Working Paper: NBER ID: w15281
Authors: 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.
Keywords: mortgage modification; foreclosures; public policy; price discrimination; optimal taxation
JEL Codes: E24; H21; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FDIC-HASP plan (G28) | reduced incentives for income-earning (H31) |
| FDIC-HASP plan (G28) | more foreclosures (G21) |
| alternative collection-maximizing policy (L21) | fewer foreclosures (G51) |
| FDIC-HASP plan (G28) | distortion in labor market incentives (H31) |