A skimmer’s guide to ‘What It’s Worth’

Excerpts from What It’s Worth: Food for Thought (Part 1)

Pam Bailey, NeighborWorks America blogger | 1/3/2016 7:49:00 PM
The Great Recession dramatically demonstrated how extraordinarily vulnerable the majority of Americans are—not just those who already were precarious even before the housing bubble burst, but also so many others who are “keeping it together” on the surface, but are actually in danger of teetering over the edge with an unexpected provocation. Cover of the book, "What It's Worth"

At the level of the individual and family, the consequence of poor financial health is catastrophic. But the collective size of this malaise (70 percent of U.S. households are savings-limited, income-constrained or debt-challenged) should be downright alarming for the nation. Jared Bernstein from the Center on Budget and Policy Priorities writes in the new book, “What’ It’s Worth” that there is “strong evidence that inequality, income stagnation and under-regulated finance interact in ways that have led to bubbles and busts that damage the larger economy.”
That’s one reason why NeighborWorks America has chosen to focus on “creating economic opportunities” in 2016, focusing all four of its Wednesday symposia at its training institutes on different aspects of the theme. It’s also why our CEO Paul Weech contributed a chapter, and why we believe “What It’s Worth” is such an important book to read and share far and wide. (It does for financial capability what we plan to do for community development in our own book, to be released in December.)

Because it is long, and also to whet your appetite, I thought I would share my “CliffsNotes” version of a few of the suggested solutions to various aspects of the financial crisis among America’s communities and families, which will hopefully stimulate discussion and debate (and lead you to puruse the full book for more detail). Note that for purposes of this summary, I focus on those that do not involve federal or state policy changes, or modification in the way financial institutions operate. Below is the first installment, followed by two more!

Findings from the ‘Diaries’

From Jennifer Tescher, Center for Financial Services Innovation, and Rachel Schneider, Center for Financial Services Innovation: “The Real Financial Lives of Americans

Schneider is one of the coordinators of the U.S. Financial Diaries project, which was featured at NeighborWorks’ August training institute on “Building Pathways to Financial Resilience.” She and Tescher offer several key observations that are important for those offering financial education and coaching:

  • Cash flow is as important an indicator as annual income. Households with seemingly sufficient income get into trouble when the timing of their expenses don’t match the inflow of funds. For families participating in the diaries project, about 60 percent of spending spikes were not accompanied by an income spike in the same month. One-quarter of expense spikes occurred when a household’s income was below its median.
  • Access to financial services (facilitating bank accounts as an alternative to payday loans) is important but insufficient.
  • Borrowing and saving are opposite sides of the same coin. What the authors mean by this is that the cheapest possible access to funds is not the sole determinant of why people choose to borrow vs. save, although that is the criterion traditional economists expect them to use. For example, although the use of personal savings is free, they require self-discipline to accumulate and provide the peace of mind that comes with knowing the funds are there. Thus, some people will borrow even when it doesn’t appear to make sense, just to preserve that “security blanket.” In contrast, sometimes people borrow for nonessential purchases, in return for the immediate gratification and the ability to build a credit history—despite the fact that it comes with a fee and the anxiety of a future obligation. The bottom line: When deciding when to borrow or save, people appear to take both the psychological and financial cost into account.
  • Financial progress is complex, unpredictable, and often messy. Practitioners tend to look at household savings balances over time, caution the authors, and are disappointed when they don’t see steady growth. However, looking at point-in-time savings balances or expecting a constant upward trajectory misses the fact that people are indeed saving.

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Freddie Mac Encourages Homebuyers to Utilize Housing Counselors

For first-time homebuyers looking for information or a guide through the complicated buying process, the best option is a conversation with a housing counselor, according to a blog post from Freddie Mac on Monday.
For those buyers who have no idea how to begin the process, might have less-than-perfect credit, might have questions about whether or not they can even afford a home, or concerns about how to avoid being cheated by those deals that seem “to good to be true,” Freddie Mac recommends the best course of action is visiting with a housing counselor.
“Counselors are trained to help in a variety of situations – from giving advice to someone who’s exploring homeownership for the first time, to helping a future homeowner overcome past credit problems (or lack of any credit history at all),” Freddie Mac wrote on its blog. “The U.S. Department of Housing and Urban Development (HUD) maintains a list of approved housing counselors across the country, and these services are offered free of charge.”
Counseling may reduce the risk of a first-time homebuyer becoming seriously delinquent by an average of 29 percent on affordable mortgages that required pre-purchase housing counseling, according to research from Freddie Mac. The study also found that one-on-one counseling, classroom counseling, and home study via the Internet, which are the three most common types of housing counseling, are equally effective.
In order to help buyers achieve successful and sustainable homeownership, Freddie Mac is offering pre-purchase counseling and financial literacy education on its expanded Borrower Help Centers and Network. There are also resources available on housing counseling on Freddie Mac’s new My Home website, just launched last month.

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Financial Counseling can make a difference!

A Personal Investment in North Charleston

by Elizabeth Duffrin

One spring morning in 2005, Dorothea Bernique, an accredited financial counselor in South Carolina, was seated across her desk from a well-dressed, middle-aged client, an African American woman who had just come into a sum of money. As Bernique gently questioned the client about her plans for the money, the woman suddenly leaned in and whispered, “Miss Dorothea, what is investing?” Bernique had long been troubled by the lack of financial knowledge among the working poor in the North Charleston area. But the vulnerability in that simple question overwhelmed her. “Someone could have really taken advantage of her,” Bernique says. “I thought, ‘This is it. I need to go all out and do what is in my heart.'”

Increasing HOPE

Within three months, she quit her well-paying job at an insurance company and launched a nonprofit offering free financial workshops to low-income residents. Ten years later, her nonprofit, Increasing HOPE (Helping Others Prosper Economically), offers a “one-stop shop” for financial services to low-income residents in three South Carolina counties. With the firm belief that quality financial education could improve lives, Bernique located her office in North Charleston, the area of greatest need. The City of North Charleston had always been primarily a working class community. When the 1,500 acre Naval Base and Shipyard closed in 1996 taking with it more than 22,000 jobs, the city fell on hard times. Today, almost a quarter of the 100,000 residents live in poverty. An elevated highway divides North Charleston from the more affluent City of Charleston.

For years on her own time, Bernique had offered free financial coaching to low-income workers through a national ministry. She knew the need for financial education was there, but in 2005, the money to support it was not. Bernique appealed to banks and foundations but could not get their attention. “I was told that financial education wasn’t a poverty issue and didn’t relate to it,” she recalls. To get started, she used the FDIC’s online Money Smart curriculum and borrowed space for workshops from nonprofits and churches. She launched a local radio show on personal finances, passed out flyers at community events and networked. “It was a lot of word-of-mouth,” she says, “a whole lot of pounding the pavement.” Within a year, Bernique settled into her own office, hired staff and expanded her financial curriculum. Her workshops drew maids, janitors, hotel clerks, cashiers and waiters as well as higher-income earners who bounced checks. She trained women moving out of transitional housing through the YWCA and new homeowners through Habitat for Humanity.

Changing people’s relationship with money 

Attendees expressed “almost overwhelming appreciation for the information,” she found. In follow-up phone calls, nearly all agreed they had learned how to budget. But sticking to those budgets proved a bigger challenge — less than 30% reported doing so.  It was only after reading a book by a couple of financial psychologists that she hit on a solution. Now, she helps clients uncover their beliefs about money and reflect on the experiences that shaped those ideas and led to financial trouble.  Bernique recalls one woman in her early 20s who realized that her family was in debt because she expected her husband to provide for all her wants, just like her older siblings had when she was a child. A middle-aged man realized that because his own mother could “stretch a dollar until it screamed,” he was unreasonably expecting his own wife to take charge of the family’s money management when he was better suited to the job. Without such insights, “it didn’t matter what we taught them about a budget,” she insists. “We had to change the mindset before we could change the behavior.” The new approach doubled the success rate. More than half of clients reported sticking to their budgets. Budgeting workshops were only one piece of what Bernique envisioned in her one-stop-shop for financial information.

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The Undeniable Benefits of Housing Counseling Are Worth Every Cent

The case for the widespread use of housing counseling in America’s residential housing marketplace is both simple and straightforward: virtually everyone who has a hand in the construction, financing and sale of an American home today is made better by the presence of U.S. Department of Housing and Urban Development (HUD)-certified housing counseling at some point within the process, whether it takes place months before the purchase of a home, or even in the weeks and months after moving day. Pre- and-post purchase housing counseling performed by HUD-certified professionals leads to better-performing loans made to better-qualified borrowers in practically every economic class, and stronger communities with healthier economies and far fewer foreclosures.

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What Happened to HAWK!

When the Federal Housing Administration announced its “Blueprint for Access” in May, it said the program was designed to open up the credit box for “underserved borrowers.” Now, one of the most ballyhooed features of the FHA’s plan to help ease credit availability is not going to happen, thanks to budgetary wrangling in Congress. One of the main features of the FHA’s Blueprint for Access was a pilot program called Homeowners Armed with Knowledge, or HAWK for short. Under the four-year HAWK pilot program, homebuyers who committed to housing counseling would qualify for tangible savings on their FHA-insured loans. But funding for the HAWK program was not included in the Consolidated and Further Continuing Appropriations Act, 2015, which was signed by President Obama this week, therefore the program will not be moving forward for at least a year. Under the program, the average buyer would have saved approximately $325 a year, or almost $9,800 over the life of their loan. “Over the last few years FHA has proposed a number of steps to better serve borrowers and lenders in an ongoing effort to expand credit access and ultimately continue moving the economy in a positive direction,” said Biniam Gebre, acting FHA commissioner and assistant secretary for housing. “We are disappointed programs that could have served many families will not be permitted under the bill.”

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Standards and goals that are focused!

Analysis:

The study below shows the direct benefit of pre-purchase counseling for home buyers. How group education (two hour course), one on one counseling, and financial literacy, can and will lead to successful buyers and home owners. This study also shows both the short term and long term benefit to meeting the specific need(s) of the participant, while establishing standards and goals (counseling) for the outcomes (coaching).

I recommend reading the full report. Anthony Mitchell

The Effectiveness of Pre-Purchase Homeownership Counseling and Financial Management Skills.  Homeownership remains a cherished goal for many people. However, developments in mortgage products and drastic changes in the housing market have made the realization of becoming a homeowner more challenging. Fortunately, homeownership counseling is available to help navigate prospective homebuyers in their quest. But the effectiveness of such counseling over time continues to be contemplated. Previous studies have made important strides in our understanding of the value of homeownership counseling, but more work is needed. More specifically, homeownership education and counseling have never been rigorously evaluated through a randomized field experiment.

This study is based on a long-term (five-year) effort undertaken by the Federal Reserve Bank of Philadelphia on the effectiveness of pre-purchase homeownership and financial management skills counseling. The study improves upon previous efforts by employing a different methodology that relies on an experimental design and tracks study participants’ creditworthiness over time. Download the full report. (49 pages, 829 KB

Conclusion:

The analysis here shows that a two-hour pre-purchase homeownership workshop and one-on-one pre-purchase counseling improved the study participants’ financial creditworthiness as they prepared to qualify for a home mortgage. However, the benefits from pre-purchase homeowner counseling and money management assistance for the treatment participants who received one-on-one counseling were generally greater in terms of credit scores, total debt, and various delinquency days on payments relative to control participants. Both treatment participants with one on-one counseling and control participants who became homeowners tended to pay their mortgages in a timely manner overall.

Home Buyer Education on Mortgage Financing

In favor of improving mortgage data to prevent housing discrimination

The Consumer Financial Protection Bureau’s (CFPB) is proposing to improve the quality and type of Home Mortgage Disclosure Act (HMDA) data collected, as required by the Dodd-Frank Act. HMDA data is used to evaluate mortgage lending activity, particularly to understand the dynamics of the mortgage market for underserved borrowers and communities of color. Consumer Action joins coalition advocates in supporting the CFPB’s efforts to improve HDMA data collection and urges the Bureau to expand on its collection fields and take further steps to improve the quality of the data collected.

The Consumer Financial Protection Bureau (CFPB) proposed a rule to improve information reported about the residential mortgage market. The rule would shed more light on consumers’ access to mortgage credit by updating the reporting requirements of the Home Mortgage Disclosure Act (HMDA) regulations. HMDA, which was originally enacted in 1975, requires many lenders to report information about the home loans for which they receive applications or that they originate or purchase. The public and regulators can use the information to monitor whether financial institutions are serving the housing needs of their communities and identify possible discriminatory lending patterns. The Bureau also aims to simplify the reporting process for financial institutions.

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