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

44 Pages Posted: 25 Aug 2009 Last revised: 1 Oct 2009

See all articles by Casey B. Mulligan

Casey B. Mulligan

University of Chicago; National Bureau of Economic Research (NBER)

Date Written: August 2009

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

Mulligan, Casey B., Means-Tested Mortgage Modification: Homes Saved or Income Destroyed? (August 2009). NBER Working Paper No. w15281. Available at SSRN: https://ssrn.com/abstract=1459582

Casey B. Mulligan (Contact Author)

University of Chicago ( email )

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National Bureau of Economic Research (NBER)

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