Columbia profs: Incentivize servicers to modify mortgages

Three Columbia University professors today tackled one of the thorniest problems of the housing debacle: how to increase modifications to soured home loans that have been bundled into mortgage bonds.

Troubled mortgages that back securities in the private market, with customer-service outfits collecting payments, are far likelier to go into foreclosure than those in which the lender keeps the loan, the professors note.

They propose creating financial incentives for loan servicers to modify loans to make them affordable, along with some changes in laws to remove impediments.

The authors are a Columbia law professor, Edward Morrison, and two business professors, Christopher Mayer and Tomasz Piskorski. In a news release, the academics said privately securitized mortgages “are at the core of the housing crisis, accounting for more than 50% of foreclosure starts."

They said federal authorities could promote cooperation between servicers and homeowners, averting unnecessary foreclosures, by:

"1) Compensating servicers who modify mortgages. Using TARP [Treasury Department bailout] 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; and

"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."

The authors contend the plan would prevent nearly 1 million foreclosures over three years. They say it would cost no more than $10.7 billion – more effective and less costly, they argue, than such alternatives as letting bankruptcy judges modify first mortgages.

Mayer and Columbia Business School Dean Glenn Hubbard had attracted attention previously by suggesting that the U.S. Treasury or the Federal Reserve reduce loan rates by buying mortgages or mortgage securities from the all-but-nationalized home-loan giants Fannie Mae and Freddie Mac.

The full proposal, along with video of Mayer discussing housing, mortgage and modifications, can be reviewed at a Columbia Business School real estate site.

After the Federal Reserve announced in November that it would spend $500 billion doing exactly that, rates on 30-year fixed mortgages eligible for Fannie and Freddie dropped precipitously, settling in the low 5% range on average and at times dropping well below 5% for particularly solid borrowers.

-- E. Scott Reckard

Comments

[Cal]

This proposal makes a lot more sense than a lot of other proposals out there and I think there are 2 compelling reasons why this has more of a shot of being introduced and passing (without being watered down like H4H) than previous proposals.

1- The fed and treasury are following the “Mortgage Rates and Homeownership” (12/18/2008) " proposal very closely already. These guys have some weight behind them apparently. Either that or the Fed came up with the same calculus around the same time.

2- The cost is lessened as it puts the cost rightfully onto the people who lent the money originally, moral hazard relative to many other plans is lessened and number of people that can be reasonably helped is maximized.

This proposal would also increase short sales not just modification. SOMETHING is going to be passed by this congress, I would rather have this something than a lot of other junk floating out there be passed.

[150 Multiple Choice Questions]

I'm sure these "experts" have heard of MORAL HAZARD but I notice they didn't mention it. How do they think rewarding the irresponsible and foolish will somehow help?

At it's core, this idiotic plan from the sheep that got us here is no different than the last 15+ idiotic plans and will also do absolutely nothing to stop the decline in housing prices, which will then force these modified loans to continue to default.

Let me put it into simple language so even those at Columbia and in Washington will understand: "you cannot artificially support asset prices." IS THAT CLEAR? Any attempts to do so is money thrown away. Let the market work as it is supposed to. Let the houses get foreclosed, let them clear at the market price, and let those who didn't buy a house they couldn't afford or refinance their lifestyle purchase them. Some of those buyers will be the ones previously foreclosed, who will get a house at a much lower cost basis than they could ever hope to through this stupid proposal... Getting a house at a lower price is what will help them, not at a lower rate. But of course these fraudulent morons are really trying to help the banks on the backs of the borrowers.

[Jennie]

The government should pay in fairness the third party loan modification company. why they should pay the mortgage servicer. The should mandated total modification considering the personal expenses in the ratios such as utilities,repairs of car and house,food,groceries,insurance of car or house,gasoline and maintenace of car. THe government should enforced that the lenders should act within 30 days and also must not asked large upfront fee. THe government especially FBI to investigate the collusioin of lenders staff and the outside foreclosed lawyer. My friend worked with maximondo modification corp. of chicago, il 60618 7735888776 and they told me the lenders is very slow in processing loan modificaiton and does not have any direct contact name,phone no. fac or email address.

[Cal]

Maximondo has been spamming the broker boards, I see they've made their way here. Who would trust people who have to resort to spamming to get business? There is also a matter of not having advanced fee agreement from the CA DRE (which they claim they are working on but are still trying to do mods in CA).

http://www.dre.ca.gov/mlb_adv_fees.html

[aj]

Let the free market continue..this was a bubble that has to play out. we can not artificially sustain this situation.
I know this is now sounding "old" but it has to be said again. Many markets that expanded to 300 and 400 percent of their original prices have to retract and they will...no government intervention will "solve the problem".
Get back to income sustaining affordable housing in the medium...

[Laker]

There is a huge moral hazard problem in modification of loans. I think that modifying somebodies loan down when he put nothing down is a crime! They must let those foreclose, and sell the houses to good buyers. House will be sold. All the government need to do is to force banks to sell REO within 30 days. If they can't sell in 30 days, they need to auction the house to the general public. ALL 100% of house will sell. If the bank refuse to sell the house, fine them with $1000 every day not sold.

I do agree that loan modification SHOULD be given to those that bought with 20% down payment. Those that put 20% of their cash should be helped as they really were trying to be home owners, the rest were renters and should be foreclosed!

[k2polo]

Loan modifications will not work unless the loans are reset to the current market value of the homes, and that is not going to happen. People will continue to foreclose or abandon their properties, then turn around and buy a home out of foreclosure at the fair market value. It is a cycle that began a year ago and will continue for all of 2009 and perhaps 2010. Lenders are slow, cumbersome, very poorly run, and overwhelmed by their demand for help by distressed owners. Forget it! Buyers will rule in the next two years and Sellers are going to suffer.

[Ditech Home Loans]

Most Alt-a and option arm loans adjust to high margins when resetting, which is pure profit to the lender. To avoid some defaults, the servicing lenders who hold the notes could offer their customers a simple modification to lower the margin before the loans reset or recast.