Thursday, December 11, 2008

Mortgage Modifications' Implicit Tax

Mark Lieberman of Fox Business News has an article about the feedback effect of mortgage delinquencies on unemployment.

I spoke to Mr. Lieberman, who explained to me how he used to work for a bank. He explained that it was common banking practice in previous recessions to modify mortgages according to borrower income. So maybe my theory applies not only to 2008 and 1933, but also a number of recessions in between?!

1 comment:

happyjuggler0 said...

I think it is worth pointing out that rational ignorance (of bank forbearance) is likely much reduced this time around than in past real estate busts.

Also, for many people (especially amongst noneconomists) there is an ethical dilemma that is very real, and that while it may be technically rational for them to think in terms of effective marginal tax rates with regards to their mortgage, not all of them will do the immoral thing and stop working.

That said, it is also worth pointing out that people are more likely to let their moral standards slide when it appears that "everyone" is doing it too.

Since we now live in bailout nation ("everyone's doing it, why not us too?"), and since mortgages are massively more covered in mainstream media this time around, and since government money is involved now, and since many people think government money is the closest thing to "free", it seems likely that your thesis is likely going to have a much bigger effect this time (and perhaps in the future too) than in most past recessions or housing downturns.