2013 Policy Summit on Housing, Human Capital, and Inequality
Highlights and Recap: 2013 Policy Summit on Housing, Human Capital, and Inequality
The Federal Reserve Bank of Cleveland has convened an annual Policy Summit in our region as a forum for outside-the-Beltway discussions about key community and economic development issues affecting our regions. In 2013, we partnered with the Federal Reserve Bank of Philadelphia, whose communities and markets are similar to those in our district. The event, held September 19 and 20, 2013, drew almost 300 academics, bankers, elected officials, practitioners, and policymakers to the campus of the Cleveland Clinic for two days of knowledge exchange, dynamic discourse, and inspiring speakers on housing finance reform, student lending, neighborhood stabilization tools, and other topics. Closing keynote speaker Eldar Shafir shared research on how people, regardless of education level, can make poor decisions when faced with a scarcity of resources.
This page contains links to a range of materials from the Policy Summit, including presentations, video segments, and summaries and policy implications from research papers presented at the event.
September 19-20, 2013 Cleveland InterContinental Hotel & Conference Center
Watch videos of select Policy Summit sessions and download summaries and PowerPoint presentations.
Keynote Sandra Pianalto, President & CEO of the Federal Reserve Bank of Cleveland, on Housing and Consumer Finance
Summary and Findings We investigate the impact of large swings in the housing market on non-mortgage borrowing, using CoreLogic geographic house price variation and Equifax-sourced Federal Reserve Bank of New York Consumer Credit Panel data for 1999 to 2012. First-differenced instrumental variables estimates indicate that all homeowner types increased both housing and non-housing debt in response to the housing boom. However, older and prime homeowners responded to house price changes by reallocating obligations between home equity and credit card debt, with little change in total debt, during both the comparatively stable 1999-2001 period and the 2007-2012 downturn. Younger and marginally creditworthy homeowners’ non-mortgage debts moved with house prices during both expansions and downturns. These results suggest meaningful wealth effects of the housing market on consumption only for the boom period, but collateral effects throughout. A difference-in-differences estimation approach yields similar results. Finally, despite broad speculation, we find little substitution out of home equity debt into student loans in response to recent house price declines.
Implications for Policy and Practice Our findings address the nature of both debt and consumption responses to movements in the housing market, in good economic times and bad. Understanding whether and which homeowners adjust consumption in response to changes in housing wealth may help us understand the path of the recovery. Further, our failure to uncover evidence of meaningful substitution out of home equity debt into student loans from 2007-2012 suggests that a housing market recovery may do little to curb the rapid growth of U.S. student debt.
Summary and Findings Economic models typically assume that households adjust their consumption based on new information rather on the actual receipt of funds (e.g., Laibson 1997). Empirical studies, however, find evidence that appears to contradict the theory. Specifically, the common result is that households react to actual cash flows. For example, households consume more following the regular receipt of monthly paychecks or social security payments (Stephens 2003, 2006), following tax return refunds (Souleles 1999), and following tax rebates (Agarwal, Liu, and Souleles 2007). One possibility is that households would like to respond to expected cash flows—as the theory predicts—however, they are bound to do so due to financial constraints. This idea is supported by the evidence of Zeldes (1989) that the correlation between income and consumption is weaker for financially constrained households. While this evidence is suggestive of the importance of financial constraints in household consumption decisions, there is no direct evidence showing that financial constraints prevent households from responding to expected cash flows. The main contribution of the study is the empirical setting: instead of examining the reaction of households only to the cash receipt event, we augment the analysis and document the response of households to the information event. We use a novel setting surrounding the filing date (information date) and receipt date of actual federal tax refunds.
Implications for Policy and Practice By providing more evidence on how consumers react to news and realization of income changes and how it interacts with credit constraints, we hope to help the evaluation and the design of policies that have an impact on the household income such as tax rebates and labor regulation.
Katherine Samolyk, Consumer Financial Protection Bureau (CFPB) Presentation Checking Account Activity, Account Costs, and Account Closure among Low- and Moderate-Income Households [ summary & implications ⇓ ]
Summary and Findings This study uses proprietary data for a large random sample of consumer checking accounts at several depository institutions to examine the costs associated with checking account use and usage patterns that pose greater account-closure risks. We have unique information related to account ownership, including balances in other accounts with the bank and whether the account is opted-in to having standard overdraft coverage of debit card and ATM transactions. We also have 18 months of data on each debit and credit to the account. We use census data on the characteristics of the tract where the account holder resides. We conduct tests of factors associated with the incidence of overdraft-related fees and with involuntary account closure. Our findings indicate that being opted into debit card and ATM overdraft coverage is a key factor that predicts whether an accountholder had overdraft-related fees. We find that, in general, having “overdraft protection” in the form of a deposit account linked for the purpose of overdraft coverage was associated with lower overdraft-related costs; however customers having linked accounts with low balances tended to incur higher costs than customers with no linked accounts. Not surprisingly, we find that overdraft fees are a primary predictor of involuntary account closure. However, we also find that controlling for account-related factors, there are differences in checking account outcomes associated with tract demographics.
Implications for Policy and Practice There is a growing body of research indicating that LMI households tend to be disproportionately represented among the unbanked and underbanked populations. A key goal of this study is to increase our understanding of banked LMI households and the costs and risks associated with bank account use. To this end, we focus on how account costs and account closures are related to the characteristics of the census tracts where the account holders reside. Our findings suggest that banked customers experiencing negative account outcomes may not look all that different from households that use alternative financial services (AFS) providers. In terms of univariate patterns, account holders residing in LMI neighborhoods were more likely to have overdraft-related fees and to experience involuntary account closure. They also tended to have lower monthly deposits and were less likely to have accounts linked for the purposes of overdraft protection than other account holders. In tests that control for account-related factors, we continue to find that account holders in LMI neighborhoods are more likely to incur worse outcomes. However, including tract characteristics measuring homeownership rates, household type, educational attainment, and racial composition attenuates the link between tract income and account outcomes. The tract characteristics associated with negative account outcomes are similar to those that researchers have found associated with the use of AFS credit products.
Practitioner Session on Small Business Financing Trends
Summary and Findings We test for racial discrimination using a matched-pair correspondence experiment on Mortgage Loan Originators (MLOs). Our matched-pair experiment examines the response MLOs offer to initial contact from a potential client interested in obtaining information about a mortgage loan. We design the experiment to test for differential treatment by client race (white or African American) as well as differential treatment by credit score. Our results show that MLOs discriminate on the basis of race, and treat clients differently by their reported credit score. We find that on net, 1.8 percent of MLOs discriminate by not responding to inquiries from African Americans while responding to inquiries from white clients. We find larger net response differences across credit score types, with 8.5 percent of MLOs responding to the high credit score group while not responding to the no credit score group, and 4.0 percent of MLOs responding to the high credit score group while not responding to the low credit score group. We also find that credit score differences exacerbate differences in differential response between races. Examining the content of the response shows that whites are favored even among MLOs that respond to both inquiries. The primary difference in the content of response between whites and African Americans is the inclusion of details about the loan.
Implications for Policy and Practice Finding discrimination in the lending market is likely to influence outcomes for minority borrowers throughout the home buying process. If African American borrowers are less likely to receive communication from an MLO and the MLO treats them differently when communication does occur, it makes submitting a loan application more difficult, and the remainder of the home purchase more arduous. In addition, our work shows that the growing importance of e-mail communication between clients and lenders, where in-person meetings are less and less common, does not mean that discrimination on the basis of race will not occur. The magnitude of discrimination we find is smaller than in recent in-person studies; however, the standard for compliance is much lower in our most basic test—we examine only if MLOs are willing to respond to an e-mail. Our findings confirm that discrimination still exists in the lending industry, and that it exists across a larger sample and a broader geographic scope than previous studies show. From a policy perspective, our results suggest that examining lending outcomes is not sufficient to uncover the level of discrimination that minorities face in the lending process. Our work also suggests that to uncover the full extent of discrimination in this market, multiple types of communication should be used in addition to in-person audits, and that enforcement of fair lending laws would be more robust if audits included other means of communication.
Lan Shi, The Urban Institute Presentation The Effect of Mortgage Broker Licensing On Loan Origination Standards and Defaults under the Originate-to-Distribute Model: Evidence from the U.S. Mortgage Market [ summary & implications ⇓ ]
Summary and Findings By exploiting state-level variations, we examine whether stricter licensing requirements for loan brokers raise lending standards and consequently improve loan performances. Using data on private label securitized loans, we find that the requirements on registration, surety bonds, net worth, work experience, education, exam, and continuing education are all effective in raising loan origination standards. Requirements placed on employees are as effective as those on licensees. The effect is larger for subprime, low/no-doc, cash-out-refinance loans, and high-minority neighborhoods.
Implications for Policy and Practice These findings point to the value of broker regulation when lenders' incentives to screen are compromised under the originate-to-distribute model.
Summary and Findings Neighborhood Reinvestment Corporation (doing business as NeighborWorks America, or NeighborWorks) has a nationwide network of affiliates offering pre-purchase homebuyer counseling throughout the country. Although the network members started to provide pre-purchase counseling in 1978, the impact of these services on mortgage performance has not yet been formally evaluated. Using information on about 75,000 loans originated between October 2007 and September 2009, Neil Mayer and Associates, together with Experian, analyzed the impact of pre-purchase counseling and education provided by NeighborWorks’ network based on the performance of counseled borrowers’ mortgages. It compares mortgage performance for counseled buyers over two years after the mortgages are originated to mortgage performance of borrowers who received no such services.
Implications for Policy and Practice The findings show that NeighborWorks’ pre-purchase counseling and education works: Clients receiving pre-purchase counseling and education from NeighborWorks organizations are one-third less likely to become 90+ days delinquent over the two years after receiving their loan than are borrowers who do not receive pre-purchase counseling from NeighborWorks organizations. The finding is consistent across years of loan origin, even as the mortgage market changed in a period of financial crisis. It applies equally to first-time homebuyers and to repeat buyers. The findings support continued support for pre-purchase counseling. The results show positive effects of counseling taking place throughout the U.S., by a large number of separate non-profit organizations, rather than in a single place or organization. At the same time, the fact that the NeighborWorks’ network has common counseling standards provides for some consistency in the counseling services provided. Further work on the role of the specific nature of the counseling in determining performance, on performance over a longer period following loan origination, and on the indirect impacts of counseling through their effect on mortgage product choice could well be fruitful future directions for research.
Practitioner Session on Nontraditional Tools in the Neighborhood Stabilization Toolbox
Lou Tisler, Neighborhood Housing Services of Greater Cleveland Presentation
Shelly Callahan, Mohawk Valley Resource Center for Refugees (Utica, NY) Presentation
Those are the dates of the 2014 Reinventing Older Communities conference, "Bridging Growth and Opportunity." The biennial conference, sponsored by the Federal Reserve Bank of Philadelphia in partnership with the Cleveland Fed and others, will be held next May at the Loews Philadelphia Hotel. Check out highlights and a summary from the 2012 event, "Building Resilient Cities."
“What we need to think about is how to scarcity-proof a world that’s just imposing on people with limited bandwidth.”