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Asset Preservation Challenges and Prescriptions

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Banks no longer make small loans usurped by credit cards ... Lerman, Robert I. and Elizabeth Bell`. 2005. Can Financial literacy Enhance Asset Building? ... – PowerPoint PPT presentation

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Title: Asset Preservation Challenges and Prescriptions


1
Asset PreservationChallenges and Prescriptions
Asset Funders Network Meeting Friday December 9,
2005
Presentation by Marva E. Williams Woodstock
Institute
2
Summary of High Cost Loan Trends
  • Lenders justify the high rates by citing the high
    risk of lending to people with little money
    and/or bad credit
  • Marketing storefronts have high visibility
    relative to alternatives, aggressive marketing
  • Small loan trends are indicative of larger U.S.
    economic trends decline in middle-wage jobs,
    rising costs of health care, immigration, people
    with limited credit histories
  • Banks no longer make small loansusurped by
    credit cards
  • Finance securitization of subprime mortgages,
    payday lender-bank partnerships, stock
    corporations
  • Credit scoring

3
Woodstock Institute Strategy
4
Quick Asset Preservation Facts
  • In 1980, the savings rate was 10 in 1990, it
    was 8 and in 2000, the savings rate was 0.
  • In 2000, homeownership rate for non-Hispanic
    whites was 72 African-Americans, 46
    Hispanics, 46 Asians, 53 and all minorities,
    47.
  • The average homeowner had 54 in equity is their
    home in 2000, down from 70 in 1982.
  • Household debt to asset ratios have increased
    from 13 in 1980 to 16 in 2000.
  • Personal bankruptcies per 100,000 people have
    increased from 120 in 1980 to 530 in 2002.
  • Financial institutions are increasingly making
    their money on fees for financial services rather
    than the spread between their cost of funds and
    their loan rates.

Woodstock Institute Social and Economic
Indicators (woodstockinst.org)
5
Key Features of High Priced Mortgage Loans
  • High interest rates and fees
  • Prepayment penalties
  • Balloon payments
  • No documentation of ability to repay
  • Single premium life insurance
  • Aggressive collections

Woodstock Institute (woodstockinst.org) ACORN
Fair Housing (acorn.org)
6
Interest-Only Mortgages
  • 61 of new mortgages in California
  • Lure of low payments
  • Generally 5 year interest only payments
  • Homes may not appreciate as quickly
  • Interest rates increasing
  • Lack of equity
  • Principal payments are forced savings
  • Option ARMs can pay as little as 1.5 of
    mortgage- negative amortization

Greg McBride. Bankrate.com Interest-Only Loans.
October 2005.
7
Key Features of High Priced Consumer Loans
  • High interest rates and fees
  • Balloon payments
  • No documentation of ability to repay
  • Cannot pay in installments

8
High Priced Consumer Loans
  • Payday Loans (PDLs) A high-interest loan made by
    a storefront lender that advances a consumers
    paycheck for a service fee
  • Car Title Loans A short-term loan that uses a
    consumers car title as collateral (consumer must
    own the car outright)
  • Refund Anticipation Loans (RALs) A short-term
    loan borrowed against an anticipated tax refund
    from the IRS the borrower pays fees to the
    lender, which serve as an effective interest rate
  • Bounced Check Loans (BCLs) a regular feature of
    checking accounts, bounce protection is marketed
    as a loan program but regulated as a service
  • Credit Cards often have misleading terms and
    fees, apply universal default, only rate range is
    advertised, convenience checks have different
    rates. Secured cards especially expensive. Over
    75 of Americans qualify

9
High Priced Consumer Loans
  • Other Types of Consumer Loans
  • Used car loans
  • Furniture loans
  • Rent-to-own stores
  • Pawnshops

10
Who is Impacted?
  • Chicago Region Consumer/Community Demographics
  • Over half of subprime loans are in communities
    that are over 50 minority
  • Payday lenders located in minority and low-income
    census tracts
  • Payday loan borrowers three times more likely to
    be debt burdened, earn 40 of area median-income,
    young, female, African-American

11
Community Impacts
  • Subprime lending Foreclosures
    Property values
  • For every 100 additional subprime loans on
    owner-occupied properties from 1996-2001, there
    were an additional 9 foreclosure starts per
    census tract in 2002. The contribution of
    subprime home purchase loans to neighborhood
    foreclosure is 28 times that of prime home
    purchase loans
  • Each conventional foreclosure within one-eighth
    of a mile of a property (in Chicago, a city
    block) results in a 1.2 decline in that
    propertys value

There Goes the Neighborhood The Effect of
Single-Family Mortgage Foreclosures on Property
Values by Daniel Immergluck and Geoff Smith,
Woodstock Institute. June 14, 2005
12
Financial Service Locations
Fannie Mae Foundation. Analysis of Alternative
Financial Service Providers, 2004.
13
Wealth Protection Strategies
  • Policy development
  • Financial literacy
  • Affordable PDL alternative loan
  • Post-purchase counseling Chicago Neighborhood
    Housing Services
  • Rescue fund National Community Reinvestment
    Coalition
  • Tax refund splitting

14
Policy Development
  • Mortgage Loans
  • Data reporting
  • Document ability to pay
  • Interest rate and fee limits
  • No prepayment penalties
  • No flipping
  • No financing of single premium insurance
  • No balloon payments
  • No loans with negative amortization
  • Payment plan

Coalition for Responsible Lending
(responsiblelending.org)
15
Policy Development
  • Short-Term Consumer Loans
  • Limit rollovers
  • Document ability to pay
  • Interest rate and fee limits
  • Cooling off periods
  • Payment plan
  • Public data

16
Financial Literacy
  • Curriculum
  • Basic financial management
  • Cost of money
  • Weigh options
  • Issues
  • Puts responsibility on consumers
  • Consumer motivation
  • Long-term impact

17
Affordable Alternative Loans
Credit Union Affordable Payday Loans
  • Lower cost
  • Lines of credit and installment loans
  • Key features
  • Underwriting-financial sustainability
  • Financial Literacy
  • Savings incentives

AECF Low-Cost Payday Loans Opportunities and
Obstacles (aecf.org) Woodstock Institute
Reinvestment Alert 16 Affordable Alternatives to
Payday Loans Examples from Community Development
(woodstockinst.org)
18
Post Purchase Counseling
  • Chicago Home Ownership Preservation Initiatives
  • Established 3-Year Initiative in 2003
  • Partnership of Chicago NHS, City of Chicago and
    Chicago Federal Reserve Bank

knowledgeplex.org/kp2/cache/documents/90881.pdf
19
Chicago Home Ownership Preservation Initiative
  • Counseling and education 25 incentive to attend
    homeowners workshops
  • Preventing foreclosures through 311 Homeownership
    Preservation Campaign
  • Intervention loan modification, forbearance, NHS
    reinstatement loans

20
NCRC Consumer Rescue Fund
Background
  • Launched in 2001
  • NCRC and 30 community partners

21
NCRC Consumer Rescue Fund
Impact
  • Helped 1,000 consumers with high risk predatory
    mortgages
  • Mediation with lender to renegotiate terms
    including loan forgiveness and forbearance
  • Affordable refinance in 17 states

22
Tax Refund Splitting
  • Background
  • In 2001, low-income files received 78 billion in
    refund payments through EITC and other tax
    credits
  • Can not save entire refund
  • Should commit to save part of refund through
    splitting in two accounts

23
Tax Refund Splitting
Refunds to Assets (R2A) Pilot Program
  • Community Action Project of Tulsa County in
    Spring 2004
  • 516 filers split refunds into savings and
    spending components

http//www.tax-coalition.org/Resource20Library/Sp
litting_Tax_Refunds.pdf
24
Tax Refund Splitting
  • R2A Findings
  • 20 filers split refunds
  • Saved 47 of refunds of which ¾ had no previous
    savings
  • Saved an average of 479
  • Four months later, more filers still had savings
    compared to other filers

25
Role of Foundations
  • Support education and counseling
  • Make advocacy and policy development a priority
  • Convene meetings of advocates and financial
    institutions
  • Development of best practices
  • Deposits in CDCUs Community Development Banks
  • Take risks

26
Asset Funders Network Meeting Friday December 9,
2005 Wealth Preservation Resources
27
References Anderson, Steven G., Min Zhan and Jeff
Scott. 2004. Targeting Financial Management
Training at Low-Income Audiences. Journal of
Consumer Affairs 38, no. 1, Summer. Anne E. Casey
Foundation. Winter 2005. Double Jeopardy
Advocasey Explores the High Cost of Being Poor.
Baltimore, MD AECF. Azmy, Baher. 2005. Squaring
the Predatory Lending Circle. Florida Law Review
57, no. 2, April. Barr, Michael S. 2004. Banking
the Poor. Yale Journal on Regulation 21, no. 1,
Winter. Clancy, Margaret, Michal Grinstein-Weiss.
2001. Financial Education and Savings Outcomes in
Individual Development Accounts. Center for
Social Development George Warren Brown School of
Social Work. Demos and CRL. 2005. Plastic Safety
Net The Reality Behind Debt in America. Demos
and Center for Responsible Lending. Elmendorf,
Fritz and Richard Caponetti. 2005. CBA's
Financial Literacy Survey Shows Efforts Aimed at
Explaining Credit Scores and Underwriting
Process. CBA News Release, April 28. Immergluck,
Daniel and Geoff Smith. 2005. There Goes the
Neighborhood The Effect of Single-Family
Mortgage Foreclosures on Property Values.
Chicago, IL Woodstock Institute. Jacob, Katy.
2002. Evaluating Your Financial Literacy Program
A Practical Guide. Chicago, IL Woodstock
Institute. Lerman, Robert I. and Elizabeth Bell.
2005. Can Financial literacy Enhance Asset
Building? Urban Institute Opportunity and
Ownership Project 6 (September). Quercia,
Roberto, and Michael Stegman and Walter David.
2004. Assessing the Impact of North Carolina
Predatory Home Mortgage Law. Fannie Mae
Foundation Housing Debate 15, no. 3. Temkin,
Kenneth and Noah Sawyer. 2004. Analysis of
Alternative Financial Service Providers.
Washington DC Fannie Mae Foundation. Westrich,
Tim and Malcolm Bush. 2004. Banking on Bounced
Checks. Chicago, IL Woodstock Institute. .
2005. Blindfolded Into Debt A Comparison of
Credit Card Costs and Conditions at Banks and
Credit Unions. Chicago, IL Woodstock Institute.
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