The U.S. economy is still suffering from a shocking drop in homeowners' equity and reforms are needed in how mortgage loans are originated and handled, Federal Reserve Governor Sarah Bloom Raskin said on Tuesday.

To my dismay, here we are in 2011, with a recovery that is still being dragged down by serious housing problems that will require not just economic talent -- but significantly, legal talent -- to address, she told a Maryland State Bar Association group.

Raskin did not mention monetary policy specifically.

She said some $7 trillion has been wiped out in homeowners' equity since early 2006 as a result of falling house prices.

This is a shocking and enormous decline, Raskin added.

She noted that there were well documented problems with mortgage servicing, including those turned up by federal banking regulators when they looked at 14 federally regulated mortgage servicing companies.

These problems indicate the existence of unsafe and unsound banking practices and violations of federal and state laws, as well as demonstrated patterns of misconduct and negligence on the part of insurers, Raskin said.

She suggested that, among other issues, the contracts underlying mortgage securitization contained disincentives for servicers to act in the best interests of investors and borrowers.

When defaults are low, the fees to servicers keep the interests of borrowers, servicers and investors in line but the system is less effective when defaults are high, as they are now.

Servicer compensation is not generally tied to the performance of the loan, and in most cases a servicer receives no extra payment for preventing a default, Raskin noted.

She said it was imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently in performing mortgages and to perform effective loss mitigation on delinquent loans.

(Reporting by Glenn Somerville; Editing by James Dalgleish)