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Foreclosures, Enforcement, and Collections under the Federal Mortgage Modification Guidelines

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  • Casey B. Mulligan

Abstract

Federal mortgage modification initiatives, targeting millions of borrowers, are intended to prevent foreclosures of underwater home mortgages. Those initiatives discourage principal reductions in favor of interest reductions, despite the possibility that the former would be a more durable foreclosure prevention tool. The programs also impose marginal income tax rates substantially in excess of 100 percent. Using the framework of optimal income taxation, this paper shows how alternative means-tested modification rules would simultaneously improve collections, efficiency, the number of foreclosures, and their total cost. As a result, lenders have an incentive to foreclose on borrowers deemed modification eligible by the federal programs.

Suggested Citation

  • Casey B. Mulligan, 2010. "Foreclosures, Enforcement, and Collections under the Federal Mortgage Modification Guidelines," NBER Working Papers 15777, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15777
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    References listed on IDEAS

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    1. Bernanke, Ben S, 1983. "Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression," American Economic Review, American Economic Association, vol. 73(3), pages 257-276, June.
    2. Robert A. Moffitt, 2003. "Means-Tested Transfer Programs in the United States," NBER Books, National Bureau of Economic Research, Inc, number moff03-1.
    3. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
    4. Robert A. Moffitt, 2003. "Introduction to "Means-Tested Transfer Programs in the United States"," NBER Chapters,in: Means-Tested Transfer Programs in the United States, pages 1-14 National Bureau of Economic Research, Inc.
    5. Casey B. Mulligan, 2009. "Means-Tested Mortgage Modification: Homes Saved or Income Destroyed?," NBER Working Papers 15281, National Bureau of Economic Research, Inc.
    6. Song Han & Wenli Li, 2007. "Fresh Start or Head Start? The Effects of Filing for Personal Bankruptcy on Work Effort," Journal of Financial Services Research, Springer;Western Finance Association, vol. 31(2), pages 123-152, June.
    7. Borys Grochulski, 2007. "Optimal Personal Bankruptcy Design: A Mirrlees Approach," 2007 Meeting Papers 1008, Society for Economic Dynamics.
    8. Kahn, Charles M & Yavas, Abdullah, 1994. "The Economic Role of Foreclosures," The Journal of Real Estate Finance and Economics, Springer, vol. 8(1), pages 35-51, January.
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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. Mulligan Casey B, 2011. "Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-47, June.
    3. John Y. Campbell, 2013. "Mortgage Market Design," Review of Finance, European Finance Association, vol. 17(1), pages 1-33.
    4. Herkenhoff, Kyle F. & Ohanian, Lee E., 2016. "Foreclosure Delay and the U.S. Labor Market," Economic Policy Paper 16-7, Federal Reserve Bank of Minneapolis.
    5. Olsen, Edgar O. & Zabel, Jeffrey E., 2015. "US Housing Policy," Handbook of Regional and Urban Economics, Elsevier.

    More about this item

    JEL classification:

    • 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
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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