Columbia Profs Tackle Loan Mods

Three Columbia University professors are the latest to weigh in on the much-discussed topic of loan modifications in a report released late last week. In a two part proposal, which suggests creating financial incentives for servicers and reducing the red tape around workouts, the academics provide what they consider a comprehensive solution to boost modifications to troubled home loans that have been bundled into mortgage bonds. “We estimate that the plan would prevent nearly one million foreclosures over three years, at a cost of no more than $10.7 billion,” the professors wrote. More effective and less costly they believe, than such alternatives as letting bankruptcy judges modify first mortgages. The proposal, which aims to stem foreclosures through loan workouts, targets privately securitized mortgages –which the trio said are “the core of the problem,” accounting for more than 50 percent of foreclosure starts. The proposal’s authors — Columbia law professor, Edward Morrison, and business professors Tomasz Piskorski and Christopher Mayer — said federal authorities could endorse cooperation between servicers and homeowners, while preventing unnecessary foreclosures by first, using TARP funds to further compensate servicers who modify mortgages. There is a need, according to the professors, to align servicers’ incentives with the interests of borrowers and investors. Federal authorities must also remove legal constraints that hinder modification, the professors said.  This could be accomplished through legislation that “eliminates explicit restraints on modification and creates a safe harbor from litigation that protects reasonable, good faith modifications that raise returns to investors.” While Fannie Mae (FNM), Freddie Mac (FRE), the FHA, and private lenders are actively and aggressively pursuing mortgage modifications, servicers of securitized loans are still lagging behind, the paper explains. And their reluctance is backed, according to the professors, by a lack of proper compensation and legal constraints surrounding the pursuit of loan mods. And while these barriers could likely be overcome if pooling and servicing agreements — that don’t compensate servicers for costs incurred with loan mods and place explicit limits on load mods — were rewritten, a rewrite typically requires unanimous investor consent; yet, another barrier, the professors said. “This is why government intervention is needed.” Mayer, along with Columbia Business School Dean Glen Hubbard, previously suggested the U.S. Treasury or Federal Reserve reduce loan rates via purchasing mortgages and/or mortgage securities from GSEs Fannie Mae and Freddie Mac. In November, the Federal Reserve announced it would do just that. Low and behold, rates plunged. Write to Kelly Curran at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.