How Much has the Government Subsidized the Mortgage Market?

By subsidies, I mean the ex poste increase in the net worth of owners of mortgages, or pieces of mortgages, as the result of:

  • government purchases of mortgages, pieces of mortgages, and liabilities of funds and institutions that own mortgages or pieces of mortgages, in excess of their market value. It’s the excess over market value that counts as a subsidy. For example, most of the $100+ billion the government paid to AIG was a subsidy, because what it got in return was essentially worthless (from the market’s point of view). The $700 billion TARP would not be all subsidy, but the Treasury received some positive value assets in return. On the other hand, I would say that Goldman Sachs received a TARP subsidy, even though it eventually paid the money back with interest, because the government paid more than market price for its Goldman Sachs securities (e.g., in another state of the world, Goldman Sachs never pays back).
  • the increase in the net worth of the owners of mortgages due to the fact that mortgage lenders are permitted to discriminate in their modifications on the basis of borrower tax returns (thereby depleting federal, state, and local Treasuries of income tax revenues).

I have seen various estimates of government monies disbursed, and committed:

These amounts are $3-8 trillion. However, much of that is not a subsidy (see above), and these total entirely exclude the implicit subsidy occurring through mortgage modification.

Luke Threinen and I calculated that the U.S. housing market crashed a total of $5 – 8 trillion (difficult to know exactly, because housing price indices disagree so much on the amount of the price reduction). So it’s easy to see that government paid for 25% of that loss, and conceivably paid for 50% or more.

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About Casey B. Mulligan 76 Articles

Affiliation: University of Chicago

Casey B. Mulligan is a Professor in the Department of Economics. Mulligan first joined the University of Chicago in 1991 as a graduate student, and received his Ph.D. in Economics from the University of Chicago in 1993.

He has also served as a Visiting Professor teaching public economics at Harvard University, Clemson University, and Irving B. Harris Graduate School of Public Policy Studies at the University of Chicago.

Mulligan is author of the 1997 book Parental Priorities and Economic Inequality, which studies economic models of, and statistical evidence on, the intergenerational transmission of economic status. His recent research is concerned with capital and labor taxation, with particular emphasis on tax incidence and positive theories of public policy. His recent work includes Market Responses to the Panic of 2008 (a book-in-process with Chicago graduate student Luke Threinen) and published articles such as “Selection, Investment, and Women’s Relative Wages,” “Deadweight Costs and the Size of Government,” “Do Democracies have Different Public Policies than Nondemocracies?,” “The Extent of the Market and the Supply of Regulation,” “What do Aggregate Consumption Euler Equations Say about the Capital Income Tax Burden?,” and “Public Policies as Specification Errors.” Mulligan has reported on some of these results in the Chicago Tribune, the Chicago Sun-Times, the Wall Street Journal, and the New York Times.

He is affiliated with a number of professional organizations, including the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He is also the recipient of numerous awards and fellowships, including those from the National Science Foundation, the Alfred P. Sloan Foundation, the Smith- Richardson Foundation, and the John M. Olin Foundation.

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