeable staffpersons, there are consequences to the consumer. with few adequate remedies to provide meaningful recourse in the event errors occur – after all, it ’ s not as if consumers have a choice regarding who does their servicing – many consumers find themselves captive to practices that have emphasized speed and aggressive timeframes over responsiveness, accuracy, and completeness. so something is wrong. here we are in 2011, looking at high levels of foreclosures on the horizon, looking at significant failures in process, and nothing much has changed since 2007. i always thought this dysfunction was going on for too long – but i ’ m someone who thought the successive waves of foreclosures in 2007 amounted to a virtual tsunami. in my mind, massive foreclosures were always a sign of an equally massive market failure. well, now it seems to me we have reached a point where this sign of failure is hindering our economy ’ s ability to rebound. in addition to improvements that individual servicers need to make, we also have to find a way to fix broader problems in the industry and make it functional. in my november remarks, i began the conversation about a flawed business model that creates misaligned incentives in ways that are more difficult for any one company to change on its own

asserted that fixed - rate mortgages would be more difficult, or perhaps even impossible, to obtain without the gses'portfolios. but, again, we see little empirical support for this argument. we have found no evidence that fixed - rate mortgages, for example, were difficult to obtain during the early 1990s when gse portfolios were small. indeed, the share of adjustable - rate mortgage originations averaged slightly more than 20 percent in 1992, when gse portfolios were small, and averaged 34 percent in 2004, when gse portfolios were large ; these data suggest that the size of the gses'portfolios is unrelated to the availability or popularity of fixed - rate mortgages. as far as we can tell, gse mortgage securitization, in contrast to the gse's portfolio holdings, is the key ingredient to maintaining and enhancing the benefits of the gses to homebuyers and secondary mortgage markets. and mortgage securitization, unlike the gse portfolio holdings, does not create substantial systemic risks. * * * we at the federal reserve remain concerned about the growth and magnitude of the mortgage portfolios of the gses, which concentrate interest rate risk and prepayment risk at these two institutions and makes our financial system dependent on their ability to manage these risks. although fannie and freddie have chosen not to expand their portfolios significantly this past year ( presumably at least partly in light of their recent difficulties ), the potential for rapid growth in the future is not constrained by the existing legislative and regulatory regime. it is a reasonable presumption that rapid growth is likely to resume once fannie and freddie believe they have resolved their current difficulties. 6 without changes in legislation, fannie and freddie will, at some point, again feel free to multiply profitability through the issuance of subsidized debt. to fend off possible future systemic difficulties, which we assess as likely if gse expansion continues unabated, preventive actions are required sooner rather than later. limiting the debt of fannie and freddie, while comparably expanding their role in mortgage securitization, would be consistent with the original congressional intent that these institutions provide stability to the secondary market for home mortgages and liquidity for mortgage investors. indeed, in 1989, before the rapid expansion of its portfolio, freddie testified before the congress that the need for safe and sound operation and provision of affordable mortgages to homebuyers was inconsistent with