Columbia profs: Incentivize servicers to modify mortgages
- Share via
This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.
Three Columbia University professors today tackled one of the thorniest problems of the housing debacle: how to increase modifications to soured home loans that have been bundled into mortgage bonds.
Troubled mortgages that back securities in the private market, with customer-service outfits collecting payments, are far likelier to go into foreclosure than those in which the lender keeps the loan, the professors note.
They propose creating financial incentives for loan servicers to modify loans to make them affordable, along with some changes in laws to remove impediments.
The authors are a Columbia law professor, Edward Morrison, and two business professors, Christopher Mayer and Tomasz Piskorski. In a news release, the academics said privately securitized mortgages “are at the core of the housing crisis, accounting for more than 50% of foreclosure starts.’
They said federal authorities could promote cooperation between servicers and homeowners, averting unnecessary foreclosures, by:
‘1) Compensating servicers who modify mortgages. Using TARP [Treasury Department bailout] funds, the federal government should increase the fee that servicers receive from continuing a mortgage and avoiding foreclosure, thereby aligning servicers’ incentives with the interests of borrowers and investors; and’2) Removing legal constraints that inhibit modification. The federal government should enact legislation that eliminates explicit restraints on modification and creates a safe harbor from litigation for reasonable, good faith modifications that raise returns to investors.’
The authors contend the plan would prevent nearly 1 million foreclosures over three years. They say it would cost no more than $10.7 billion – more effective and less costly, they argue, than such alternatives as letting bankruptcy judges modify first mortgages.
Mayer and Columbia Business School Dean Glenn Hubbard had attracted attention previously by suggesting that the U.S. Treasury or the Federal Reserve reduce loan rates by buying mortgages or mortgage securities from the all-but-nationalized home-loan giants Fannie Mae and Freddie Mac.
The full proposal, along with video of Mayer discussing housing, mortgage and modifications, can be reviewed at a Columbia Business School real estate site.
After the Federal Reserve announced in November that it would spend $500 billion doing exactly that, rates on 30-year fixed mortgages eligible for Fannie and Freddie dropped precipitously, settling in the low 5% range on average and at times dropping well below 5% for particularly solid borrowers.
-- E. Scott Reckard
