A top Federal Reserve official on Friday warned mortgage servicing industry executives they could face enforcement actions and that they shoulder some of the blame for a sluggish economic recovery.

I have seen little or no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007, Fed Governor Sarah Raskin said in remarks to an industry conference in Park City, Utah.

Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish, she said.

Raskin, formerly the top bank regulator for the state of Maryland, said a review of loan servicing practices shows widespread weaknesses still exist.

The industry suffered a black eye in 2010 when it emerged that institutions were using machines to send foreclosure notices to homeowners, sometimes in disregard of actual circumstances.

Regulators have to be ready to monitor loan servicing to ensure confidence is restored in the industry, and are prepared to take enforcement actions, where necessary, to address significant failures, Raskin told a housing finance conference.

More broadly, Raskin said continued high rates of foreclosures are holding back a recovery in the housing industry, which, in turn, is weighing on the economic recovery.

The pace of recovery is agonizingly slow, she said. The critically important drag on the economy is the absence of any substantial recovery in the housing sector.

The Fed in November launched a $600 billion Treasury buying program aimed at fueling stronger growth. While the recovery appears to be gaining momentum, the Fed has made clear it intends to see the bond-buying program through with unemployment at lofty levels and inflation below levels considered ideal by policymakers.

Raskin urged servicers only to initiate foreclosures when no other options are available. Lower inventories of distressed properties will lead to a healthier pace of recovery in housing and the broader economy, she said.

The Fed official accused the industry of having engaged in a selfish free-for-all in the run-up to the financial crisis.

Relevant private sector actors need to think beyond their bottom line and focus on how their firms' actions are or are not contributing to the economic recovery, she said.

Raskin said the way the industry charges for services should be changed. An annual servicing fee that covers a range of costs should be changed to fees that are more closely aligned with whether loans are performing or in trouble, she said.

Specialists could evolve who focus on servicing performing loans or the more complicated non-performing loans, she said.

She also called for more explicit rules and procedures to define how industry should behave.

Many practices were not only standard, but shoddy, she said.

(Editing by Diane Craft and Carol Bishopric)

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