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Building Assets, Building Credit

Building Assets, Building Credit: Creating Wealth in Low-Income Communities

Nicolas P. Retsinas
Eric S. Belsky
Copyright Date: 2005
Pages: 395
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  • Book Info
    Building Assets, Building Credit
    Book Description:

    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.

    eISBN: 978-0-8157-9784-5
    Subjects: Sociology, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-viii)
  3. Foreword
    (pp. ix-xii)
    Edward Gramlich

    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 have witnessed a marked resurgence spurred, at least in part, by growth in credit and homeownership.

    The increased access to credit and expanded opportunities for homeownership (for households that previously...

  4. Acknowledgments
    (pp. xiii-xvi)
  5. 1 New Paths to Building Assets for the Poor
    (pp. 1-9)

    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 in 2001, the median net wealth of renters with incomes of $20,000 or less was a low $900.

    Indeed, assets for the poor among those who do not own homes seem an oxymoron. After all, low incomes coupled with high rents and other living expenses rule out savings. In...

  6. 2 Credit Matters: Building Assets in a Dual Financial Service System
    (pp. 10-42)

    Since the publication in 1991 of Michael Sherraden’s seminal bookAssets 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...

  7. Part 1. Making Choices

    • Introduction
      (pp. 43-46)

      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 ironic use of debt to build assets. For most low- and moderate-income, and minority (LMIM) families in the United States, the only widely available...

    • 3 To Bank or Not to Bank? A Survey of Low-Income Households
      (pp. 47-70)

      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 ofwhois unbanked, relatively little is known aboutwhy. Moreover, many low-income consumers who have bank...

    • 4 Refinance and the Accumulation of Home Equity Wealth
      (pp. 71-102)

      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...

  8. Part 2. Beyond Prime

    • Introduction
      (pp. 103-106)

      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 credit, the changes in the mortgage market raise important policy issues. There are roles for both government action and community-based organizations in addressing...

    • 5 Changing Industrial Organization of Housing Finance and Changing Role of Community-Based Organizations
      (pp. 107-137)

      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 served by government-backed, subprime, or manufactured home lending, and exposed to new threats linked to rising rates of mortgage...

    • 6 Exploring the Welfare Effects of Risk-Based Pricing in the Subprime Mortgage Market
      (pp. 138-152)

      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 termsubprime, which covers a wide-ranging set of mortgage products and practices, is also callednon-prime. 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...

  9. Part 3. Keeping Score

    • Introduction
      (pp. 153-154)

      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 homeownership rates and sustainability. In addressing issues related to credit scores and risks, the chapters of part 3 provide new research on the question of whether the...

    • 7 Hitting the Wall: Credit as an Impediment to Homeownership
      (pp. 155-172)

      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 of a homeowner’s family and a lower incidence of neighborhood challenges such as crime and blight (Aaronson, 2000; DiPasquale and Glaeser, 1999; Rohe, McCarthy, and van Zandt, 2000; Haurin, Dietz, and Weinberg, 2002). These perceived benefits have been the motivation for...

    • 8 Credit Scoring’s Role in Increasing Homeownership for Underserved Populations
      (pp. 173-202)

      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 balanced all risk factors, so decisionmakers could apply one consistent measure of risk to all applications. This made credit more accessible and affordable to millions of Americans. Credit...

  10. Part 4. Role of Regulation

    • Introduction
      (pp. 203-205)

      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 are up to the task of protecting low-income consumers while providing them with an adequate flow of...

    • 9 Modes of Credit Market Regulation
      (pp. 206-236)

      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 communities. Enormous progress has been made in expanding access to home mortgage lending, but there is evidence that minority borrowers still face discrimination. Others have argued that low-income communities generally have lower access to capital...

    • 10 Accuracy in Credit Reporting
      (pp. 237-265)

      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 requires credit bureaus to follow “reasonable procedures to assure maximum possible accuracy” of the information in their credit reports.² This language reflects the fact that a hallmark...

    • 11 Cost-Benefit Analysis of Debtor Protection Rules in Subprime Market Default Situations
      (pp. 266-282)

      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 also make money through loan performance, but invest in quick, low-cost foreclosure, and anticipate sometimes being able to appropriate some or all of the debtor’s equity. Enforced nonwaivable debtor protection would likely significantly...

  11. Part 5. Working toward Solutions

    • Introduction
      (pp. 283-285)
      KEN WADE

      In the 1970s, when the Neighborhood Reinvestment Corporation and its nonprofit 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 institutions, and community residents to create access to credit for underserved areas. Thankfully, the market has changed dramatically in the last twenty-five years. Through the efforts of the Community Reinvestment Act, along with advances in technology and innovative public-private...

    • 12 Institutions and Inclusion in Saving Policy
      (pp. 286-315)

      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 important. For most households, including low-income households, asset accumulation requires saving as well as credit.²

      Recent applied research has contributed to...

    • 13 Unbanked to Homeowner: Improving Financial Services for Low-Income, Low-Asset Customers
      (pp. 316-347)

      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 education levels. In 1998, 45.3 percent of blacks and Hispanics were asset poor, compared to 20.5 percent of white...

    • 14 Innovative Servicing Technology: Smart Enough to Keep People in Their Houses?
      (pp. 348-378)

      The advent of automated credit-scoring evaluation tools in the mid-1990s has 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 relatively little (for a rare exception, see Stegman, Quercia, and Davis, 2003). Yet it is the case (as shown in figure 14-1) that foreclosure rates have stayed below their 1998 levels throughout the 2001...

  12. Contributors
    (pp. 379-380)
  13. Index
    (pp. 381-395)