Incentives and Compliance Under the Federal Mortgage Modification Guidelines

Casey B. Mulligan

in The Redistribution Recession

Published in print November 2012 | ISBN: 9780199942213
Published online January 2013 | e-ISBN: 9780199980772 | DOI:
Incentives and Compliance Under the Federal Mortgage Modification Guidelines

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Under water mortgages, delinquencies, foreclosures, and the mortgage industry's slow pace of modifications may be a direct result of stark incentives created by the FDIC and HAMP programs and their practice of targeting the ratio of housing expenses to borrower income. The chapter shows how the programs resemble government safety net programs, except that the marginal income tax rates from mortgage modification far exceed 100 percent in some instances. Lenders have an incentive to randomly foreclose on borrowers deemed modification-eligible by FDIC and HAMP, because the resulting uncertainty faced by borrowers would discourage them from fully responding to the program's massive marginal income tax rates. Finally, the Chapter relates the microeconomics of mortgage modification to the safety net replacement calculations presented in chapter 3.

Keywords: mortgage modification; foreclosures; marginal tax rates

Chapter.  7233 words.  Illustrated.

Subjects: Public Economics

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