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


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.