The Ladder

They're Not Waiting for Washington

Ellen Seidman — Fri, 16 May 2008 21:40:00 -0400

With the drama playing out in the Senate about whether a bill responding to the mortgage crisis as well as enhancing regulation of Fannie Mae and Freddie Mac will get out of the Banking Committee with enough Republican support to both pass and avoid a veto, a Washingtonian might be forgiven for not paying attention to what's going on in the states. (Some wonder whether we ever do.) But in fact, there is a good deal of action-as well as frustration at the lack of activity inside the Beltway.

State action is focused both on preventing foreclosures and on dealing with their aftermath-the vacant and vandalized properties; decline in the tax base; increased demand for community services; and enhanced need for affordable housing, both owned and rented. On preventing foreclosures, several states (Ohio and Massachusetts among them) started working a year ago on bond programs to enable borrowers having trouble to refinance. Especially in the face of Congressional delays in making additional tax-exempt bond authority available, these programs have not been very successful. So while counseling and refinance programs are still getting some attention, states are moving on to other strategies.

Foreclosure moratorium bills are pending in Minnesota (where a one-year deferment has passed the Senate), New York (where a one-year moratorium has passed the Assembly) and Massachusetts. Mainly, these reflect dissatisfaction at not being able to get servicers to move and are, like the Bankruptcy Law change that has so far been blocked at the federal level, an attempt to change the negotiating dynamics and force servicers to the table.

But moratoria are not the only types of laws being considered. Georgia has just enacted a law that requires the security interest entitling someone to foreclose to be filed in court prior to the foreclosure sale and that the notice of foreclosure include the name, address and telephone number "of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor." These safeguards, which ensure both that the foreclosing entity has the right to take the property and that the borrower has one last effective chance to negotiate, are particularly valuable in a non-judicial foreclosure state like Georgia, where foreclosures can occur very quickly. They would also be helpful in judicial foreclosure states where, for example, judges have begun to throw out foreclosure petitions because the underlying security interest can't be produced.

Renters are also getting increasing consideration. Following New Jersey's lead, a bill is pending in Massachusetts that would prevent a lender from evicting tenants from foreclosed properties without "just cause," such as non-payment of rent. In part this reflects concern for tenants, but it is also a reflection of the fact that foreclosed property that is vacated is far more likely to turn into a vandalized property that demands more services and brings down neighborhood property values. Of course, making sure the new landlord provides maintenance and utilities (a particularly important issue in a New England winter) may prove challenging.

But recognizing that there are already many properties that have been foreclosed on and that the trend is unlikely to stop any time soon, states and-more immediately-local governments are focusing attention on what to do with property already in foreclosure (or foreclosed property's close cousin, property subject to tax liens). The State of Michigan has an aggressive land banking law, which Genesee County-where Flint, one of the hardest-hit cities in the country, is located-has been using since 2003 to acquire, hold and reuse tax-lien property. That land bank is now being used to acquire homes being lost in the current crisis.

In Cleveland, the city has partnered with the state and a group of community-based organizations to buy 300 homes to forestall foreclosure, buy an additional 300 vacant properties for demolition and construct 150 new units for a lease-purchase program. In Chicago the Troubled Building Initiative has been placing vacant buildings that, if left unattended, would have to be demolished, with one of several community based organizations for reclamation. And many Chicago partners are working on a variety of strategies to get foreclosed property back into circulation for either rental or affordable homeownership.

There is undoubtedly more going on elsewhere. The point is, they've stopped waiting for Washington out there in the country. But it sure would be nice if Washington got its act together to help.

Way to Go Ohio!

Reid Cramer — Fri, 16 May 2008 15:00:00 -0400

One unfortunate growth industry in recent years has been the rise of alternative financial institutions. These are the payday lenders, auto title companies, and check cashers who offer access to cash to virtually anyone that walks through their doors but on horrific terms. I mean really bad.

Payday lenders often charge about $15 for every $100 borrowed on a two-week loan. This would be equivalent to an annual interest rate is approaches 400%. It is an outlandish deal that many people take because they feel like they dont have other options. The problem is that many people in America don't have basic bank accounts, so they conduct their everyday financial transactions with these stores just move their money around. Our colleagues at the Center for Responsible Lending have been committed to ending these abusive practices and are working with people all across the country to change the state laws that govern these transactions. The need for the service is real but the terms are criminal. There ought to be a law...

But the great news out of Ohio is pretty soon it looks like there will be! Just this week, a bill cleared both houses of the state legislature which will put a 28% cap on payday loans. This cap is effectively a ban because it blows up the business model of these firms. Governor Strickland is expected to sign the bill and Cash America has already announced plans to close its 139 stores. Way to go Ohio!

LATimes Supports New America's Retirement Bill

Rourke OBrien — Tue, 13 May 2008 19:47:00 -0400

The Los Angeles Times published an editorial today in support of Assemblyman Kevin de Leon's plan to provide workers who are not eligibile to participate in an employer sponsored plan access to a safe retirement savings product.

This is obviously a major boost to New America's efforts to create a voluntary, portable, low-cost, high quality retirement account structure for all workers in California. See this previous post for more.

Stay tuned for updates as this important (and ambitious) proposal travels through the state legislature en route (we hope!) to the Governor's desk.

The New Thrift

Reid Cramer — Tue, 13 May 2008 16:50:00 -0400

In true blogger fashion, I've brought my laptop along to a conference we are co-hosting today on Confronting the Debt Culture.

It is a pretty compelling gathering for a couple of reasons. First off, the idea behind the conference is to raise the profile of the concept of thrift and all of the anti-thrift institutions that now prevade our culture. Secondly, the conference is sponsored by a really diverse set of organizations. It has been spreaheaded by the Institute for American Values, a group lead by David Blackenhorn which has mainly been known for its work promoting marriage. In recent years David has become a champion of thrift and has teamed up with other groups such as Demos, Consumer Federation of America, Public Agenda, and others.

It is being filmed and I supsect the keynotes will be posted. I highly recommend the presentation of Christopher Peterson, a law professor at the University of Utah who has focused his research on usury laws. It turns out that it is an ancient concept. Chris showed a slide of the babalonian stone that stated a 33% cap on loans of grain. He went on to describe the legal framework which governs payday lending across the country today and the wide range of abusive practices that are completely legal in many states. Recently, Congress capped payday loans at 36% APR but in many places it can exceed 450%! This is an area that needs alot more sunlight. He had a couple of great charts which showed how the proliferation of payday lending stores has vastly outpaced Starbucks shops and McDonalds Restaurants. And they dont add value, they strip assets from households that can not afford the hit.

Can You Name All of the Tax Breaks to Support Higher Education?

Reid Cramer — Mon, 12 May 2008 18:21:00 -0400

The tax code is a mess. Even those pointy-headed economists that can bicker about anything (except the gas tax) agree that it is too complicated. They cry in virtual unison that the growth of tax deductions, credits, and deferrals leads to inefficiencies and market distortions (yikes!).

To confirm these fears, we need look no further than the education arena. Do you know how many tax provisions there are designed to support post secondary education and workforce training? It's a long list.

There are tax breaks for contributions to specific accounts and savings plans such as Coverdell education savings accounts, section 529 college savings plans, pre-paid tuition plans, and penalty-free withdrawals from IRAs. Further, there are other tax breaks that cover the treatment of educational expenses. These include the Hope Credit, Lifetime Learning Credit, deduction for tuition and fees, and the deduction for interest on student loans. So, that's a count of at least 8.

Many of these overlap and as such they cause a great deal confusion among consumers. Last week the House Ways and Means Commitee held a hearing on this topic and I sent in some testimony that offered my take on the matter.

I’m in favor of serious tax reform. We probably need to consolidate and simplify. That said, we have learned a great deal with the experience of 529 college savings plans over the past few years which provides a blueprint for how to construct an attractive savings platform for education and training. We need to stop adding tax breaks to support savings for a growing number of purposes and spend more energy looking at how to create the institutional supports that maximize savings. I'll gladly make this point again when serious tax reform is put back on the political front burner.

An (Almost!) Victory for Asset Limit Reform

Rourke OBrien — Thu, 08 May 2008 22:10:00 -0400

Breaking news -- Asset limits to be reformed in the Food Stamp Program!

The conference committee formed to work out differences in the House and Senate versions of the 2007 Farm Bill has included provisions to reform asset limits in the food stamp program-- an issue championed by Chairman Harkin (D-IA) and Ranking Member Chambliss (R-GA).

The Farm Bill, if passed unchanged by the full House and Senate, will officially exclude savings in IRAs and 529 college savings accounts from consideration in determining eligibility for food stamp assistance.

What's more, the existing asset limit, which is set at 2,000 for most families and has only been increased once since the late 1970's, will be indexed to inflation to prevent further erosion.

This is a tremendous victory for the entire assets community. I'd especially like to recognize the Corporation for Enterprise Development, the Center on Budget and Policy Priorities, and the Retirement Security Project, who we've worked closely with to educate policymakers and push for change.

To learn more about how asset limits negatively influence economic behavior and undermine the economic security of low-income Americans, see my previous articles in The Washington Post and the Christian Science Monitor as well as New America policy papers here and here.

A Cool New Way For the Poor in South Africa To Save For College

Jeff Meyer — Thu, 08 May 2008 19:36:00 -0400

A key goal of New America's Asset Building Program is to encourage governments and other entities to offer each child born in the United States - and around the world - a savings account at birth. We believe doing this is the first step toward ensuring that all children have a stock of financial assets at the start of their adult lives.

With this in mind, we see the "529" college savings account in the United States as potentially an excellent platform for enabling parents to save for their children's education. This type of investment account - established by Congress in 2001 and named after a section of the tax code - allows parents to save money and withdraw the funds tax-free when their children head off to college. Every state, as well as the District of Columbia, offers 529s. Yet, right now, it is primarily mid-to-high-income parents who are taking advantage of them. We believe that making 529s "progressive" (i.e. having the government offer incentives such "seed" funding and/or matches to the accounts of less well-off families) is an excellent way to put these savings vehicles to work for children who come from families of more modest means.

As such, I was intrigued by a new college savings plan in South Africa I came across earlier this week. The Association of Collective Investments, an industry association for investment funds in South Africa, recently launched the Fundisa Fund as a three-year pilot project. The gist of the plan is that family and friends of a learner (or others) make contributions to an investment account opened by the parents at a bank.

Then, when the learner is ready to attend college or university in South Africa, the money accumulated in the account - plus bonus money offered as an incentive by the Fundisa Fund - is transferred to the college or university as payment for tuition.

What is intriguing to me about the plan is the large bonus - as much 25% of the money put into the account each year (with a cap of 600 South African rand, or about US$79). According to an email I received from the Association of Collective Investment's chief executive, the plan is aimed at South Africa's poor.

Another interesting feature of the Fundisa Fund is: the apparent requirement that family/friends/others need to contribute at least 40 rand (about US$5) per month into the learner's account.

The money saved in the Fundisa Fund is invested in a relatively conservative way (in government bonds and bank deposits), as opposed to more aggressively (such as in stocks, which is an option among 529 plans in the United States).

After an initial glance at basic details of the Fundisa on its website, a few questions my colleague Rourke O'Brien and I have about the program include:

are there any penalties for withdrawing money from the account in addition to losing the 25% bonus that learners would have received?;
is all money going into these accounts post-tax, and are the accounts tax-advantaged?;
and is there a progressive element to the plan?

South Africa is unique in that it has one foot in the developed world and the other in the developing world. As such, the design of the Fundisa Fund could be useful study fodder for the providers of 529 plans in the United States, as well as governments and banks in developing countries. We hope to learn more details about the Fundisa Fund, so stay tuned for perhaps another blog post on this development.

The FDIC Does It Again

Ellen Seidman — Wed, 07 May 2008 21:28:00 -0400

FDIC Chairman Sheila Bair has struck again-with yet another creative response to the ongoing mortgage crisis. Chairman Bair has a history of being ahead of just about everyone else in Washington with proposals to respond to the crisis in a manner that is doable and fair. This time it's the Home Ownership Preservation or HOP loan, and the FDIC estimates about one million loans-make that one million homeowners in trouble-might be eligible.

Any mortgage loan taken out between January 1, 2003 and June 30, 2007 by an owner-occupant at a level below the FHA conforming loan limit that was unaffordable at origination would be eligible. What does "unaffordable at origination" mean? According to the FDIC website, it means that when the borrower took out the loan, his or her total housing payment-for principal and interest on the loan, taxes and insurance-exceeded 40% of income. And, according to an FDIC conference call May 7, that does not mean that the amount the borrower actually paid at origination exceeds 40%; it means that the amount the borrower would have paid had escrows for taxes and insurance been included and had the initial payment been for both principal and interest, at the fully-indexed rate, not the teaser rate. This makes the proposal far more powerful than it appears at first glance.

The way HOP would work is that a servicer would apply to Treasury for a loan to the borrower that would pay down 20% of the current mortgage. In exchange, the servicer would agree to modify its loan into a fully-amortizing fixed rate mortgage for the balance of the mortgage term, with interest set so that the borrower's monthly mortgage payment, including taxes and insurance, would not exceed 35% of the borrower's verified current income. Interest on the modified loan could be no higher than Freddie Mac's published rate for 30-year fixed rate mortgages, and if that interest rate were not low enough to get down to 35% of income, the lender would have to set a lower rate. And no negative amortization, prepayment penalties or deferred interest would be allowed.

The lender would pay the Treasury the first five years of interest on the Treasury loan up front, and would also subordinate its interest to the Treasury's. Thus, if the borrower defaulted or the property was transferred, the Treasury would get paid first-giving the lender a real incentive to make the loan work. The borrower would not pay anything on the Treasury loan for the first five years, and then would pay off the entire principal (with interest at Treasury's rate) during the remaining 25 years of the larger mortgage.

In addition to creating affordable mortgages the appeal of the HOP program lies in three primary characteristics:

It leaves the mortgages in their existing pools, and, according to the FDIC, requires alterations that are totally consistent with current Pooling and Servicing Agreements (PSAs)
It does not affect the interest of subordinate lien-holders, which means they can't hold up the process of modification
The amount of and interest rate on the modified mortgage are not dependent on appraisal of the property, but rather only on the borrower's verified current income

Like all proposals that attempt to deal with this difficult situation, HOP has its flaws:

Eligibility is dependent on information that lenders should have in their files, but may well not, at least not accurately, as we know that at origination of many loans now in trouble there was either no verification of income, and/or the amount "verified" was incorrect
To retain consistency with the PSAs, this proposal, like many before it, requires the servicer, not the borrower or someone acting on the borrower's behalf, to initiate the process; so far, servicers have been slow on the draw, to put it mildly
The Treasury loan could, in some circumstances, generate an unaffordable "payment shock" in the fifth year when the borrower needs to start paying it down; the FDIC's own examples would take the borrower up to a 40% debt to income ratio, even assuming that the borrower's income grew 1.5% annually

But HOP is a creative, constructive addition to the dialog. Maybe its largest flaw is one that Chairman Bair desperately wanted to avoid: it requires legislation. Let's hope it gets serious consideration by Congress and a fair hearing by the White House.

The Cellphone as Asset Builder? Maybe One Day

Jamie Zimmerman — Wed, 07 May 2008 17:05:00 -0400

I consider my cell phone an asset. With all those hi-tech capabilities packed into a little handset, it keeps me simultaneously connected, productive, on-time, en route, entertained and informed. And I'm not alone - more than 3 billion people around the world (almost half of the global population) have a cell phone. But what if this gadget that seems capable of reaching almost anybody and doing almost anything could also provide a mechanism for savings and asset building for individuals around the world? Despite seemingly limitless potential and enthusiasm for such an innovation, it will unfortunately be some time before this is a reality.

I've been following developments in mobile banking for some time. For years, excitement has been brewing about its potential to bank the unbanked, reach the unreachable. I've been to the events, the conferences, read the blogs and become a believer that this technology will one day help every person on the planet have a bank account, a financial identity, and an opportunity for wealth creation through access to low-cost, simple financial services. Sound hopelessly optimistic? Just check out the April 13 New York Times article "Can the Cellphone Help End Global Poverty?" or the CGAP announcement of its most recent focus note "Mobile Banking to Transform Microfinance." Pretty exciting stuff.

But after reading the CGAP report "the Early Experience with Branchless Banking," I see that the hype doesn't exactly match reality. Some disheartening observations discussed in this excellent report show that mobile banking is:

Mainly used for payments, not savings or credit;
Not actually used by or targeted to the poor, the unbanked, or those lacking access (geographic or otherwise) to the extent expected or hoped (less than 10% of all branchless banking customers);
Offered to Bottom of the Pyramid (BOP) markets primarily as a result of competition among mobile operators, not by initiatives led by banks or governments;
For regulatory, cost or other reasons, largely exclusive of MFIs (which are most capable of reaching the poorest of the poor), and;
Because of strict Know Your Customer regulations (which require specific documentation for opening accounts), is unlikely to reach the poorest and most remote customers in the developing world, particularly those without any proof of identity.

Given all the promise and excitement around mobile banking, imagine my disappointment to read that it has "yet to demonstrate pro-poor, pro-growth impacts for households, communities and national economies."

Nonetheless, my enthusiasm for the potential of asset building via mobile phone is not tempered by these new findings. By most accounts, the capabilities are there, and so is the interest of financial institutions, governments and the development community. And the potential (and the need, and in some cases the demand) outweighs the obstacles. Eighty percent of the global population falls within range of a cell phone network and 68% of cell phone subscribers are in the developing world, but just a fraction of either of those populations have any sort of effective access to banking services. And the industry is slowly but surely finding creative ways to overcome certain obstacles. The CGAP report highlights numerous interesting examples of this, such as how South Africa's Exemption 17 from the Know Your Customer (KYC) requirements resulted in a gangbusters expansion of their mobile-banking poster child, Wizzit. And to be fair, in many cases, outcomes of mobile banking launches have largely surpassed expectations. According to the NYT article, for example, Kenya's m-pesa mobile banking program "aimed to add 200,000 new customers in the first year, but got them within one month." Now, m-pesa has over 2 million customers.

So I realize there is a ways to go before the cell phone can be used to effectively achieve financial inclusion of the poor and excluded, particularly in the developing world, much less facilitate simple, low-cost opportunities for savings and asset building. But my sense is still a hopeful one of not if but when. I encourage the asset-building field to seize upon the opportunities created by momentum around mobile banking to think deeper and more creatively about how to innovate within this space.

The Assets Baseline

Reid Cramer — Tue, 06 May 2008 14:32:00 -0400

The rise of an assets perspective is a relatively recent phenomenon. And like any phenomenon, to understand what it is you need to describe where it came from. Researchers and scientists often go to great lengths to find the baseline.

So, what's the assets baseline? There are two ways to look at this question. One is to survey the landscape of social policy and another is to describe the current role assets play in people's lives.

In terms of social policy, it is fair to say that the baseline approach to thinking about poverty and social policy is income. Traditionally, our anti-poverty programs have focused on income maintenance efforts. But beginning in the early 1990s, a number of academics began exploring the potential of assets to help inform social policy thinking. Michael Sherraden's 1991 book Assets and the Poor presented a series of hypothesis about what might happen we thought about poverty as more than just a condition of low incomes but also low assets. From the relatively simple observation that people don't spend their way out of poverty but must save resources to invest in themselves over time, has come a recognition that the dynamics of poverty must consider the role of assets and their deployment over an extended period of time. This includes a consideration of the savings process and the behavioral effects that accrue to asset owners. Even the holding of small sums can potentially make a big difference in how people think about themselves and their future.

In addition to this theoretical baseline, we need to know more precisely the role that assets actually play. Beginning in 2003, the New America Foundation was committed to providing access to this knowledge base. We created an informational clearinghouse called AssetBuilding.org that was designed to catalogue recent research, policy developments, and media coverage of a wide range of topics related to asset building. The website is still going strong and is worth checking out on a regular basis (along with the daily content of The Ladder).

We were also were interested in tracking the baseline of the assets field and have worked with scholars from the Urban Institute and Center for Social Development on a research project funded by Department of health and Human Services. The project is called Poor Finance and it is releasing a series of reports on poverty, asset building, and social policy. The purpose of the series is to assess the state of knowledge and policy development and to synthesize recent progress in these areas. In other words, it is intended to establish the baseline.

To date, four reports have been released and four more are coming. The project has produced plenty of excellent material and is a real valuable resources for practitioners and researchers alike. While the focus of this series of reports is on asset accumulation and asset-based policies for low-income individuals and families, the conceptual frameworks developed are not limited to low-income populations. This broad approach helps to identify the overall critical issues that relate to asset holding for all populations.

A few weeks ago, the latest report was released on factors that determine asset building. I was a co-author on the report and what I like about this particular report is that is reviews both the theoreitcal and empirical basis for our understanding of how people actually go about the process of savings and building assets. All of the reports are on Assetbuilding.org and you can access the project page here. Take a look.