New: Read the authors' appraisal of Obama's housing plan. Hubbard and Mayer discuss the refinancing component, while Mayer, Morrison, and Piskorski weigh in on the loan modifications. (PDFs)
Low Mortgage Rates: Fixing the Market
by R. Glenn Hubbard and Christopher Mayer*
Our proposal to reduce mortgage rates would allow over 40 million homeowners to refinance into more affordable mortgages, stabilize house prices, and help unfreeze credit markets and save our financial institutions.
See a two page summary of the basic proposal. Here are details of our analysis, and our estimates of the savings by state of the proposal, as well as national estimates using different interest rates. Also read our response to recent critiques in the Wall Street Journal. (all PDF)
Here is our recent paper analyzing the impact of mortgage rates on house prices to be published by Berkeley Economic Press. (PDF)
Read our previous work on lower mortgage rates in our op-ed piece in The Wall Street Journal from 12/17/2008, along with a more detailed description of that plan (PDF), plus our original op-ed piece from 10/1/2008 and the FAQs from that proposal.
Loan Modification Proposal
by Christopher Mayer, Edward Morrison, and Tomasz Piskorski**
The loan modification 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.
Read the full proposal in “A New Proposal for Loan Modifications” (1/07/2009, PDF) where we discuss how to stem foreclosures through loan modifications by targeting privately securitized mortgages, which are at the core of the housing crisis, accounting for more than 50 percent of foreclosure starts. We estimate that the plan would prevent nearly one million foreclosures over three years, at a cost of no more than $10.7 billion. We have also provided an addendum discussing how this plan would deal with second liens. (DOC).
*R. Glenn Hubbard is the Dean and Russell L. Carson Professor of Finance and Economics at Columbia Business School. Christopher Mayer is Senior Vice Dean and Paul Milstein Professor of Real Estate, Finance and Economics at Columbia Business School.
The authors wish to thank Rembrand Koning, Ben Lockwood and Ira Yeung for their dedication, extraordinary research assistance and many suggestions and ideas in pursuing this project. We also thank Stan Humphries at Zillow.com for his assistance in generating comparable data, as well as Adam Ashcraft, Andrew Haughwout, Charlie Himmelberg, Karen Pence and Shane Sherlund for helpful comments and suggestions. These views are those of the authors alone.
**Christopher Mayer is the Senior Vice Dean and Paul Milstein Professor of Real Estate at Columbia Business School. Edward Morrison is a Professor at Columbia Law School. Tomasz Piskorski is an Assistant Professor at Columbia Business School.
To speak with the authors, please contact Marie Burks at 212-854-2747 (or meb2155@columbia.edu), or Elizabeth Schmalz at 212-854-2156
(or eschma@law.columbia.edu).
The authors wish to thank Adam Ashcraft, Richard Epstein, Andrew Haughwout, Glenn Hubbard, Thomas Merrill, Gillian Metzger, Henry Monaghan, Karen Pence, Amit Seru, Joseph Tracy, and Vikrant Vig for helpful thoughts and comments and Rembrand Koning, Benjamin Lockwood, Bryan McArdle, Ira Yeung and Michael Tannenbaum for excellent research assistance. The authors alone take responsibility for this proposal and any errors or omissions therein.
