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Settling debts with other people's money: Use of investor funds in lender settlements

Author: Laurie Goodman and Ellen Seidman and Jim Parrott

| Posted: July 24th, 2014




As part of their $25 billion settlement in 2012 of lending abuse claims, five of the nation’s largest banks agreed to modify mortgages for borrowers struggling to make their original monthly payments. To the consternation of many investors, the settling banks were given credit not only for modifying loans that they held in their own portfolios, but also for modifying loans that they serviced but that were actually owned by investors.

In June 2014, the Association of Mortgage Investors (AMI) appealed to Attorney General Eric Holder to eliminate investor’s loans from future settlements.

While there is considerable merit to investors’ concerns, AMI’s solution goes too far.

How much of the settlement was paid with “other people’s money”?

That depends on the bank. Earlier this year, in our commentary about the $25 billion national mortgage settlement, we found that while none of Wells Fargo’s or Citi’s credits came from investor-owned loans, Bank of America and JP Morgan Chase used a significant number of investor-owned loans.  The settlement does not disclose, however, exactly how many loans were modified, and to what extent.

In this national settlement and more recent settlements between JP Morgan Chase and the Justice Department and Citi and the Justice Department, banks received about half the credit for modifying with investor-owned loans than the loans in their own portfolio.

Why do investors care?

In theory, investors should be pleased if their loans are modified. Each settlement agreement provides that the expected value of the modified loan should be greater than the expected value of the current, unmodified loan—or net present value (NPV) positive. But in reality, investors are deeply suspicious about the accuracy of the NPV models used in these settlements, and question whether the modified loans are actually more valuable than they would have been if left alone.

A modified loan that is worth more than the original may seem counter-intuitive, but the increase in value comes from the borrower’s increased likelihood of paying off the loan once modified—supposedly a win-win-win, with benefits to the investors, the settling servicers, and the borrowers.

Investors argue, however, that the banks should be doing NPV positive modifications as a best practice regardless and shouldn’t get settlement credit. A similar argument applies to portfolio loans, but the settlements strongly suggest that the business imperative isn’t powerful enough.

Eliminating investor loans in settlements is too far.

While we sympathize with AMI’s concerns, legitimate NPV positive modifications accrue significant benefits to all of the involved parties and help ease the debt overhang that still troubles the recovery. Rather than abandoning the opportunity to modify the large number of troubled loans that happened to fall into MBS pools, it would be more sensible to provide safeguards to ensure that the NPV calculations are legitimate and place limitations on the amount of investor funds that can be used.

Greater clarity and transparency is better.

Settlements should continue to include investor loans, but should adopt three conditions:

  1. Clarify limits. The settlement should stipulate up front the maximum percentage of consumer relief that can be granted with investor funds.  The percent should be made public prior to finalizing the settlement, so investor objections can be considered.
  2. Clarify method. Similarly, the method used to calculate the NPV and the re-default rates should be made public prior to finalizing the settlement, so that investor objections can be considered.
  3. Require disclosure. Servicers should be required to disclose to settlement monitors the individual loan NPV calculations in their reports, and settlement monitors should be required to disclose those calculations to the public, to the maximum extent possible consistent with privacy concerns. This can certainly be done by aggregating small groups of loans in a specific private label security.

While investors are right to be concerned about both how much of their assets are being written down in these settlements and the way in which they are being written down, the best solution isn’t to ban modifications of their loans.  Rather, the Justice Department, state attorneys general and other settling parties should set limits on the use of these loans and ensure that the NPV tests are transparent and public.

Photo: Attorney General Eric Holder on July 14, 2014 announces a $7 billion settlement with Citigroup related to risky subprime mortgages. (AP Photo/Pablo Martinez Monsivais)

Filed under: Federal programs and policies, GSE reform, Housing and Housing Finance, Housing and the economy, Housing finance, Housing Finance Policy Center |Tags: , , , , ,
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The Washington DC area needs more affordable rental housing

Author: Leah Hendey

| Posted: July 24th, 2014

Last Tuesday saw the release of Housing Security in the Washington Region, a study I wrote with my colleagues at the Urban Institute with assistance from the Metropolitan Washington Council of Governments.

The study is unique for its breadth, spanning Washington, DC and 11 surrounding jurisdictions in Maryland and Virginia. It’s also thematically expansive, examining the full continuum of housing needs, from emergency shelter to affordable homeownership, highlighting how supply, demand, funding streams, and policies impact homeowners, renters, and the unhoused at every income level.

In a study of this size, it’s easy to lose sight of what all these numbers mean for real people. Let’s unpack a small portion of the study.

Rental housing affordability is a big problem in the area. Nearly half of all renters (regardless of income level) in the Washington region were cost burdened in 2009-11. That means almost 315,000 households were paying more than 30 percent of their monthly income on rent and utilities. To give you a sense of the magnitude of the problem, there were about 300,000 households total in Prince George’s County, Maryland.

Of course, households at the bottom of the income scale were most likely to be cost burdened. In fact, 86 percent of extremely low income households—those earning less than $32,000 annually—were cost burdened in 2009-11. Keep in mind that many of the services that get you through your week are performed by workers who would fall into the “extremely low income” category—maids, drycleaning workers, pharmacy aides, fast food cooks, coffee shop cashiers, and nursing aides and orderlies, to name a few.


Take, for example, a nursing aide (who may just be caring for a loved one right now). On average, an aide in the DC metro area earns $28,700. Imagine that the nursing aide has two children and needs a two-bedroom apartment. If we think that she could afford to pay 30 percent of her income in rent, then she could afford a utilities-included apartment that rents for $720. (By the way, that only leaves her with $20,000 to pay for food for a family of three; clothing, including her scrubs for work; transportation to get to work; health insurance; emergencies; etc.)

As you can see in the chart above, it’s no surprise that our nursing aide might be cost burdened—there is not one jurisdiction in the area that she could afford to live in if she paid the DC metro area’s median rent of $1,320. At that level, our nursing aide would have to work the equivalent of 1.83 jobs to afford to rent such an apartment and not be cost burdened. In Virginia’s Arlington and Fairfax Counties, she would have to work more than two full-time jobs.

Our study concludes that every jurisdiction in the Washington region needs more units to meet the needs of renters like our nursing aide—94,200 units in total. Policymakers, local agency staff, and philanthropists can use this data on gaps in the housing supply to inform their work and make strategic investments to aid those struggling with high rents.

This study was commissioned by The Community Foundation for the National Capital Region, with generous support from The Morris and Gwendolyn Cafritz Foundation.

Filed under: Affordability, Affordable housing, Economic Growth and Productivity, Geographies, Housing and Housing Finance, Housing and the economy, Income and Wealth, Job Market and Labor Force, Labor force, Low-wage workers, Metro, Metropolitan Housing and Communities Policy Center, Multifamily housing, Neighborhoods, Cities, and Metros, Wages and nonwage compensation, Wages and nonwage compensation, Washington DC, Washington, D.C |Tags: , , , , , , ,
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A flourishing performance management landscape

Author: Mary Winkler

| Posted: July 23rd, 2014




In summer 2013, John Bridgeland and Peter Orszag’s “Can Government Play Moneyball?” challenged the government and nonprofit sectors to make greater investments in understanding what works and to pursue a more rigorous approach to evidence and impact.

Today, the spirit of the “moneyball” movement is blossoming. At its core, it’s about organizations improving their performance by continuously tracking whether their programs and services are leading to desired results. Although performance measurement and management is hardly new to the public and nonprofit sectors, it is much more utilized than arguably it has ever been due to demands for greater accountability and growing expectations that organizations do more with less.

Demand for performance management techniques is high

In 2012, the Urban Institute, in partnership with Child Trends and Social Solutions, launched a new tool to help nonprofits measure and manage performance: PerformWell. This resource was designed to fill an information void, help nonprofits identify outcomes and performance indicators, and provide surveys and assessment tools to assist with tracking and reporting.

Since its launch in March 2012, the PerformWell site has had nearly 300,000 visitors and more than 12,500 have signed up for webinars, signaling a genuine need and appetite to engage in this work.

The performance management landscape

PerformWell is only one recent addition to an increasingly vibrant landscape of performance measurement and evaluation resources. In October 2012, the Bill and Melinda Gates Foundation, Hewlett Foundation, and Liquidnet launched Markets for Good, a forum for sharing innovative ideas, best practices, and diverse points of view for helping the social sector make better decisions and support a “dynamic culture of continuous learning and development.”

America Achieves, through the Results for America Initiative, developed an agenda that calls for a federal evidence and evaluation framework, an increase in the use of evidence in all federal formula and competitive programs, the creation of a federal “what works” clearinghouse, and more accessible, user-friendly, publicly available data.

In December 2013, Leap of Reason and PerformWell partnered to host After the Leap, the first-ever national conference on performance management. Themes from this conference have been repeated in many circles, including the recent Social Impact Exchange (SIE) conference which included a panel on how funders can support the capacity of nonprofits. Although this annual conference  is generally geared toward nonprofits and funders interested in scaling social impact, many participants acknowledge that performance and evaluation strategies and practice evolve along a continuum of practice – a message echoed by Nancy Roob at the ATL conference and more recently in her blog post in the Stanford Social Innovation Review series on the “Value of Strategic Planning and Evaluation”.

And not to be left out, foundations are now likely to face increasing scrutiny around investment choices, thanks to a recent entrant to the field – Philamplify – designed by the National Committee for Responsive Philanthropy. Just launched in May, the new site is described by the Washington Post as “Yelp for the philanthropy sector.” What distinguishes Philamplify from other efforts to hold foundations accountable is that reviews are conducted independently and with or without the consent of foundations. The goal is to grow the number of foundation assessments from 3 to 100 of the largest foundations in the United States.

A bright future for performance management

As my colleague Jeremy Koulish pointed out last year, “getting to measures that can be applied uniformly across the whole sector is a challenging endeavor.” Yet these resources and initiatives are indicative of growing attention and a sense of urgency around issues of measurement and evaluation for the nonprofit, government, and philanthropic sectors, neither of which are likely to diminish anytime soon.

Photo: AP Photo/J. Scott Applewhite. 

Follow Mary Winkler on Twitter @MaryKWinkler.

A version of this piece was originally published in the PerformWell newsletter (July 2014).

Filed under: Center on Nonprofits and Philanthropy, Cross-Center Initiatives, National Center for Charitable Statistics, Nonprofit data and statistics, Nonprofits and government policy, Nonprofits and Philanthropy, Performance Management and Measurement, Performance measurement and management, PerformWell, Public and private investment, Tracking the economy |Tags: , , , , ,
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Four ways to help low- and moderate-income families build wealth

Author: Caleb Quakenbush

| Posted: July 22nd, 2014

You may have read about the worrying trends concerning wealth and mobility in America. Americans were hit hard by the Great Recession, and household balance sheets have been slow to recover.

Worse, young families and families of color have been falling behind on wealth-building for some time. The good news is that there are opportunities to move the dial, if even a little, to counteract these trends.

Policies that enable families to save early, often, and automatically are key. Last fall, a group of the nation’s leading wealth experts convened here at the Urban Institute to identify possible policies to help families onto a wealth-building path. Last week, the conversation continued at an Urban Institute-sponsored briefing on Capitol Hill.

Addressing attendees, Representative Thomas Petri recalled the famous quip attributed to Einstein that compound interest is the most powerful force in the universe. Being on the wrong side of that force, Petri noted—having inadequate savings, high levels of debt, and little training or education—can crush vulnerable families. Being on the right side, however, can open up opportunities for upward mobility and self-sufficiency.

So what policies can help?

  1. Children’s savings accounts (CSAs) can be valuable tools for building savings and teaching financial capability. CSAs get families and communities involved and hopeful about their children’s financial futures. Even having small amount of savings for college by high school graduation has been shown to increase college enrollment, possibly by creating a college-bound identity for children. CSAs can do double duty if seed funds and matches on contributions are tied to achieving other outcomes, such as graduating from high school.
  2. Make savings automatic. Having a safe place to deposit money and earn a decent return is the first step toward building savings. Access is crucial. Policies that expand access to retirement accounts at work and automatically enroll workers are a good place to start, and some efforts are already underway at the state level.
  3. Paying down a mortgage and building equity in a home, month by month, can be a powerful, automatic way to build assets to draw on later in life. Unfortunately, conversations about homeownership often encourage low-income families to buy when prices are high, and discourage homeownership for the same families when prices are low. Further, current tax incentives for homeownership (and other forms of saving) are “upside down”—going mainly to high-income households that are likely to own anyway, and promoting larger and more expensive homes in the process. Replacing the mortgage interest deduction with more targeted incentives could help more low- and moderate-income families into homes.
  4. Remove barriers to building assets and help families build emergency savings. Asset limits in safety net programs such as TANF and SSI can punish families for having savings or even owning a car. Tax time is a strategic moment for encouraging saving and connecting families to financial services. Families receiving refundable tax credits could be encouraged to save a portion of their refund with an additional match into a savings account, building a foundation for vital emergency savings.

No single policy will be a panacea for alleviating the inequalities and limited upward mobility facing the United States today. But taken together, policies that reform savings incentives in the tax code, retool and expand access to existing wealth-building vehicles, and support automatic long-term saving can put more families on the pathway to building stronger balance sheets.

Filed under: Asset and debts, Earned income tax credits, Financial products and services, Housing subsidies, Income and Wealth, Job Market and Labor Force, Poverty, Poverty, Vulnerability, and the Safety Net, Race, Ethnicity, and Gender, Racial and ethnic disparities, Wages and nonwage compensation |Tags: , , , , ,
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Reflections on instability in children's lives: Why it matters and what we can do

Author: Gina Adams

| Posted: July 22nd, 2014

In the past decade, I have become fascinated by the problem of instability in children’s lives. The first time I really thought about it, I was caring for my almost-three-year-old daughter while watching the horrifying footage of moms trying to keep their children quiet in the Louisiana Superdome during Hurricane Katrina. I watched, wondering how the children would be affected, both in the short- and long-term, and how on earth the parents were going to help their families feel safe in a world that had fallen apart around them.

These questions kept resurfacing in my professional and personal life. In my job, I studied ways to stabilize parents’ access to child care assistance during major life changes. At home, I watched my own child’s reactions to destabilizing events in our family, realizing the repercussions for her and how hard it was to stay calm and be a good parent, even with the resources that I had to support us both.

The questions started to build in recent years when I broadened my research focus to think about child care stability overall, beyond only child care assistance. Given that stability in child care arrangements is often dependent on stability in other realms of families’ lives, I did a quick review of instability in different domains: parental employment, housing, income, health, schools, and so forth. It revealed that many children were facing instability in many aspects of their lives, and that often instability in one realm—say, a parent losing a job—would lead to a cascade of instability in other domains (loss of income, food insecurity, parents’ separation, residential move, change in schools, etc.). So what does all of this mean for children and what we could do about it?

As a researcher, I felt that we needed to start by looking at the problem of childhood instability in a more comprehensive way. So I reached out to other researchers at the Urban Institute with similar interests. First, my colleague Heather Sandstrom looked across different domains of families’ lives to pull together what the research said about the impact of instability on children’s development. This work made it clear that instability leads to problems for kid’s development, but that there was very little work done to look at these issues in a holistic way. We now had a clear sense that there was a problem. The next step was figuring out how to start to tackle it.

With funding from the Foundation for Child Development, we have started to take this on. A small group of Urban Institute colleagues (Lisa Dubay, Julia Isaacs, Heather Sandstrom, and Margaret Simms) and I brought together a set of thoughtful experts—researchers, policymakers, practitioners, thought leaders, and funders—from different perspectives and areas of expertise to talk about instability and child well-being for a day-long meeting in November. Our conversation focused on three questions: What do we know? What do we need to learn? And what do we need to do?

It was a fascinating day… while in some ways, the conversations we had were enormously complicated, in other ways, they were incredibly simple. On a basic human level, kids who experience a lot of instability don’t feel safe. And when they don’t feel safe, it is hard for them to learn, grow, and develop to their full potential. Parents can help, but often have a hard time helping their kids feel safe when they themselves are experiencing instability and stress.

We wrote up the main ideas from the conference in a report released today, along with a volume of short essays written by some of our participants. The report lays out a lot of interesting questions, such as: What is instability? What aspects of instability seem most problematic? Where does it show up in kid’s lives and how does it affect children’s well-being? What are the characteristics of the child or the parents, or the contextual factors that may either buffer or facilitate the impact of instability on children’s development? What do we need to learn or study to better inform policy? And what does all of this mean for policy and practice?

While in some ways these questions are daunting because there is much we don’t know, I was heartened to see how much we do know and how many good ideas are out there when we put our heads together. It is clear, for example, that parents play a critical role in buffering the impacts of instability on their children, but sometimes need help to stabilize their own lives. It is also clear that “anchor institutions”—for example, child care facilities, schools, and pediatricians—can play an important role in providing children with a stable environment and stable relationships with adults. It is also clear how critical it is to make sure our safety net functions to stabilize families and provide children (and their parents) some security in their basic needs of food, health care, and a home. It is clear that we can learn from systems like the military that have been figuring out how to support children and families who face enormous amounts of instability and stress. It is clear that each of our public systems needs to start paying attention to the warning signs of instability in children’s lives and work across silos to help interrupt the cascade of instability hurting our kids.

So while this is a complicated issue that we need to learn more about, on some level it is also very basic. The message is clear: we need work together, across all of our systems and perspectives, to help stabilize families so their children can have a safe and trusting foundation from which to learn and grow.

Filed under: Adolescents and Youth, Child care, Child support, Child welfare, Children, Children's health and development, Economic well-being, Economic well-being, Economic well-being, Families, Family structure, Foster care, Foster care, Housing subsidies, Hunger and food assistance, Income and Wealth, Job Market and Labor Force, Kids in Context, Low-income working families, Low-income working families, Low-Income Working Families, Parenting, Poverty, Poverty, Vulnerability, and the Safety Net, Social Security, Supplemental Nutrition Assistance Program (SNAP), Supplemental Nutrition–Women, Infants, and Children (WIC), Supplemental Security Income (SSI), Temporary Assistance for Needy Families (TANF), Unemployment, Volatility |Tags: , , , , , ,
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Quality care for veterans: Can the nonprofit sector save the day?

Author: Henry Smart

| Posted: July 21st, 2014




If you’ve been following the news, it’s no surprise that the Veterans Health Administration (VHA) is struggling to provide adequate services and care. Lawmakers are considering the creation of a commission to evaluate the VHA’s actions, but the Office of the Inspector General already serves that purpose. Instead of adding another layer of bureaucracy, lawmakers should consider expanding patient advocacy.

Currently, each Veterans Affairs (VA) hospital has at least one patient advocate (PA) on staff. PAs work with veterans and their families to assist them with navigating the VA healthcare system, from scheduling appointments to clarifying and resolving issues related to patient rights.

But the VA lacks the capacity to properly execute its current Patient Advocacy Program, and PAs are overworked, responsible for unmanageably large caseloads. These and other challenges have led to the inability of the current system to provide timely health care, which has consequences for veterans and the VHA.

Studies show that waiting for an initial health screening could further complicate existing health issues and increase the number of preventable hospitalizations, and missed opportunities for early detection and delayed treatment may accelerate the deterioration of a veteran’s health. And in the long run, improving access to health care could lead to a better quality of life for many veterans and ultimately reduce medical costs for the federal government.   

Outsourcing PA work: Potential benefits

  • The VA could strengthen its capacity to provide quality care to veterans and achieve its quality standards
  • The VA could identify and resolve problems before they escalate
  • Each veteran could receive the support they need to successfully maneuver the VHA system

So why NPOs? Here’s why I think they could get the job done:

  • They’re currently assisting military veterans.   According to Urban’s National Center for Charitable Statistics, there are over 40,000 NPOs throughout the United States dedicated to veteran affairs. The VA currently contracts with NPOs to provide hospice care, adult day care, case management, nursing home services, transitional housing services, homeless housing services, substance abuse treatment, injury rehabilitation, and counseling services.
  • They’re an untapped mine of transferrable skills. The aforementioned services are difficult to provide without rendering some form of advocacy for the client/patient, so more than likely, NPOs are already advocating on behalf of the veterans they serve. For example, it’s probably safe to assume that a program coordinator at a homeless shelter will know how to advocate for veteran services that are beyond the program scope of the shelter.
  • They’re an integral part of the communities where veterans live. The problems that lead to poor wait times occur at the VA hospital level. Since most NPOs are a part of the fabric of communities served by VA hospitals, NPOs are not only familiar with the population, but they are properly situated to provide support.

So how can we integrate NPO services into the VA system? I would suggest somewhat of a hybrid of the “one stop” model used by the Veterans One-Stop Center of Western New York, which provides streamlined social and health services for veterans, and the “one stop” model used by the Department of Labor to provide career services in various cities.

Increasing the VA’s capacity to provide each veteran with a single point of contact in a PA has the potential to improve the interaction between veterans and the VHA, and the potential to positively impact health outcomes.

Photo: Travis Fugate, a member of the Kentucky National Guard who was blinded by an IED attack in Iraq, wipes his eyes as he testifies on Capitol Hill in Washington, Thursday, May 29, 2014, before the House Veterans Affairs subcommittee on Oversight & Investigations. The panel is examining inadequacies in the Veterans Administration's treatment of visually-impaired veterans. (AP Photo/J. Scott Applewhite)

Filed under: Aging, Center on Nonprofits and Philanthropy, Health and Health Policy, Health care delivery and payment, Vulnerable populations |Tags: , , , , , ,
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Social impact bonds: Solving government problems in four (not so) easy steps

Author: John Roman

| Posted: July 18th, 2014




At the cutting edge of new social innovation financing are social impact bonds (SIBs), a potentially transformative idea. SIB transactions merge traditional public/private partnerships and performance based contracting. Private investors invest in demonstrated social programs, with a promise from government to repay that investment, plus a profit, if predetermined performance targets are met.

The deals transfer risk from the government to the private sector and generate new capital to invest in evidence-based interventions that would otherwise go unfunded.

But on their current path, they are unlikely to fully achieve their promise. Today's deals are bespoke, complex, and have large transactional costs. They also replicate current mistakes in how government purchases services, rather than reforming that process.

Today's deals are mainly efforts to fund well-intentioned programs that are appealing to all parties to the transaction: the government, investors, and social service providers. But in order to satisfy the interests of all parties whose incentives are not aligned, rather than creating real reform, they end up funding the lowest common denominator— something that sounds good, is low risk, but does not solve big problems.

There is a better way to use these transactions to create broader and deeper systems reform, using the SIB development process as the mechanism for reform.

The deals funded by social innovation financing should be the product of a real, intensive strategic planning process, rather than a one-off response to a particular opportunity.

Step one should be an effort to understand what drives the most frustrating costs to government: individuals, families, and places that cycle endlessly through our systems.

Who are these “frequent flyers” who continually touch many systems and generate disproportionately high expenses for taxpayers? Examples include:

  • Kids involved in juvenile justice, child welfare, and special education.
  • Adults who are chronically homeless, mentally ill, and returning from prison.
  • City blocks that the police, fire, and public works spend all their time patrolling.

Step two is to determine why government is ineffective in treating these frequent flyers. The answer is deceptively simple: government knows what it spends, but not what it buys. That is, we know what is in the budget, but in today’s system, we don’t know what outcomes that spending produces. The current procurement process creates no incentives to prioritize outcomes over outputs. A SIB requires that the outcomes are explicit.

Step three is to determine if there are evidence-based interventions that would alleviate the problem. It’s important to remember that not every significant problem has an evidence-based solution. Today, research evidence is generally constrained to a single problem, such as the effectiveness of drug treatment. There is much less evidence around broad social phenomena, like increasing high school completion. Care is thus warranted in prioritizing interventions for SIB funding.

For the final step, a clear-eyed decision must be made about whether SIBs are the right financing mechanism. It should be noted that SIBs are not the answer to every undercapitalized intervention. For example, some frequent flyer populations are so small that a reasonable comparison group cannot be found, and thus it is impossible to determine if outcome targets were met.

The social innovation field is currently in an evolutionary stage, with a focus on building a SIB-ready sector, which simply means educating and experimenting across all parties involved in these transactions.

In order to get to a stage where these innovations are scaled and serve high proportions of targeted populations, a much more strategic approach is required.

And that process is worth doing, even if no SIB is ever financed. The simple process of government articulating what its problems are, what its goals are, and what the potential solutions could be would be a tremendously positive reform in its own right.

Photo: Steve Pepple /

Filed under: Adolescents and Youth, Children, Children's health and development, Corrections, reentry, and community supervision, Courts and sentencing, Crime and Justice, Crime and justice statistics, Delinquency and crime, Economic well-being, Families, Neighborhoods, Cities, and Metros, Nonprofits and Philanthropy, Social impact |Tags: , , , ,
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Is student debt hindering homeownership?

Author: Maia Woluchem and Taz George

| Posted: July 17th, 2014

Since 2004, student loan debt has tripled to $1.1 trillion, surpassing both outstanding auto and credit card debt. Many have sought to connect the dots between the rise in student debt and the five percent decline in homeownership, but research presented this week at the Urban Institute raises questions about the evidence.


While there is some indication of a possible link, it’s not nearly strong enough to fuel a narrative casting debt-ridden graduates as a significant economic burden, permanently lowering the homeownership rate.

Regardless of the evidence, we still need to monitor student debt’s effects to the best of our ability, given its outsized role in household balance sheets, said Meta Brown of the Federal Reserve Bank of New York. In previous years, borrowers with student loans were associated with better credit profiles and higher homeownership rates among young households relative to their student debt-free counterparts. Now, the relationship is less clear, and those with student debt are slightly less likely to hold home-secured debt (a proxy for homeownership). Holders of student loan debt also have worse credit scores, meaning it could be more difficult for them to qualify for a loan, find housing, and obtain a credit card.


If student debt really is hurting homeownership, the panelists agreed that certain types of students are bearing the bulk of the damage. Research presented by Jeffrey Thompson of the Federal Reserve Board found a connection between student debt and lower homeownership almost entirely attributable to students that took out loans but did not successfully attain a degree.

Other factors besides student debt are more certainly at play in driving down the homeownership rate, such as changing interest in homeownership and the broader issue of restricted credit availability. Notably, the homeownership rate has declined steeply for 27-30 olds both with and without student debt. Many of these young potential homeowners have been locked out of the housing market at an opportune time to buy a home due to their inability to meet the debt-to-income ratios required in this tight lending environment. Others have been stymied by low credit scores, which hamper their ability to secure loans for a home. Others still may have decided that homeownership is not the best financial decision at this point.

Sandy Baum of Urban’s Income and Benefits Policy Center also critiqued the notion that student loan debt is weighting down the  homeownership rate. She notes many student debt measures are flawed because of weak data and questionable assumptions about borrowing patterns.  And from the perspective of students planning on taking out loans to continue their education, what is the alternative? Forgoing college is rarely the best long-term financial decision, demonstrated by the well-established earnings gap between those with and without a college degree. Moreover, a large proportion of the borrowers with more than $40,000 in student loan debt have borrowed for graduate or professional school, raising long-run earning power even higher.

The mainstream discourse often ignores the nuances surrounding the issue of growing student debt and it’s linked to financial hardship and broader economic woes, suggested Beth Akers from Brookings Institution. As student loans comprise an increasingly large share of total household debt, expect the conversation to continue.

Correction: The original version of this post mislabeled the series in the second chart. The chart plots only 30-year-olds with home-secured debt, broken out by those who did and did not have student loan debt at any time between ages 27 and 30. We originally implied that it showed homeowners between ages 27 and 30. Our apologies.

Filed under: Credit availability, Economic Growth and Productivity, Education and Training, Employment and education, Higher education, Homeownership, Housing and Housing Finance, Housing Finance Policy Center, Labor force, Tracking the economy |Tags: , , , ,
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Is residual income the key to the superior performance of VA loans?

Author: Laurie Goodman and Ellen Seidman and Jun Zhu

| Posted: July 16th, 2014

Default rates on loans guaranteed by Veterans Affairs (VA) are consistently lower than on loans insured by the Federal Housing Administration (FHA). For loans originated in 2007, the worst origination year, 36 percent of FHA loans have experienced at least one delinquency of 90 days or more, compared with only 16 percent of VA loans, as shown in the figure. These differences persist; for 2012 origination, the 2.3 percent FHA default rate was 64 percent higher than the VA’s 1.3 percent default rate.


While FHA and VA borrowers spend roughly the same percentage of their income on their mortgage payments, FHA borrowers have lower incomes and lower credit scores. When controlling for income and credit score, VA borrowers still have considerably lower default rates. For 2008 loans, for example, the default rate for FHA loans was 26.1 percent compared with just 11.6 percent for VA loans. But even if we apply VA borrower characteristics to FHA borrowers, the FHA default rate for 2008 loans would still have been 20.1 percent.

Why does the difference persist over time? In a commentary posted today, we looked at some possible explanations:

  • Military culture – Could military culture or special incentives not to default, such as potential loss of a security clearance, cause a significant difference? Evidence is weak to support this theory and in 2013, only 17 percent  of VA borrowers were on active duty when they took out their loan.
  • Direct contact – The VA has a statutory requirement to service its borrowers and contact them directly. FHA does not engage in direct contact; the servicer contacts the borrower. As a result, the VA intervenes at an earlier point in a more uniform manner. While this might improve the likelihood that a delinquent loan reperforms, often referred to as the cure rate (it actually doesn't seem to), it is unlikely to explain the difference in the substantially higher rate at which FHA loans go 90 days delinquent.
  • Skin in the game – Unlike the FHA’s 100 percent insurance, VA lenders remain on the hook for losses after the VA’s limited guaranty is exhausted. As a result, VA loans tend to be concentrated in lenders who are familiar with the VA’s special underwriting and servicing systems. We hope to explore FHA and VA default rates for lenders who originate both types of loans.
  • Residual income test -- While the VA’s uses a residual income test and debt-to-income (DTI) guidelines to assess a borrower’s ability to pay, the FHA and conventional lenders rely exclusively on DTI. The residual income test measures whether a borrower will have enough money left after paying their mortgage and related expenses each month to meet unanticipated expenses. Although the expense side of the VA’s test has not been updated for years, and therefore probably understates the residual income a family actually needs, it works. For 2008 originations by borrowers with incomes under $50,000, the VA default rate was about 60 percent of the FHA default rate.

While adding a residual income test may cause some families to rethink or delay a home purchase or purchase a less expensive house, it also appears to be an effective way to reduce default rates and ensure borrowers take out mortgages they can afford. FHA and conventional programs should consider adding residual income to their underwriting. Moreover, lenders making higher cost Qualified Mortgages may want to consider using a residual income screen to provide more certainty that their borrowers can truly repay the loan.

Filed under: Agency securitization, Credit availability, Economic Growth and Productivity, Federal programs and policies, GSE reform, Homeownership, Housing and Housing Finance, Housing and the economy, Housing finance, Housing Finance Policy Center, Tracking the economy |Tags: , , , , , ,