To help stem the destructive increase in mortgage foreclosures, Professor Edward Morrison and two colleagues have devised an innovative proposal that has congress listening.
Professor Edward R. Morrison never envisioned himself as a policy wonk, carefully crafting the minute details of legislative proposals. He’s a tried-and-true academic. He spends his time writing about bankruptcy laws, primarily for other academics.
But after the financial and housing markets collapsed last year, Morrison began
doing something he had never done before: drafting a bill for Congress, one that
could help stop the rising tide of home foreclosures. He did it with the help of two real
estate experts from Columbia Business School, Christopher Mayer and
It was the group’s first project together, though Morrison and Mayer had known each other for years. “My interest in bankruptcy and his interest in real estate collided,” Morrison says.
Soon they asked Piskorski to join them, and the professors, along with some of their students, spent the winter holidays pouring over databases and analyzing statistics. They realized the central problem fueling America’s financial crisis was the rising number of home foreclosures.
About 2.25 million foreclosures were started last year, and at least 1.7 million more are expected in 2009. Mortgages that were sliced up and sold in pieces, or securitized, were the core of the problem. They make up more than half of all foreclosures, the professors found, and many of them could have been avoided.
“Everybody would be better off if [loan servicers] just renegotiated,” Morrison says. “But they aren’t negotiating. We wondered if there were economic conditions or legal rules that prevent win-win situations.”
Their answer was yes, so Morrison and his co-authors addressed those barriers in a January paper titled “A New Proposal for Loan Modifications.” The paper showed that loan servicers spend more to renegotiate a mortgage than to foreclose on a home, and that legal restrictions make it difficult to renegotiate securitized mortgages. Also, people who invested in securitized mortgages can often sue if any modifications reduce the value of their investments.
To encourage mortgage renegotiation, Morrison says, the federal government should increase the fees servicers are paid for renegotiating, using funds from the Troubled Asset Relief Program. Furthermore, Congress should override provisions in securitization agreements that make it difficult to modify mortgages, while also protecting loan servicers from lawsuits. The authors say their plan would stop nearly a million foreclosures over the next three years and cost $10.7 billion, a fraction of the $75 billion housing relief plan proposed by President Obama.
The professors have already met with congressional staffers and testified before Congress. They remain hopeful that some of their suggestions will soon be signed into law. They are also excited by the collaborative process that brought their ideas into focus and believe that this kind of collaboration is an effective way to translate academic work into policy impact.
“This project has made it crystal clear that interdisciplinary work can lead to ideas that are really innovative,” Morrison says. “An interdisciplinary focus produced something that was greater than the sum of its parts.”