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.
The proposal consists of two parts:
1) Compensating servicers who modify mortgages. Using TARP 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.
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.
This proposal, coupled with Prof. Mayer and Dean Glenn Hubbard's earlier proposal for the federal government to reduce mortgage rates, is part of a two-pronged approach to stabilize the housing market and prevent foreclosures. To read the full proposal, visit www4.gsb.columbia.edu/realestate/research/housingcrisis.