Working Paper

Do Mortgage Subsidies Help or Hurt Borrowers?

Abstract: Mortgage subsidies affect homeownership costs by reducing effective mortgage rates and increasing house prices. I show analytically the role of mortgage subsidies in determining house price changes, economic incidence, and efficiency costs using a theoretical framework for applied welfare analysis. I derive simple expressions for these effects, as functions of reduced-form sufficient statistics, which I use to measure the effects from eliminating mortgage deductions. My main results characterize the distributional impact of mortgage subsidies among buyers and owners and how house price responses attenuate efficiency losses. My results provide broader methodological insights into the welfare analysis of credit policies.

Keywords: Public economics; Mortgage subsidies; Incidence; Optimal taxation; House prices; mortgage interest deductions; MID;

JEL Classification: H22; R21; R28;

https://doi.org/10.17016/FEDS.2016.081

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2016-10-05

Number: 2016-081

Pages: 46 pages