Borrowing to Live

Borrowing to Live: Consumer and Mortgage Credit Revisited

Nicolas P. Retsinas
Eric S. Belsky
Copyright Date: 2008
Pages: 289
https://www.jstor.org/stable/10.7864/j.ctt1262m3
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  • Book Info
    Borrowing to Live
    Book Description:

    Americans are awash in debt, and the U.S. economy is in trouble. Credit undergirds daily life more than ever -it has become one of the defining aspects of American life, and the ramifications are becoming clearer by the day. The already considerable damage from a depressed housing market has been exacerbated by the subprime lender implosion, sending shock waves through the financial sector, international economies, and government at all levels. Most low- or moderate-income people borrow, but that should not be construed as uniformly poor judgment or lack of disciplines -Americans are not borrowing merely to keep up with the Joneses, but too often simply to stay afloat.

    InBorrowing to Live, the Joint Center for Housing Studies of Harvard University brings together a group of experts drawn from the best of academia, research, and public services. Together with editors Nicolas Retsinas and Eric Belsky, they dissect the worrisome current state of consumer and mortgage credit in the United States and help point the way out of the current struggles.

    Contributors: Michael S. Barr, Eric S. Belsky, Raphael W. Bostic, Shawn Cole, Amy Crews Cutts, Kathleen C. Engel, Ren S. Essene, Elaine Kempson, Patricia A. McCoy, William A. Merrill, Sendhil Mullainathan, Anthony Pennington-Cross, Elizabeth Renuart, Eldar Shafir, Edna R. Sawady, Jennifer Tescher, John Thompson, Peter Tufano, Susan M. Wachter

    eISBN: 978-0-8157-0172-9
    Subjects: Business, Political Science

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments
    (pp. ix-xii)
  4. Introduction: Borrowing to Live
    (pp. 1-4)
    NICOLAS P. RETSINAS and ERIC S. BELSKY

    Not so long ago, when poor people desperately needed a loan, they sought out neighborhood sharks—and paid and paid. Or they relied on retailers like car dealers and furniture stores to finance their purchases. Houses were beyond reach. Before the Community Reinvestment Act in 1977 was enacted, deposit-taking banks—the traditional mortgage lenders—often rejected them. These banks would offer thirty-year fixed rate mortgages, generally with 20 percent down payments, to middle- and upper-income Americans. But these borrowers’ credit met the lenders’ standards: in the jargon, they were “prime” borrowers. The would-be homeowners without stellar credit were “subprime,” and...

  5. 1 Consumer and Mortgage Credit at the Crossroads
    (pp. 5-64)
    ERIC S. BELSKY, REN S. ESSENE and NICOLAS P. RETSINAS

    By all measures, Americans are awash in debt as never before.¹ While median net wealth grew from $69,465 to $93,001 from 1989 to 2004, it was outpaced by consumer debt, which more than doubled during the same period, from $22,000 to $55,300.² By 2004, 76.4 percent of all households reported some form of borrowing; 46.2 percent were carrying a balance on at least one credit card, 48.0 percent on a mortgage loan or line of credit, 39.5 percent on an auto loan or lease, 13.4 percent on a student loan, and 19.3 percent on some other form of borrowing.³ Undoubtedly,...

  6. 2 Where Does It Go? Spending by the Financially Constrained
    (pp. 65-91)
    SHAWN COLE, JOHN THOMPSON and PETER TUFANO

    Despite widespread interest by academics, businesspeople, and policymakers, little is known about the financial behavior of low-income individuals, particularly the unbanked and underbanked. We examine the spending patterns of low- and moderate-income (LMI) households using a new database and focus on differences in spending as a function of consumers’ credit constraints. Our work leverages a unique and proprietary data set of spending information on more than 1.5 million individuals to shed light on important questions at the intersection of consumer credit and consumer spending: Do credit-constrained consumers spend money more quickly than less constrained consumers? Do they spend the money...

  7. 3 Financial Decisionmaking Processes of Low-Income Individuals
    (pp. 92-109)
    EDNA R. SAWADY and JENNIFER TESCHER

    InThe End of Poverty, Jeffrey Sachs describes the poor as “ready to act, both individually and collectively . . . hard working . . . [and having] a very realistic idea about their conditions and how to improve them, not a mystical acceptance of their fate.”¹ This description differs markedly from the stereotypical portrayal of low-income individuals as reluctant workers and irrational consumers. By judging various choices as irrational, observers who are not themselves poor invoke the traditional notion of rationality, which assumes that individuals make choices that maximize economic utility. Examples of perceived irrationality abound, particularly when it...

  8. 4 The Legal Infrastructure of Subprime and Nontraditional Home Mortgages
    (pp. 110-137)
    PATRICIA A. McCOY and ELIZABETH RENUART

    We are at a crossroads. The regulatory landscape of mortgages, through decades of deregulation, crass competition for charters, and aggressive concentration of federal power at the expense of state laws protecting local citizens, failed to curb abuses in the mortgage market in any meaningful way. The subprime crisis was the direct result of not policing the market, resulting in skyrocketing foreclosures, falling homeownership rates, lost municipal tax revenues, vacant buildings, and distress to the economy as a whole. The persistent nature of these problems strongly suggests that proper reregulation of mortgage loans, with a strong federal floor augmented by state...

  9. 5 The Impact of State Antipredatory Lending Laws: Policy Implications and Insights
    (pp. 138-169)
    RAPHAEL W. BOSTIC, KATHLEEN C. ENGEL, PATRICIA A. McCOY, ANTHONY PENNINGTON-CROSS and SUSAN M. WACHTER

    The subprime mortgage market, which consists of high-cost loans designed for borrowers with weak credit,¹ has grown tremendously over the past ten years. Between 1993 and 2005, the subprime market experienced an average annual growth rate of 26 percent.² As this market emerged, so did allegations that subprime loans contained predatory features or were the result of predatory sales practices.³ In the worst cases, brokers deceived borrowers about the meaning of loan terms or falsely promised to assist them in obtaining future refinance loans with better terms. In other situations, borrowers entered into loans with low teaser rates, not aware...

  10. 6 Behaviorally Informed Home Mortgage Credit Regulation
    (pp. 170-202)
    MICHAEL S. BARR, SENDHIL MULLAINATHAN and ELDAR SHAFIR

    Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today’s environment, where mortgages vary along several dimensions and on unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation—disclosure and usury or product restrictions. This paper uses insights from both psychology and economics to...

  11. 7 Interventions in Mortgage Default: Policies and Practices to Prevent Home Loss and Lower Costs
    (pp. 203-254)
    AMY CREWS CUTTS and WILLIAM A. MERRILL

    The implosion of the subprime market in early 2007 and subsequent deterioration of the prime market in 2008 caused by the rapid rise in mortgage defaults resulted in significant media and political focus on saving homeowners from foreclosure and the possible loss of their home. Although the default problem in the prime segment of the market is less severe, the issues related to keeping borrowers in their homes affect all market segments, not just subprime loans. In particular, what do we know about defaults and what causes them? Is there an ideal cost-benefit time frame for the foreclosure process? What...

  12. 8 Looking beyond Our Shores: Consumer Protection Regulation Lessons from the United Kingdom
    (pp. 255-268)
    ELAINE KEMPSON

    Credit regulation in the United Kingdom has been undergoing substantial reform in the past three years. This chapter reviews these reforms and discusses how they take account of criticisms of previous regulatory regimes. It draws out some of the strengths and weaknesses of current regulation from a consumer’s perspective. In doing so, there is a need to distinguish between mortgages and other forms of consumer credit because there are two quite different regulatory regimes for the conduct of business, including consumer protection. The chapter is restricted to retail markets and does not cover prudential regulation.

    Since October 31, 2004, all...

  13. Contributors
    (pp. 269-270)
  14. Index
    (pp. 271-290)