Pay lenders to stem foreclosures: report

WASHINGTON (Reuters) - The U.S. government should pay mortgage finance companies to rewrite troubled loans and steer homeowners away from default, according to recommendations from legal and finance scholars released on Wednesday.

"(Mortgage) servicers are not properly compensated for loan modification," according to a report prepared by professors from Columbia Business School and Columbia Law School. "Using TARP funds, the federal government should increase the fee that servicers receive from continuing a mortgage and avoiding foreclosure."

More than half of fresh foreclosures involve mortgages that were financed by Wall Street investors who do too little to modify the loan terms, according to the report.

If the government gives cash to mortgage companies, they will have a strong incentive to ease burdensome loans, it said.

In another useful move, Congress could enact legislation that would create a "save harbor" for mortgage companies that want to ease loan terms and give them some protection from investors, according to the report co-written by Professors Christopher Mayer and Tomasz Piskorski of Columbia Business School and Professor Edward Morrison of Columbia Law School.

Details of their proposal can be found here /housingcrisis

(Reporting by Patrick Rucker; Editing by Andrea Ricci)