Columbia Professors Offer New Proposal for Preventing Foreclosures

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Columbia Law School: Sonia von Gutfeld,
212-854-1453, [email protected]
Columbia Business School: Marie Burks, 212-854-2747, [email protected]

NEW YORK, January 7, 2009 — Columbia Business School and Columbia Law School today announced a new joint proposal to stem foreclosures through loan modifications. The proposal, co-written by Professor Edward Morrison of Columbia Law School and Professors Christopher Mayer and Tomasz Piskorski of Columbia Business School, takes aim at privately securitized mortgages, which are at the core of the housing crisis, accounting for more than 50 percent of foreclosure starts.

Research shows that when these mortgages become delinquent, servicers of securitized mortgages opt for foreclosure over mortgage modification much more often than private lenders who service their own mortgages.
The solution
, according to the professors, is to facilitate modification, instead of foreclosure, by:
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; 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.
By the authors’ estimates, the plan would prevent nearly one million foreclosures over three years, at a cost of no more than $10.7 billion. It does not raise any constitutional concerns, because it builds on well-established Supreme Court case law. The authors show that this solution is more effective and less costly than alternatives, including bankruptcy reforms involving judicial mortgage reductions, known as “cramdowns,” and the recent FDIC servicer incentive and mortgage guarantee program.
Homeowners will benefit as much as servicers and investors under this plan, the authors argue, as it promotes cooperation between servicers and homeowners so that homes go to foreclosure only when necessary.
This proposal, coupled with an earlier proposal advanced by Professor Mayer and Columbia Business School Dean Glenn Hubbard for the federal government to reduce mortgage rates, is part of a two-pronged approach to stabilize the housing market and prevent foreclosures.
More information, including the proposal, is available here:

About Columbia Law School

Columbia Law School, founded in 1858, stands at the forefront of legal education and of the law in a global society. Columbia Law School joins traditional strengths in international and comparative law, constitutional law, administrative law, business law and human rights law with pioneering work in the areas of intellectual property, digital technology, sexuality and gender, criminal and environmental law.

About Columbia Business School

Led by Dean R. Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics, Columbia Business School seeks to provide a truly global business education that lasts and evolves over a lifetime, preparing students for strong leadership in any industry. The School’s cutting-edge curriculum bridges pioneering academic theory with industry practice, imparting not only functional skills but the entrepreneurial mindset required to recognize and capture opportunity in a competitive business environment. Beyond academic rigor and teaching excellence, the School offers programs that are designed to give students practical experience making decisions in real-world environments. The strength of its ideas, the breadth and accessibility of its alumni network, and the extent of its connections to New York City combine to make Columbia Business School one of the most innovative and dynamic business communities in the world. The School offers MBA and Executive MBA (EMBA) degrees, as well as non-degree executive education programs. For more information, visit