Grow It: Building Assets from Income

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Grow It Building Assets from Income

• Presentation by Ellen Seidman
• Asset Funders Network Launch Meeting
• December 9, 2005

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CFSI
The Center for Financial Services Innovation
assists the financial services industry to
identify, develop, and implement innovative ways
of delivering asset-building opportunities to the
underbanked market.

• CFSI provides
• funding for innovative solutions
• a meeting place for interested parties
• information on how to respond to the needs of the
  underbanked profitably and responsibly

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Low Income Means Both Low Wealth And Low Liquid
Wealth, And No Cushion Against Setbacks
Source Federal Reserve Survey of Consumer
Finance, 2001
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Credit Path-Getting from Access to Assets
Source Alternatives Federal Credit Union
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Asset-Building Strategies

• Education
• Financial assets
• The process
• The assets
• Homeownership
• Insurance
• Entrepreneurship

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Education More Leads to Both Income and Wealth
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EducationEspecially a College DegreeIs a
Lasting Asset
Source US Census, 2002
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More Education, More Kinds Of Assets
Mutual funds, stocks, bonds Defined
contribution plans, IRAs, KEOGHs Source EBRI
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And More Net Worth
Source Pew Hispanic Center tabulations of SIPP
data, 2002
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Education Issues and Questions

• What are the actual rates of return to education
  in terms of wealth-building? Early childhood
  education? Adult education? Technical education?
• How do we better connect post-secondary
  education, especially community colleges, with
  wealth-building, growing job opportunities in a
  manner that effectively responds to the practical
  needs of mature students?
• How can we make certain that student aid
  qualifications are not inconsistent with
  asset-building?

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Financial Services Both the Means to Building,
and A Source of Assets
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Why are they Underbanked?
Who Are the Underbanked?

• Economic barriers
• Lack of liquidity to carry account balance
• High fees, especially for bounced checks
• Structural barriers
• Lack of sufficient identification to open account
• Bad prior experience (ChexSystems)
• Experiential barriers
• Unfamiliar with banks
• Lack of account transparency
• Distrust of banks

• As many as 22 million households 20 of U.S.
  households are unbanked, including at least 53
  of Mexican immigrants
• The combined unbanked and subprime credit
  population may be 30-40 million households

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Healthy Financial Services
What the Poor Often Get

• Obscure, often unfair terms
• Over-priced
• Disproportionately open to theft or accidental
  loss
• Little or no interest paid
• Little opportunity for leverage
• Little opportunity for diversification
• Prone to wealth-stripping

• Fair and open terms
• True risk-based price
• Risk of loss disclosed in comprehensible manner
• Paid for time value of money (i.e., earn
  interest)
• Opportunity for leverage
• Opportunity for diversification
• Asset-building

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Key A Suite of Financial Products

• Start with safe, well-priced transactional
  products check cashing, bill pay, remittances,
  checkless checking, full checking
• Reduce asset-depleting behavior
• Move on to savings and credit-building
  opportunities, recognizing need for small,
  unsecured credit in the process
• Then to asset-building borrowinghome, school,
  business
• Insurance
• And investments

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Financial Services Issues and Questions

• What are the best ways to connect the need to use
  financial services with asset building?
• What are promising innovationstechnological and
  otherthat can improve the asset-building
  capacities of financial services?
• How can we change the context within which
  mainstream financial services institutions work
  to enhance the business case for serving the
  low-income population?
• How can the regulatory environment for financial
  services, both federal and state, better
  encourage asset building?

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Homeownership Leverage and Stability Risk and
Lack of Liquidity
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Homeownership Is Increasing Among All Races and
Incomes, But Gap Remains
Source HUD, Census
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Homeownership Accounts for Virtually All The
Wealth of Lowest-Income Groups
Housing Equity as of Total Net Worth
Median Housing Equity
Median Net Worth
86.1
6,371
7,396
Lowest Income Quintile
76.4
20,601
26,950
2nd Quintile
72.2
32,067
44,400
3rd Quintile
65.4
51,003
78,001
4th Quintile
46.9
86,990
185,500
5th Quintile
Source Net Worth and Asset Ownership of
Households 1998 and 2000, US Census Bureau, May,
2003
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Renters Have Little Wealth Compared to
Homeowners Race Matters, but Not As Much
Source Joint Center for Housing Studies
Tabulations of Survey of Consumer Finance data
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Benefits of Homeownership at Low Wealth Levels
Risks of Homeownership at Low Wealth Levels

• Leverage
• In purchaselow down payment requirements
• During ownershipcan be pledged to generate cash
• On salecapital appreciation goes to equity
  holder, and is lightly untaxed
• Forced savings through mortgage payoff
• Stabilityevidence of improved educational
  attainment by children of homeowners increased
  civic activity
• Psychological benefit of being part of the
  American dream

• Financing frequently at non-prime prices and
  terms, and less flexibility to refinance,
  especially if credit not good
• Less flexibility to move if employment
  opportunities or neighborhood amenities change,
  especially if house prices decline in tandem with
  changes
• Repair costs, property tax increases and
  appropriate kind and level of insurance can
  exceed ability to pay
• Asset is so big as to lead to non-diversified
  portfolio

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Homeownership Issues and Questions

• How can we reduce both the incidence and impact
  of predatory lending?
• How can we improve pre- and post-purchase
  counseling so that clients stay with the program,
  providers are held to standards, and providers
  are sufficiently compensated?
• How can we best deal with the fact that
  low-income homebuyers tend to buy homes that are
  likely to need major repairs or improvements?
• What are the alternatives to classic
  homeownership, especially in high-cost areas,
  that might have some of the same benefits as
  homeownership for consumers and communities, but
  be more affordable and less sticky (e.g., land
  trusts, limited equity coops)? How can they
  become more standardized?

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Insurance Rented Savings, the Hidden
Asset-Builder
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Insurance as An Asset-Building Strategy

• Insurance is a means of spreading risk, both over
  populations and over time, enabling a relatively
  small premium to buy protection against a large
  loss
• Even for low-income families without assets,
  life, disability and health insurance are
  important protections against financial disaster
• For those who finally begin to acquire assets,
  property and casualty is essential to cover
  losses that income and savings alone cannot.
• In essence, insurance is a means of renting
  savings that can be used under special
  circumstances.

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An Example Losing Health Insurance Is An
Important Cause of Bankruptcy
Source Himmelstein, et al analysis of data from
Consumer Bankruptcy Project, 2003
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Savers Carry More Insurance, But Non-Savers May
Need Insurance More
Source MetroEdge survey
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Insurance Issues and Questions

• What is the relationship of insurance to
  wealth-building?
• How can insurance underwriting in lower income
  communities better reflect actual risk?
• What is the proper risk-based pricing of
  insuranceof all kindsfor low-income and
  low-wealth households?
• What is the business case for insurers to
  responsibly and sustainably serve low-income and
  low-wealth communities, and how can it be
  enhanced?
• Are there forms of micro-insurance that can
  affordably protect the assets of low-wealth
  families?
• Is the insurance regulatory system optimal for
  serving low-income and low-wealth communities?
  How can it be improved?

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Entrepreneurship Challenge in Moving from
Startup to Assets
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Entrepreneurship Is Strong Among Low Income
Households, But How Successful?

• The rate at which people start or manage a new
  business is as high among those with household
  incomes of 15-20,000 per year as with incomes
  of 75-100,000 per year, but more of the former
  were driven by necessity rather than opportunity
• Business start-up rates among black men with
  household incomes up to 20,000 were as high as
  rates among women of all races and income levels,
  and among black men with incomes up to 75,000
• Only 2.5 of lowest income quintile households
  own any business equity

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Entrepreneurship Issues and Questions

• What are the best systems for finding and
  encouraging successful entrepreneurship,
  especially in low-income communities and
  communities of color?
• What is the impact of successful and unsuccessful
  entrepreneurship on entrepreneurial household
  wealth? On the wealth of other households in the
  community?
• What are the best ways to support the equity
  needs of a successful entrepreneur that come
  between initial capitalization (and money from
  family and friends) and private equity?

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For more information

• Ellen Seidman
• The Center for Financial Services Innovation
• 2230 S. Michigan Ave., Suite 200
• Chicago, IL 60616
• 312-881-5816
• eseidman_at_sasbk.com
• www.cfsinnovation.com