Research Shows Public Policy Hampers Home Ownership

by: Casey Mulligan

This August, I released a paper explaining why the mortgage modification programs implemented by the Bush and Obama Administrations were probably increasing foreclosures, rather than reducing them. The paper was based on government explanations of the programs rules, and economic reasoning as to how borrowers and lenders would respond. I said that, absent a federal modification program, lenders would have their own programs that allow more borrowers to be eligible, and thereby more borrowers who would have their mortgage modified rather than being induced to leave their home for the lender.

Recently the Congressional Oversight Panel released a report reviewing the federal modification programs. It noted how some mortgage servicers are included in the program by mandate. Others servicers have the option to participate, although non-participation (ie, modifying mortgages by rules that differ from the federal rules) would cause them to forgo the 20K+ per mortgage subsidy for the entire population of mortgages they might modify. So you can understand why those "voluntary" servicers might follow the federal guidelines even if they thought alternative guidelines made more sense.

Nevertheless, a number of servicers have chosen to forgo the subsidy and follow their own guidelines. When the Congressional Oversight Panel interviewed them, those that responded said "their own modification programs provided borrowers with more aggressive and flexible relief than did HAMP, allowing more borrowers to receive modifications" (COP, p. 66).

I suppose that this answer was filtered through a committee of corporate lawyers, but if there were any truth to it, it looks like economic theory gets it right again!