Columbia Professors Are Offering Tips for Tackling Foreclosures

Professors from Columbia Business School as well as Columbia Law School jointly sent out proposals suggesting tips that can be taken for stopping foreclosures by resorting to modifications of loans. Behind the writing of the proposals are professors Christopher Mayer and Tomasz Piskorzki belonging to Columbia Business School and Professor Edward Morrison of Columbia Law School. They are targeting the problem of securitized mortgages that are at the heart of the foreclosure crisis and are responsible for 50% of the foreclosed numbers. Glenn Hubbard the Dean of Columbia Business School is also associated with this project.

Detailed study shows that at the time of these mortgages becoming delinquent the servicers of the securitized mortgages do not go for mortgage modification but always gives priority to proceeding with foreclosure. But the private lenders who do the work of servicing themselves do not do so.

Thus, the professors opine, the best thing is to give priority to loan modification and not to foreclosure. This can be done by giving an incentive to the servicers for going ahead with mortgages. The funds from TARP could be used for this. The fees of the servicers could be increased from their present amount if they avoid foreclosure and continue with the mortgage. Thus the interests of the servicers will be linked with that of the investors as well as of course the borrowers.

The second suggestion is the removal of legal hurdles that stand in the way of modifications. For this the onus is on the federal government to pass laws that will do away with the restraints on negotiations and create a safe climate without possibility of legal threats, for viable modification that will safeguard the interests of the investors with the hope of better returns.

The professors calculate that by doing so about one million foreclosures stretching over three years will be avoided. The cost is modest – not over $10.7 billion. No constitutional hassles are involved because it tunes in with the laws laid down by the Supreme Court. The trio says that their solution is the most cost effective than various other alternatives so far suggested. It is even better than proceeding with bankruptcy reforms termed as cram-downs.

The FDIC incentive offered towards servicers and mortgage guarantee measures are commendable. Along with the borrower the servicers as well as the investors will gain from it. Foreclosures then will become the last option to be taken up.