The Federal Deposit Insurance Corp.'s plan to pay mortgage servicers to modify troubled loans and absorb some of their losses will cost too much and have limited success, according to Columbia University professors.
While House and Senate Democrats have embraced the FDIC's proposal, it's unlikely to attract widespread industry participation and would expose taxpayers to future losses, Columbia business and law school professors say in a report released Wednesday.
The mortgage servicers would be paid $1,000 for each loan, and the FDIC would accept up to half of their losses if the borrower defaults, under the plan. The FDIC's initiative "has many virtues," although it doesn't eliminate legal barriers that dissuade many servicers from modifying bad loans, the study found.
"Further, the costs to taxpayers would be very large," wrote business professors Christopher Mayer and Tomasz Piskorski and law school professor Edward Morrison. "Taxpayers would face large liabilities for years to come based on the possibility that modified loans might again fail."
They also said plans in Congress to allow bankruptcy judges to "cram down" mortgage balances and lower interest rates are "deeply problematic."
"These proposals would raise future borrowing costs and could encourage solvent borrowers to miss payments," they said. "Proposed reforms could push millions of borrowers into bankruptcy."
They propose instead to use some of the $350 billion in remaining money from Treasury's Troubled Asset Relief Fund to pay servicers while shielding the industry from investor lawsuits.
Their plan would increase fees for loan servicers to up to 10 percent of the borrower's monthly mortgage payments collected. Congress would also need to enact legislation that gives loan servicers temporary legal protections from investor lawsuits, among other things. They say their plan would cost $10.7 billion, wouldn't expose taxpayers to future losses and may prevent almost 1 million foreclosures over the next three years.