Building Assets, Building Credit
Creating Wealth in Low-Income Communities
Publication Year: 2005
Poor people spend their money living day to day. How can they accumulate wealth? In the United States, homeownership is often the answer. Homes not only provide shelter but also are assets, and thus a means to create equity. Mortgage credit becomes a crucial factor. More Americans than ever now have some access to credit. However. thanks in large part to the growth of global capital markets and greater use of "credit scores," not all homeowners have benefited equally from the opened spigots. Different terms and conditions mean that some applicants are overpaying for mortgage credit, while some are getting in over their heads. And the door is left wide open for predatory lenders. In this important new volume, accomplished analysts examine the situation, illustrate its ramifications, and recommend steps to improve it. Today, low-income Americans have more access to credit than ever before. The challenge is to increase the chances that homeownership becomes the new pathway to asset-building that everyone hopes it will be.
Published by: Brookings Institution Press
Series: James A. Johnson Metro Series
One of the more significant social developments of recent years has been the increased access to credit for lower-income communities and people. Lending statistics for the 1990s show high rates of credit growth for low- and moderate-income households, much higher than comparable rates of growth for higher-income households. Homeownership rates over this period also increased smartly, especially for lower-income and minority households. And, many formerly downtrodden urban and rural neighborhoods ...
This book is the culmination of a conference exploring ways low-income Americans can build assets and the critical role that access to credit plays in making this possible. Principal funding for the symposium was provided by the Ford Foundation, Freddie Mac, and Neighbor Works America. We are indebted to these organizations for seeing the value of sponsoring an event dedicated to understanding these issues, and, especially, what can be done to improve low-income access to credit and asset-building opportunities. A project of this magnitude ...
Chapter 1. New Paths to Building Assets for the Poor
Most poor people have no problem filling in the spaces on their balance sheets for income, debts, and expenses, but come up short in the space for assets. Apart from seniors who bought homes when their incomes were higher, few among the poor have many assets. In fact, when last measured in2001, the median net wealth of renters with incomes of $20,000 or less was a low $900.00 Indeed, assets for the poor among those who do not own homes seem an...
Chapter 2. Credit Matters: Building Assets in a Dual Financial Service System
Since the publication in 1991 of Michael Sherraden’s seminal book Assets for the Poor, efforts have intensified to document the extent of asset poverty and devise strategies for ameliorating it. Interest in the subject derives not only from the importance of assets to individual well-being and economic security, but also from the extreme disparities in wealth found in the United States, disparities that eclipse even the wide income gaps between the rich and poor. By one measure of asset poverty, as many as 41 percent of all households in 1999 had inadequate savings or other liquid assets to cover their basic needs for three months (Caner and Wolff, 2004).1 Among those...
PART 1: Making Choices
How poorly does a market need to function before the public sector steps in to correct market imperfections? How would one determine whether a market is functioning? A main theme of this volume, and the conference that inspired it, is the critical importance of access to a range of financial services to facilitate individual asset building. Using other people’s capital to build assets is the historic foundation of most wealth building in capitalist economies: the seemingly ...
Chapter 3. To Bank or Not to Bank? A Survey of Low-Income Households
There has been a recent surge of interest in the market potential for mainstream financial service firms to serve unbanked and marginally banked consumers. The financial services industry is gradually awakening to the message that low-income consumers are a huge, untapped market for financial products and services. Despite the general recognition of unmet demand among lower-income consumers, important gaps in information about this market segment pose obstacles to conventional financial services firms. In particular, while there is an evolving consensus around the description of who is unbanked, relatively little is known about why. Moreover, many low-income consumers who have bank accounts also conduct business with fringe institutions, straddling both sides of the dual financial service system ...
Chapter 4. Refinance and the Accumulation of Home Equity Wealth
In aggregate across the United States, home equity totaled $9.6 trillion by the end of 2004, an increase of $3.7 trillion in just five years.1 According to the 2001 Survey of Consumer Finances, home equity (the difference between the home value and amount of mortgage debt on the property) accounted for at least 50 percent of net wealth for one-half of all households. Home equity is not only the single largest component of net wealth for most families, but is also held by a broader cross section of families when compared with other assets. For example, the U.S. homeownership rate was 69 percent in 2004, while only 52 percent of American families held stock either directly or indirectly.2 Thus an increase in real home equity (that is, adjusting for general inflation) is the most significant component to overall wealth building ...
PART 2: Beyond Prime
Technology has driven two changes in the mortgage market, consolidation in the industry and use of automated underwriting to assess quickly and at low cost the risk of borrower default. For many borrowers, the changes have been unambiguously good. Low-cost mortgages are available with little hassle. These borrowers, who are likely to be proficient in dealing with financial institutions and have good credit, are considered in the prime market. For others with less financial sophistication or blemished...
Chapter 5. Changing Industrial Organization of Housing Finance and Changing Role of Community-Based Organizations
Building on the recent revolution in computer technology and telecommunications, today’s mortgage market bears little resemblance to the one that existed just a few decades ago. While new approaches to mortgage marketing, underwriting, and servicing have prompted a surge in lending in lower-income and minority neighborhoods, this growth is linked to the emergence of a dual mortgage delivery system characterized by a noticeable absence of conventional prime mortgages in these same areas. Instead, low-income and minority borrowers and communities are disproportionately ...
Chapter 6. Exploring the Welfare Effects of Risk-Based Pricing in the Subprime Mortgage Market
Over the last ten years, subprime mortgage lending has evolved from a small niche in home equity lending to a market valued at over $200 billion annually, or roughly 10 percent of the overall single-family residential mortgage market (Cutts and Van Order, 2005). The term subprime, which covers a wide-ranging set of mortgage products and practices, is also called nonprime. In simplest terms, it is mortgage lending where the cost of credit is higher than that offered by prime and FHA lending specialists. In most cases, the higher cost reflects the lower credit quality of approved applicants as measured by their credit scores. This chapter presents ...
PART 3. Keeping Score
The use of credit scores to assess consumer financial risk has grown rapidly.Increasingly, utilities, landlords, and even employers are using these scores to predict not just payment risk but also, more broadly, financially prudent and responsible behavior. Consumer lenders, first to demand credit scores, continue to use them most extensively, with mortgage lenders leading score demand and use.The use of credit scores by mortgage lenders has had a significant impact on...
Chapter 7. Hitting the Wall: Credit as an Impediment to Homeownership
Representing the American Dream, homeownership has long held a special place in the United States. A significant fraction of the typical American household’s wealth is wrapped up in its primary residence, which makes homeownership a vital investment tool (Kennickell, Starr-McCluer, and Surette, 2000). Moreover, homeownership has been found to have ancillary benefits, such as better health outcomes for members ...
Chapter 8. Credit Scoring's Role in Increasing Homeownership for Underserved Populations
Credit scoring grew out of the need to offer more credit more quickly, and without discrimination, to an increasingly mobile population after World War II. It made lending processes faster, fairer, and more accurate and consistent. Loan decisions could be made in minutes, rather than days or weeks. The extension of credit could be based only on factors proven (not assumed) to relate to future repayment. Sophisticated scorecard models precisely weighted and ...
PART 4: Role of Regulation
Regulations can help markets operate more efficiently and transparently, or they can protect consumers, or they can accomplish both tasks. It is not easy, however, to strike a balance between efficiency and protection. Prescriptive regulations intended to protect consumers can add to costs and discourage providers from serving certain markets where violations incur stiff penalties. Many of the laws designed to protect consumers’ rights and encourage equal access to credit were passed decades ago. Recent market developments raise questions about whether current regulations...
Chapter 9. Models of Credit Market Regulation
Despite the depth and breadth of U.S. credit markets, low- and moderate-income communities, as well as minority borrowers, have not enjoyed full access to those markets. 1 Community advocates have long argued that redlining—a practice of not lending to borrowers in neighborhoods with a higher concentration of minority households—has, at least historically, limited the flow of capital from depository institutions for homeownership in minority...
Chapter 10. Accuracy in Credit Reporting
The accuracy of consumer credit reports was among the most prominent issues in the congressional debate over amending the Fair Credit Reporting Act (FCRA) during the summer of 2003. This came as no surprise to observers of the credit reporting industry and its evolution since the original FCRA was passed in 1970.1 One of the primary impetuses for passage of the FCRA was to enhance accuracy in credit report content. The act explicitly...
Chapter 11. Cost-Benefit Analysis of Debtor Protection Rules in Subprime Market Default Situations
Debtor protection rules ought to influence debtor/creditor interaction in the residential real estate market at three points: post-default pre-foreclosure negotiations, the rate of default, and the cost of credit. Their cumulative impact should be different for “high road” than for “low road’ subprime creditors. High road creditors make money through loan performance, invest in minimizing default, and lose money when they have to foreclose. Low road creditors...
PART 5: Working toward Solutions
In the 1970s, when the Neighborhood Reinvestment Corporation and its non-profit NeighborWorks network were in their early stages, the driving issue in neighborhoods was redlining—lenders simply were not making loans available for buying or renovating homes predominately occupied by low-income and minority families. Across the country, hundreds of community development organizations formed to harness the resources of local governments, financial...
Chapter 12. Institutions and Inclusion in Saving Policy
Credit is important, especially for purchasing a home, but credit is only one pathway to asset accumulation—the other is saving. The poor must save,not only to qualify for and pay off credit, but also for key purchases such as clothing for the start of a child’s school year; life course events, such as births,weddings, and funerals; and emergencies, such as car repair, illness, or job loss.1 Saving and credit are complementary, often intermingled, and both are ...
Chapter 13. Unbanked to Homeowner: Improving Financial Services for Low-Income, Low-Asset Customers
Being poor at the end of the twentieth century did not necessarily mean having a low income. In 1998, at the height of the most recent economic boom, the official poverty rate for families had fallen to 10 from 12.3 percent at the close of the severe recession of the 1980s. Yet in the same fifteen-year period,asset poverty had risen to 25.5 from 22.4 percent (Haveman and Wolff, 2001).1 The asset poor disproportionately belong to minority groups and have lower...
Innovative Servicing Technology: Smart Enough to Keep People in Their Houses?
The advent of automated credit-scoring evaluation tools in the mid-1990shas led the mortgage industry through a major technological revolution.The impact of credit scoring and automated underwriting in the loan origination process and on homeownership has received much attention (see, for example, Avery and others, 2000; Straka, 2000; Gates, Perry, and Zorn, 2002; and Gates, Waldron, and Zorn, 2003); innovations in loan servicing have received...