FHA head: Mortgage industry has 'trust deficit'

ATLANTA (Reuters) - The U.S. mortgage industry must do more to establish trust with consumers and take stronger steps to participate in government programs to help struggling borrowers, the head of the Federal Housing Administration said on Tuesday.

The industry faces "an enormous trust deficit," FHA Commissioner David Stevens said, after the discovery of errors and possible fraud in foreclosure practices by mortgage servicing companies have put a spotlight on the industry's shortcomings.

"There's a reflection in the media and a reflection in the industry that we aren't being held accountable enough," Stevens said at a meeting of the Mortgage Bankers Association.

The FHA is expanding its review of five major servicers to others in the wake of the foreclosure flap, he told reporters after addressing a meeting of the Mortgage Bankers Association. A preliminary study launched in May found compliance among some servicers while others haven't met obligations of borrowers or taxpayers, he said.

Stevens said some bankers have simply refused to participate in government efforts designed to help borrowers and shore up the fragile housing market, such a new FHA program to help refinance some of the millions of borrowers who are underwater on their mortgage. A quarter of borrowers have a loan whose principal tops the home's value, sharply limiting their abilities to save money by refinancing, or moving.

Frustrations come as banks and others in mortgage finance have seen their profits fattened by low interest rates engineered by the government, and through $148 billion in taxpayer support of Fannie Mae and Freddie Mac, which provide liquidity for lenders' loan pipelines, he said. The "idea" that banks are directing resources from servicing existing customers to seek bigger profits is unacceptable, he said.

U.S. support is "creating success for these institutions and they need to participate equally as much on the other side," Stevens told reporters after addressing the bankers.

This focus has sharpened in recent weeks as the errors in foreclosure proceedings have surfaced, he said. Wrongdoings, including the use of "robo-signers" -- employees who signed hundreds of foreclosure documents a day without inspecting them -- may be doing further harm to an industry that itself hasn't met the needs of greater accountability, he said.

SHORT REFI

The urgency of improvements in mortgage finance come as the housing market teeters on the verge of another downturn, fueled by persistently high unemployment, lack of access to credit and soft consumer confidence. Prices of single-family homes fell for a second straight month in August, the Standard & Poor's/Case Shiller report showed on Tuesday.

Falling home prices have exacerbated defaults because many struggling borrowers find themselves unable to refinance or sell their homes to pay off their mortgage

The lack of engagement in government housing efforts by the private sector overall has been a mistake, Stevens told the MBA, the lobbying group, which has 2,200 members.

"It's time for all housing industry players to move beyond rhetorical support for some of our new initiatives and reestablish trust by fully participating in them," Stevens said in prepared remarks. "The importance of that commitment has only grown with recent foreclosure revelations."

Stevens said the short refinance option is resisted by some banks, partly due to the complications when the lender -- which could also be the loan servicer -- holds a second-lien loan on the property. The second lien should be completely written down before any loss on the main mortgage is taken, big investors such as BlackRock Inc. contend.

The FHA is meeting with servicers to resolve this conflict, Stevens said. In addition, Fannie Mae and Freddie Mac -- which he said initially did not consider participating -- may have taken on "a slightly different tone," on using the principal write-down option for loans that they control, he said.

"The FHA short refi is clearly the single most effective way to do a principal write-down," he said. "So far we have seen a variable response. We know that many investors would like a lot more of this done."

The short refinance program has some "attractions" compared with other FHA efforts, said the MBA Chief Executive Officer John Courson, who added that he has echoed Stevens' "call to arms" for bankers to restore confidence in their industry.

(Editing by Jackie Frank)