Richard Green takes up Paul Krugman’s argument that we should provide debt relief to underwater borrowers.
His recommendations are great, and you can rationalize all of it from a social welfare perspective. I think he should add another group:
People who took out equity to pay for home improvements.
They should get the same treatment as people who used equity to cover health care costs.
Green points to a very nice paper form Michael Lacour-Little that shows that about half of southern California borrowers took out equity to buy toys like vacations and boats.
As to Richard’s worry that it would be hard to prove who was who here, I don’t agree. Economists are always allergic to transactions costs, but those are inevitable. If you want to get food stamps or your kid to receive occupational theory for his disability, you’re expected to document your entire freaking life down to the minutest detail. Homeowners wanting relief should face the same scrutiny. Or else barriers to resources should go down for other people in need, too.
Given that we are talking about giving away a lot of money to a particular class of people, some of whom are victims and others of whom are decidedly not, I think it’s reasonable to expect people to establish that at the time of their loan they had the documentation to prove the income they claimed even if they didn’t have to document that income to get their loan. Everybody has tax returns. Moreover, I think you can and should be expected to demonstrate where the home equity line of credit went. Hospitals issues bills and so do universities.
The question is how much time this would take, but you can’t get a student loan overnight, either.
For those who think the bad banks are enjoying the cream while poor little struggling homeowners are getting hosed, Lacour-Little shows that property owners in southern California extracted $2 billion of in equity gains while banks have a lost a billion on SoCal. This is a complicated story–much more so than David versus Goliath narrative.
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5 thoughts on “Richard Green on providing debt relief”
What if the home improvements were frivolous? or made not out of necessity, but just because they wanted to (even though they can’t afford it)? Who decides?
And some people bought houses they couldn’t afford (happens every day). Isn’t that like joining the National Guard for the sweet benefits and then bitching when you are called up?
I don’t think it really matters whether the improvement was frivolous or not. For a home improvement, people borrowed money to add value to an asset that the bank still owns, so while the use value of the improvement may go to the homeowner, the asset value is still shared by the bank.
Fair enough, Lisa. However, I still thinks it matters. If homeowners borrowed money to make frivolous improvements that they couldn’t afford, then they added value to an asset that the bank still owns, as you say. The bank should get the benefit of that added value when they foreclose. It’s similar to a renter putting in an improvement like a pool. When the lease expires, that’s a windfall to the lessor.
In addition, some improvements add more value to the home than the cost, others less value than the cost of the improvements. Maybe we should distinguish based on that factor as well.
I just don’t think homeowners who have borrowed money for improvements are necessarily meritorous of foreclosure relief compared to others.
When you borrow money from the bank it is always a tricky situation for you. Any kind of improvement can add the final value for the bank’s assets and bankers are familiar with that. I don’t think that homeowners should be the one who has to carry the blame and responsibility on their shoulders…
I want to know what the toxicology report is. I don’t see any indication of a hate crime altho I can see an investigation given the leanings of the AG of the US
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