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Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?

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  • Casey B. Mulligan

Abstract

This paper uses the theories of price discrimination and optimal taxation to investigate effects of underwater mortgages on foreclosures and the incentives to earn income, and the degree to which those effects are shaped by public policy. I find that the federal government's means-tested mortgage modification plan creates a massive implicit tax that may be significant even from a macroeconomic perspective. An alternative of modifying mortgages to maximize lender collections would also feature means tests, but with less effort distortion and perhaps fewer foreclosures. The paper also considers the consequences of a public policy that left mortgage modification to lenders, subject to a requirement that modification would not be conditioned on borrower income.

Suggested Citation

  • Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15281
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    14. Casey B. Mulligan, 2008. "A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance," NBER Working Papers 14514, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Hagedorn, Marcus & Karahan, Fatih & Manovskii, Iourii & Mitman, Kurt, 2013. "Unemployment benefits and unemployment in the Great Recession: the role of macro effects," Staff Reports 646, Federal Reserve Bank of New York, revised 01 Feb 2015.
    2. Casey B. Mulligan, 2010. "Does Labor Supply Matter During a Recession? Evidence from the Seasonal Cycle," NBER Working Papers 16357, National Bureau of Economic Research, Inc.
    3. Casey B. Mulligan, 2010. "Foreclosures, Enforcement, and Collections under the Federal Mortgage Modification Guidelines," NBER Working Papers 15777, National Bureau of Economic Research, Inc.
    4. Adelino, Manuel & Gerardi, Kristopher & Willen, Paul S., 2013. "Why don't Lenders renegotiate more home mortgages? Redefaults, self-cures and securitization," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 835-853.
    5. Casey B. Mulligan, 2011. "Means-Tested Subsidies and Economic Performance Since 2007," NBER Working Papers 17445, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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