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

36 Pages Posted: 1 Mar 2010 Last revised: 12 Aug 2010

See all articles by Casey B. Mulligan

Casey B. Mulligan

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

Date Written: February 2010

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

Mulligan, Casey B., Foreclosures, Enforcement, and Collections Under the Federal Mortgage Modification Guidelines (February 2010). NBER Working Paper No. w15777. Available at SSRN: https://ssrn.com/abstract=1560912

Casey B. Mulligan (Contact Author)

University of Chicago ( email )

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