Greg Mankiw's Blog: Mortgage Forgiveness as a Tax Hike

Greg Mankiw's Blog: Mortgage Forgiveness as a Tax Hike

Consider a hypothetical example: You and your spouse were both employed in 2005, at which time you bought a house, took out a mortgage equal to four years' family income and committed to a monthly payment about one quarter of your family's monthly income. Today your house is worth three year's income. To add to your injury, your family income is cut in half because you lost your job. Your housing payment is now more than half of your family income.
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The profit motive, not sympathy for the unemployed, makes banks willing to implement the formula: Collecting some of their debts—from borrowers who are "able to pay"—is better than not collecting any at all. As affected borrowers (or borrowers who anticipate that they too will be affected) earn less income, pay less federal and state taxes and receive more unemployment benefits, the 38 percent formula siphons tax revenue out of public treasuries even while it helps banks improve on the collection scenario for bad loans. Rather than promoting the 38 percent formula, the federal government needs to rein in this practice by regulating it or by repudiating part of the mortgage debts without regard for the borrowers' incomes.

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