Working Paper: NBER ID: w15777
Authors: 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.
Keywords: mortgage modification; foreclosures; income tax; optimal taxation
JEL Codes: H21; L11; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income share targets (D33) | foreclosure rates (G21) |
| marginal income tax rates (H31) | foreclosure rates (G21) |
| principal reductions (G51) | foreclosure prevention (G51) |
| interest reductions (G32) | foreclosure rates (G21) |
| mean-tested modification rules (I38) | collections efficiency (A30) |
| mean-tested modification rules (I38) | foreclosure rates (G21) |