Columbia Business School and Columbia Law School announced on January 7 a new joint proposal to stem foreclosures through loan modifications. The proposal, cowritten by Christopher Mayer, senior vice dean and Paul Milstein Professor of Real Estate, and Tomasz Piskorski, assistant professor of finance and economics, of the Business School and Edward Morrison, professor of law, of the Law School, focuses on privately securitized mortgages. These types of mortgages are at the core of the housing crisis, accounting for more than 50 percent of foreclosure starts.
Research shows that when privately securitized mortgages become delinquent, their servicers opt for foreclosure over mortgage modification much more often than private lenders who service their own mortgages.
The plan aims to facilitate mortgage modifications — and thus decrease the number of foreclosures — by compensating servicers and removing some legal constraints.
The authors call for the federal government to use TARP funds to increase the fee that servicers receive for continuing a mortgage and avoiding foreclosure, thereby aligning servicers’ incentives with the interests of borrowers and investors.
Additionally, the authors argue for federal legislation that eliminates explicit restraints on modification and creates a safe harbor from litigation for reasonable, good-faith modifications that raise returns to investors.
By the authors’ estimates, the plan would prevent nearly one million foreclosures over three years, at a cost of no more than $10.7 billion. The proposal does not raise any constitutional concerns because it builds on well-established Supreme Court case law.
The authors contend that their plan is more effective and less costly than alternatives, such as bankruptcy reforms involving judicial mortgage reductions, known as cramdowns, and the recent FDIC servicer incentive and mortgage-guarantee program. According to the authors, the plan will benefit homeowners as much as servicers and investors by promoting cooperation between servicers and homeowners so that homes go to foreclosure only when necessary.
This proposal, coupled with an earlier proposal advanced by Mayer and Dean Glenn Hubbard for the federal government to reduce mortgage rates, is part of a two-pronged approach to stabilizing the housing market and reducing foreclosures.