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January 07, 2009

Stemming the Foreclosure Tide

Chris Mayer
Senior Vice Dean and Paul Milstein Professor of Real Estate
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The housing market and growing number of foreclosures are placing an enormous strain on American households and the economy. There were more than 2.2 foreclosures started last year and house prices are in the worst decline since the Great Depression. Fixing these problems must be a priority for the next administration.

The government needs to take a two-pronged approach. The first part — stabilizing the housing market — is something I have discussed widely. In a plan developed with Dean Glenn Hubbard, I propose that the government allow new mortgages to be issued at a rate that is 1.6 percent above the rate of a 10-year Treasury bond. That new rate, which may be as low as 4 percent for conforming mortgages, will stabilize the housing market, provide a fiscal stimulus and raise housing demand.

The second part is preventing foreclosures, which I spoke about today in an interview with CNBC (watch video). My Columbia University colleagues Edward Morrison and Tomasz Piskorski and I have outlined a new proposal for reducing foreclosures. We propose a combination of an incentive fee program for service providers and a legislative initiative to modify servicing agreements.

Ours is a new approach that focuses on what has been the most intractable part of the foreclosure problem: the behavior of third-party servicers who manage portfolios of securitized portfolios. Recent research from Thomas Piskorski, Amit Seru and Vikrant Vig shows that third-party servicers opt for foreclosure much more often than banks that service their own loans.

The proposal eliminates the barriers that prevent these third-party servicers from better managing their portfolios. The first step is to create an incentive fee structure to make loan modification rewarding for both servicer and investor. Secondly, temporary legislation must remove explicit barriers for modifying PSAs and should create “litigation safe harbor” that insulates servicers, provided they modify loans in good faith for investors. We calculate that by taking these steps, up to one million foreclosures can be prevented at a modest cost of $10.7 billion to taxpayers.

The way to fund solutions on both these fronts is with TARP expenditures. If the new administration makes this a priority, they can facilitate economic recovery, reduce foreclosures and help struggling homeowners while protecting taxpayers.

Comments

by Steve Alter | April 27, 2009 at 1:06 AM

I'm very interested in how Christopher Mayer may have changed his paper on Real Estate Auctions if it were written now, more than ten years after the internet can be used to bridge the gap between the negotiated and auction real estate sale? Please have Chris Mayer contact me. thank you, Steve Alter

by Charles Hoffmann | April 30, 2010 at 8:42 AM

The proposal does not address the impact of "occupancy" on the underlying mortgages. In 2005, 40% of all home sales were intended to be either vacation homes or investment properties [see NAR data]. It is a safe bet that this percentage is much higher in those markets that have had the highest rates of delinquencies and foreclosures [Florida, Nevada, Arizona]. The study assumes that the easing of the modification process would have the same impact on all occupancy types. Lenders know that homeowners of primary residences are motivated to try and keep their homes. The motivation is not the same with vacation homes or investment properties. Should the TARP funds [taxpayers] be used to subsidize owners of non-primary residences? Would the local real estate markets in these resort locations be better served by a streamlined foreclosure process that quickly sells these properties at a deep discount? What is the occupancy breakdown for the non-conforming MBS referred to in the proposal? Thanks for listening!

by john miller | September 27, 2010 at 1:26 AM

Lowering the interest rate, en mass, for those still stuck at rates above 4%, would not only increase their disposable income, more money to spend on the economy, but would LOWER the income of the investor's owning those 5%-6% (and higher) loans. The home owners that are able to itemize would have less deductions, and would pay more in income taxes. Taxable entities owning the loans would have less income, therefore lower taxes. Probably a net loss in tax collections. But not because of a change in rates, rather, reduced income. (Non profits / pensions/ etc., who would receive less income, would not have an impact on taxes paid to the US). Since Money Never Sleeps, the repaid loans would be in the market for the new loans, or others types of investments. Capital looking for a home (something to invest in) sounds like a winner. (as opposed to so many banks sitting on 'free' deposits and investing in risk free Treasuries.

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