Asset Preservation Challenges and Prescriptions
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Transcript of Asset Preservation Challenges and Prescriptions
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Asset PreservationChallenges and Prescriptions
Asset Funders Network Meeting
Friday December 9, 2005
Presentation
by
Marva E. WilliamsWoodstock Institute
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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 loans–usurped by credit cards
Finance: securitization of subprime mortgages, payday lender-bank partnerships, stock corporations
Credit scoring
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Woodstock Institute Strategy
Regulation of Existing High Cost Products
Consumer Education
on Alternatives
New Product Development
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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)
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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)
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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.
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Key Features of High Priced Consumer Loans
High interest rates and fees
Balloon payments
No documentation of ability to repay
Cannot pay in installments
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High Priced Consumer Loans
Payday Loans (PDLs): A high-interest loan made by a storefront lender that advances a consumer’s paycheck for a service fee
Car Title Loans: A short-term loan that uses a consumer’s 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
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High Priced Consumer Loans
Other Types of Consumer Loans
Used car loans
Furniture loans
Rent-to-own stores
Pawnshops
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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
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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 property’s 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
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Financial Service Locations
Fannie Mae Foundation. Analysis of Alternative Financial Service Providers, 2004.
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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
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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
Borrowers gets loan they qualify for
Coalition for Responsible Lending (responsiblelending.org)
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Policy Development
Short-Term Consumer Loans
Limit rollovers
Document ability to pay
Interest rate and fee limits
Cooling off periods
Payment plan
Public data
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Financial Literacy
Curriculum
Basic financial management Cost of money Weigh options
Issues
Puts responsibility on consumers Consumer motivation Long-term impact
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Affordable Alternative Loans
Credit Union Affordable Payday Loans
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)
Lower cost Lines of credit and installment
loans Key features
• Underwriting-financial sustainability
• Financial Literacy• Savings incentives
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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
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Chicago Home Ownership Preservation Initiative
Counseling and education: $25 incentive to attend homeowner’s workshops
Preventing foreclosures through 311 Homeownership Preservation Campaign
Intervention: loan modification, forbearance, NHS reinstatement loans
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NCRC Consumer Rescue Fund
Launched in 2001
NCRC and 30 community partners
Background
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NCRC Consumer Rescue Fund
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
Impact
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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
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Tax Refund Splitting
Community Action Project of Tulsa County in Spring 2004
516 filers split refunds into savings and spending components
http://www.tax-coalition.org/Resource%20Library/Splitting_Tax_Refunds.pdf
Refunds to Assets (R2A) Pilot Program
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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
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Role of Foundations
1. Support education and counseling
2. Make advocacy and policy development a priority
3. Convene meetings of advocates and financial institutions
4. Development of best practices
5. Deposits in CDCUs & Community Development Banks
6. Take risks
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Acorn Fair Housing Advocates for people with high cost loans acornfairhousing.org
Brookings Institution Research on financial assess for immigrants brookings.edu
Center for Responsible Lending Engages in policy development and litigation for consumers with high cost loans
responsiblelending.org
Consumer Federation of America Consumer advocacy, research, and education consumerfederation.org
Consumers Union Comprehensive source of advice about financial products and services
consumersunion.org
Demos Addresses the widespread economic insecurity and declining opportunity
demos-usa.org
FDIC Money Smart Program Financial education fdic.gov
National Community Reinvestment Coalition
Coalition of nonprofit organizations supporting community reinvestment and economic justice
ncrc.org
National Consumer Law Center Supports new consumer protections or effective implementation of existing protections
Nclc.org
National Council of La Raza Established to reduce poverty and discrimination and improve life opportunities for Hispanic Americans
nclr.org
Neighborhood Housing Services of Chicago
Foreclosure prevention nhschicago.org
U.S. Public Interest Research Group Research, organizing, advocacy, and litigation in the interests of citizens
uspirg.org
Woodstock Institute Promotes means to bring economic resources to lower-income and minority families and communities
woodstockinst.org
Asset Funders Network MeetingFriday December 9, 2005
Wealth Preservation Resources
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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.