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. Williams Woodstock
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 loansusurped by
  credit cards
• Finance securitization of subprime mortgages,
  payday lender-bank partnerships, stock
  corporations
• Credit scoring

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Woodstock Institute Strategy
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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 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

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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
  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
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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

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

• 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)
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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
  homeowners workshops
• Preventing foreclosures through 311 Homeownership
  Preservation Campaign
• Intervention loan modification, forbearance, NHS
  reinstatement loans

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NCRC Consumer Rescue Fund
Background

• Launched in 2001
• NCRC and 30 community partners

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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

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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
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
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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

• 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

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Asset Funders Network Meeting Friday 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.