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
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
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