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

  • Casey B. Mulligan

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.

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File URL: http://www.nber.org/papers/w15777.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15777.

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Date of creation: Feb 2010
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Handle: RePEc:nbr:nberwo:15777
Note: EFG ME PE
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