New 'Ability to Repay' Rules Highlight Need for Affordable Housing
By Anne Kim on 01/17/2013 @ 10:00 AM
EDITOR'S NOTE: This post originally appeared on Real Clear Policy and can be read here.
This week, the Consumer Financial Protection Bureau (CFPB) released long-awaited new mortgage rules aimed at protecting consumers from abusive loans.
The new rules, when they take effect next January, will effectively shut down some of the worst practices leading up to the 2007-2008 housing crash: “interest-only” loans, predatory fees, and “teaser rates” that trapped people into mortgages they couldn’t afford once the low initial rates expired. Mortgages with these features are now excluded from what the CFPB defines as “qualified mortgages” shielded from consumer lawsuits.
Most significantly, the new rules will also require lenders to ensure that borrowers can pay back their loans. Among the new requirements, a borrower’s monthly debt payments (including the mortgage) can’t exceed 43 percent of pre-tax income.
Without doubt, the mortgage lending landscape will now be much safer for homebuyers, who once faced a confusing and potentially toxic array of “exotic” products. These rules will also provide much needed certainty to the mortgage finance industry, which has had a rocky few years.
Nevertheless, the “ability to repay” rule may have the unintended effect of shutting some Americans out of the housing market, unless policymakers address an issue they’ve the past few years: the need for affordable housing.
Despite the crash, many Americans are still stretching budgets to the breaking point for housing, especially in high-priced areas. As generous as the 43 percent debt-to-income standard is meant to be, the dearth of affordable homeownership options could make this requirement unexpectedly burdensome.
According to Harvard’s Joint Center for Housing Studies, 9.5 million homeowners spent more than half their income on housing in 2010, while another 13.3 million homeowners spent at least 30 percent of their income on housing. The number of these “cost-burdened” homeowners, say the Harvard researchers, has grown by more than 6 million since 2001. In high-cost states such as California and Hawaii, CFED finds more than half of homeowners are cost-burdened.
Moreover, many Americans are struggling with other debts—student loans and credit card balances—that limit how much house they can afford. In 2010, the average borrower held a credit card balance of $10,852, while the average student loan debt for graduates was $25,250.
While the CFPB is allowing some exceptions to its “ability to repay” rule, the solution isn’t to permit anything-goes underwriting again—that’s what got us into trouble in the first place.
Rather, the answer is to make homeownership more affordable, so that fewer homebuyers, particularly moderate-income buyers, bump up against the debt-burden threshold.
Two ideas could be the starting point for making responsible homeownership more attainable:
1. Help homeowners save for down payment.
Down payment requirements are a major hurdle to affordability, particularly for first-time buyers.
According to mortgage services provider Ellie Mae, Inc., borrowers coughed up an average 21 percent down payment on mortgages completed in November 2012. On a home worth the median price of $186,100 in the third quarter of 2012, that’s $39,081 down —a potentially insurmountable amount for a young prospective homebuyer. While future regulations could relax standards, credit is likely to stay tight in the short term, and the days of “zero-down” are deservedly long over.
One option is expanding special matched savings accounts, known as “individual development accounts,” to help lower and moderate-income Americans save. Small-scale experiments with these accounts have proven successful nationwide in helping even the poorest Americans save.
Another idea might be allowing employers to create and match down payment savings accounts in the same way they match retirement contributions to a 401(k).
Helping homeowners save for down payment would not only help meet stricter lending requirements, it would reduce the amount people need to borrow and start homeowners off with a needed cushion of equity. Moreover, research by CFED and the Urban Institute found that low-income Americans who used individual development accounts to buy a home were up to three times less likely to face foreclosure during the housing crisis.
2. Expand affordable homeownership options.
One overlooked option for affordable housing is manufactured housing. Over the last several decades, manufactured homes have made huge strides in quality, durability and energy-efficiency. It’s time to set the “trailer” stereotypes aside.
Already, manufactured housing is one of the nation’s largest sources of unsubsidized affordable housing. In 2009, manufactured housing accounted for 43 percent of new home sales under $150,000. 17 million Americans live in manufactured homes.
Unfortunately, the current mortgage finance system largely excludes manufactured housing. Manufactured home loans are typically personal property loans, not mortgages, and lack most of a mortgage’s protections.
Changing laws to treat manufactured homes as real property would both protect consumers and make manufactured housing a viable homeownership option for more Americans.
The CFPB’s new rules take a big step toward making homeownership “safer” for consumers. The next priority for policymakers should be to make homeownership more affordable as well.
Impressed by Child Savings in Jackson, MS
By Michael Chasnow on 01/16/2013 @ 10:00 AM
The 1:1 Fund promotes educational opportunity for low-income students by raising matched funds for children’s savings incentive programs that encourage saving and build assets. Last week, when I was in Jackson, Mississippi, visiting one of the 1:1 Fund’s local children’s savings partner programs, the power of these initiatives became overwhelmingly evident to me.
Last Wednesday, I spent the afternoon traveling to two of the three early childhood development centers in Jackson, where about 230 preschoolers have Children’s Savings Accounts (CSAs). At one of the centers, I spent about an hour in a classroom with 15 four-year-olds. We asked the kids if they had bank accounts, and over half excitedly raised their hands while exclaiming, “Yes I do!” Then we asked how many of the students wanted to go to college, and again, more than half enthusiastically shot up their hands. The field trips that these kids have taken to Hope Credit Union to deposit money into their accounts have made a significant difference, and now hundreds of kids are saving for their futures and thinking about college as a real, attainable goal.
Moreover, at a higher level, this program is increasing parent engagement and leading to real savings for college. In this opt-in college savings program, 100% of eligible Jackson, MS, preschoolers have their own CSA. Teachers and site directors know about the CSA program and encourage parent involvement, and it’s working: over 50% of families had put dollars into their child’s CSA accounts in 2012, with some families saving in the $200-300 range. One-hundred percent participation in an opt-in program with over 50% having made deposits is an incredible milestone for these types of programs.
Moreover, the Deputy Director for the City of Jackson, Mr. Louis Armstrong, had the following to say about the local child savings program:
“The child savings program has really helped our parents think about their kids’ future. Ever since it started here in Jackson, parent participation at our early childhood development center schools has really increased; parent involvement in their child’s education has never been higher."
Mr. Armstrong puts it better than I ever could – increased parent engagement in their child’s education and tangible savings for their child’s future is a powerful combination.
You can subscribe to updates about the 1:1 Fund by visiting www.1to1fund.org.
More From This Contributor
Infographic: The Case for Affordable Housing Done Right
By Next Step Network on 01/15/2013 @ 01:30 PM
Win Big with D2D this Tax Season
By Jimmy Crowell on 01/14/2013 @ 04:15 PM
Do you or your clients need a New Year’s resolution for 2013? Do you wish you had saved more of your federal tax refund last year? Well, you’re in luck! To encourage individual filers to save more of the $300 billion of federal tax refunds disbursed each tax year, D2D Fund has announced a new prize-linked savings contest called the SaveYourRefund Sweepstakes. Beginning February 1, 2013, and running through April 15, 2013, all U.S. citizens and legal residents age 18 and above can enter the Sweepstakes if they save at least $50 of their federal tax refund. Today, saving part of a federal tax refund has never been easier. IRS Form 8888 allows filers to direct-deposit portions of their refunds into multiple accounts, including Individual Development Accounts (IDAs). Filers can also save some of their refunds directly in U.S. Savings Bonds using IRS Form 8888.
Starting February 1, you can enter the Sweepstakes by completing a simple submission form with details about your refund and how much you saved using IRS Form 8888. With multiple weekly drawings of $250 prizes and a $25,000 Grand Prize drawing, a small amount of money diverted from a tax refund into a savings account has the potential for a huge return on investment. D2D’s previous work with prize-linked savings has shown that people are motivated to save by even the smallest of prize incentives. With the SaveYourRefund Sweepstakes, D2D Fund is encouraging people to realize the potential of saving part of your federal tax return while giving filers a chance to win big. Sign up at http://www.saveyourrefund.com for updates about the promotion!
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New Year's Resolution: Reduce Spending to Fund Your future
By Brian Spero, Guest Contributor on 01/11/2013 @ 03:30 PM
With the new year comes old promises: lose weight, quit smoking and sometimes, save money. If you or clients are among millions of Americans living paycheck-to-paycheck, securing what you need today while leaving nothing for tomorrow, it's time to break the cycle of breaking even. Whether you are hoping to contribute more toward your retirement fund, or are setting your sights on amassing a nest egg for a downpayment on a home, here are nine straightforward tips for finding the additional funds that can get you one step closer to your goal:
- Don't Over-Indulge. There's a difference between living life to the fullest and living high on the hog. One of the easiest ways to find more money in your budget is to cut out extravagant spending. Ask yourself which is more important: Buying a house in a good neighborhood and being able to retire in comfort, or purchasing another pair of Italian boots and springing for a $200 bottle of champagne?
Leave the pair of Gap jeans on the rack and get a little more milage out of what you already have in your wardrobe. Right there, you've just saved $40. Find a few more ways to save money, and you could trim hundreds from your monthly expenses.
- Look at Transportation. Whether it's how you get to work or the way you spend your leisure time, a sizable portion of your income likely goes towards transportation. By getting into a carpool on workdays, biking locally instead of driving, and opting to take a nice weekend walk instead of a Sunday drive, you can discover extra money in your monthly budget. Find a way to use one less tank of gas per month and you can save around $50, in addition to potentially cutting costs for things like maintenance and tolls.
- Shop Smarter for Groceries. If you believe clipping coupons and shopping specials is a waste of time, think again. Using coupons when purchasing essential needs and waiting for premium brands and higher priced items (like meat and seafood) to go on sale can shave anywhere from 10% to 40% off your total monthly food bill.
If you spend $500 a month on groceries, a 10% reduction saves you $50. You can easily increase that amount by buying in bulk when possible, and choosing generic products over name brands when the difference is negligible.
- Resist Eating Out. A sandwich and a beverage for lunch at a restaurant in most areas will cost you about $10, while making the same meal at home takes five minutes and costs half as much or less. Take a brown bag lunch to work, and brew your own coffee, pack a bottle of water and bring a snack. Additionally, if you can simply eat leftovers instead of going out for dinner once or twice a month, you can save $125 or more each month.
- Cut the Cable. Does anybody really need 300-plus television channels? If saving for your future is your main priority important to you, cut the cord on cable to save an average of $50 per month in fees.
The alternative: A streaming account from Netflix costs $7.99 a month and offers unlimited access to movies and TV shows. Furthermore, if you are already paying for Internet access, you can find hours of entertaining content (including many network TV shows) for free online. It may take some adjustment to get used to not having cable, but the significant savings can make it worthwhile.
- Be a Homebody. Leisure time on the weekend for the hard-working professional or young couple is often sacred, but consider how much you typically spend on a night out on the town. A bite to eat, admission to a show or club, and perhaps a few drinks can easily run you $50 or more. Try staying in just one weekend night per month and utilize that Netflix account to dial up a good movie. Pop the cork on a nice bottle of wine, cozy up on your comfy couch and enjoy some tasty homemade treats. You can save about $35 and enjoy the home you rarely get to spend time in during the workweek.
- Live Green. By being green, not only can you learn to live more economically, but you can also lead a healthier life and make a positive impact on the environment. Just a few ways you can cut spending by living green is to start a vegetable or herb garden, do an energy audit to make your home more efficient, and adjust water heater temperatures, air conditioning and heating levels. Other easy ways to save is to filter tap water instead of buying bottled, rent or borrow tools or equipment when needed, and utilize a source like Freecycle, which connects people getting rid of "good stuff" to those who can use it.
Using just a few of these strategies can easily trim $50 a month from your budget, with higher potential to save when taking a blanket approach.
- Scale Back.
Whether it's your apartment, automobile or wardrobe, it's time to make the tough decision to sacrifice the things you fancy for the betterment of your future. Can you find an apartment that you would be happy in for a couple hundred dollars less in rent? Are you willing to trade in your gas-guzzling luxury SUV for an economy car that can cut your auto expenses in half? By scaling back, you can easily save at least $100 a month.
- Sell Off. You might not be able to take on a second job, but you can still earn money by selling the things that you no longer want or need. While a garage sale can bring in anywhere from $200 to $500, there are less work-intensive ways to make extra money, like dropping off your quality used clothing and goods at a consignment shop every few months, or listing used electronics or bicycles on Craigslist. It might not earn you a fortune, but if you make back about $300 a year on the used market, that equals $25 a month to stock away.
It's important to live for today, but you need to take necessary steps to prepare financially for tomorrow. While some of these strategies may seem insignificant, and others a bit hard to swallow, added together you could find an estimated $500 or more per month to save. Effectively invested, that money can help you realize your dreams of owning a home, starting a family or paving the way to a smooth retirement.
What other tips can you suggest to save money every month?
Brian Spero writes about frugal living and the importance of saving for the future on the blog, Money Crashers Personal Finance.
Impactful Returns From Mobile Home Parks
By Ellie Winninghoff on 01/10/2013 @ 11:00 AM
EDITOR'S NOTE: This post originally appeared on the Financial Advisor and can be read here.
Manufactured homes in mobile home parks were not always an intriguing alternative for low-income people. Homeowners could be evicted on 30 days notice simply because their landlord wanted to do something different with the land. And their value depreciated over time. The New Hampshire Community Loan Fund's transformative work in the mortgage market for these homes has changed that.
"These guys are really, really smart," says George McCarthy, director of metropolitan opportunity at the Ford Foundation. "[NHCLF] president Juliana Eades is creative, thoughtful, and willing to take risks and put the institution and the institution's money on the line to make things happen."
Since 1984, the Concord, N.H.-based community development finance institution, or CDFI, has helped organize and finance more than 100 cooperatives in New Hampshire that allow homeowners to own the mobile home parks underneath their homes. That's more than 20% of the parks in the state, and this does not just give control of the land back to people who were prey to random decisions by landowners.
Contrary to perception, it is also a key reason that 40% of these homes are appreciating in value, according to studies conducted by the Consumer Union and the Joint Center for Housing Studies at Harvard University.
Based on its success in New Hampshire, NHCLF in 2008 spun off ROC USA, a partnership with the Corporation for Enterprise Development and NCB Capital, to catalyze cooperative ownership of mobile home parks nationwide. And during the last nine years, NHCLF has also made $25 million in loans to finance 600 homes in those parks in New Hampshire. Loans range from $10,000 to $100,000, and the default rate is 1.6%.
NHCLF is also lauded for its innovative small business loans for growth businesses, which incorporate royalty financing that goes up and down based on ability to pay.
Individuals can invest in NHCLF for one to 25 years. Invested money is combined with NHCLF’s own capital to create the pool of funds it lends to create affordable housing and jobs.
Returns range up to 4% (for 7 to 9 years) and 5% (for 10 years-plus.) NHCLF is rated AAA+2 by the CDFI Assessment and Ratings System, or CARS, and the minimum investment is $1000. Top investors include Ford Foundation, Endowment for Health, Bank of America and Sovereign Bank.
In l983 when an elderly couple needed to sell the land that supported 13 manufactured homes so the husband could go to a nursing home, the residents quickly realized there was no place to go and their homes were not really mobile. The group, aided by a board member of the newly forming NHCLF, organized as a cooperative to buy it together. But when no bank would lend them the funds, the NHCLF stepped in with a $43,000 loan so the cooperative could buy 67 acres.
"They weren't imagining themselves to have an access-to-capital problem," says NHCLF president Julie Eades. "They were imagining themselves as having a homelessness eviction lose-their-home problem."
After an article about the venture appeared in a statewide paper and she was flooded with calls about evictions so landowners could sell to developers, Eades realized the problem was "systematic rather than a one-off." In l988, after it financed the second ROC in the state (one in which the cooperative had engaged in a protracted legal battle for its right to own the park), NHCLF made its real mark.
It worked closely with Elliott Berry, managing attorney of the Manchester office of New Hampshire Legal Assistance, who convinced the state legislature to pass two laws. One required park owners to give residents 18 months notice before closing a park or evicting residents due to a planned change of use. And the other required them to provide residents notice of a proposed sale and to negotiate with them in good faith so they could buy the park.
"It basically let homeowners be part of the transaction in a way they were completely excluded before," Eades recalls. "It was not a right of first refusal. But because we're so active, it operates similarly to a right of first refusal because many sellers don't care who they may sell to as long as they get their price."
Since l988, NHCLF has organized and financed 101 more ROCs. It isn't easy and not all succeed. But when they do work, studies show, residents not only take control of their future but they plant more flowers, attend more school conferences and the like. In short, they tend to take care of the property and become community members.
And while a 2006 study showed property values increasing 12.5% per year, a study NHCLF commissioned this summer showed that manufactured homes in ROCs are still appreciating at 3.5% per year.
Throwing Away The Blue Book
According to McCarthy at the Ford Foundation, there are more low-income people living in manufactured housing than in all the country's subsidized housing programs.
But while manufactured homes are high quality these days--there have been housing codes since l976, and many are green and energy efficient--the terms for loans have been abusive. In 2003, NHCLF began making loans on manufactured homes in ROCs with a view toward system-wide change.
According to Eades, banks don't make loans on manufactured homes for "structural" reasons (the loans are too small, there is no secondary market and no mortgage insurance.) When loans are available, she says, the interest rates are exorbitant and terms limited to 15 years.
But the biggest problem, she says, is that the financial system treats manufactured homes like cars by appraising them on a blue book model. And she says loans are not available at all if the home is more than ten to twelve years old. This means, of course, that a homeowner does not have an asset that is growing in value or even maintaining its value. And it also means that a homeowner was not able to sell a home unless it was virtually brand new.
"We treat [a manufactured house] like a house, because it is a house," she says. "We get an appraisal. And we don't discriminate against a house based on its age."
At a current rate of 8.75%,Eades admits that NHCLF's loans are not cheap.
"It's better than 14% or nothing," she says, "and it costs us to do this. We're a lender and an organizer. Most lenders don't want to organize, and most organizers don't know anything about lending. The fact that we're a lender helps pay for the organizing."
Three months ago, NHCLF began offering mortgages in New Hampshire to manufactured homeowners who also own their own land. This should make it easier for people to choose manufactured homes as a housing option, which may be necessary considering there’s an average wait for subsidized housing of one to three years.
"If you clicked your fingers and imagined that manufactured housing would disappear," McCarthy asks, "where would all these people live?"
Ellie Winninghoff is a writer and consultant specializing in impact investing. More of her writing is linked at her blog, www.DoGoodCapitalist.com, and she can be reached at: ellie.winninghoff (at) gmail (dot) com.
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Hurricane Sandy and the Merits of Manufactured Housing
EDITOR'S NOTE: This post originally appeared on Andrea Levere's Huffington Post Politics Blog.
As the difficulties facing Hurricane Sandy victims continue to mount many weeks after the storm, several options have been considered for those whose homes were destroyed in the storm, including hotel rooms, apartments, boats and even shipping containers. Relatively far down on the list: manufactured homes.
FEMA administrator Craig Fugate recently acknowledged the negative connotations associated with manufactured housing, particularly their link with the notorious "Hurricane Katrina trailers": "When you say FEMA trailers, you harken back to Katrina... I think the majority of folks will be helped with rental assistance, which is faster and puts more money in the economy."
Unfortunately, Fugate's words only fuel outdated and incorrect notions about what manufactured housing is and what it has the potential to become, particularly for low-income families. While Fugate acknowledged the association, he failed to clarify that these trailers were not, in fact, manufactured homes. The temporary trailers used to house Hurricane Katrina victims, later found to contain toxic levels of formaldehyde, were actually recreational vehicles that were not built to meet federal building codes for manufactured homes.
In reality, today's manufactured homes have about as much in common with RVs or "Katrina trailers" as mini-mansions have with Buckingham Palace.
For starters, there is nothing mobile about today's manufactured homes, which range from single-room units to four-bedroom homes with covered front porches and attached garages. Unlike mobile homes, which have not been built since the enactment of the 1976 federal housing code and which could theoretically be driven off a property, today's manufactured homes are designed to be permanent and can be constructed on foundations like any other site-built home.
The term "manufactured housing" itself has less to do with quality and more to do with the production process, which is a derivative of Ford's assembly lines -- an innovative business model that helped grow the United States economy. This model allows manufactured homes to be built in a more controlled work environment, translating into predictable costs, increased efficiencies and reduced waste.
Because they are constructed in a factory in about one-fifth of the time and half the cost of site-built homes, manufactured housing is an ideal solution for low-income families -- and a compelling alternative for those seeking a quick and more permanent housing solution following a devastating storm like Sandy. Today's manufactured homes, particularly those that comply with the federal government's Energy Star standards, are also vastly more environmentally friendly than the old-school variety and offer significant energy saving costs to homeowners.
For too long, however, manufactured housing has been consigned to the back burner of public policy debate. As a result, many of the old notions about manufactured homes continue to dictate policy. Nearly two-thirds of these homes, for instance, are still titled as automobiles rather than real property, making it difficult for owners to obtain mortgage financing and reap benefits, such as building home equity, that often come from owning a home in this country.
Policymakers need to address these and a range of other issues that prevent families who own manufactured homes from benefiting in the same way as owners of traditional site-built housing. For instance, federal agencies like the Consumer Financial Protection Bureau could require that manufactured home lenders provide all their customers the same easy-to-read disclosure forms outlining the full cost of the loan (such as interest and fees) that site-built homebuyers will start receiving in 2013.
The housing challenges resulting from natural disasters like Sandy offer a perfect opportunity to change perceptions about manufactured housing and the role it can play in helping families find high quality, stable housing and build long-term assets. Thousands of Sandy's victims, for example, lived in public housing and likely had few assets of any kind. Many of these families could be put on a path toward permanent housing and a more financially secure future if they had the opportunity to purchase modern manufactured homes.
The Inclusive Economy: 2012 in Review
By Sean Luechtefeld on 01/08/2013 @ 12:00 PM
Last year was a busy year here at The Inclusive Economy. Over the course of 2012, we posted 291 blog posts from CFED’s staff of assets experts alongside guest contributions from over 40 professionals in our field. In case you missed them, here were the five most highly trafficked posts from 2012:
What were your favorite stories from 2012? What would you like to see in 2013? Use the comments section below to let us know your thoughts!
Improving Economic Mobility Through Increased Savings
By Sean Luechtefeld on 01/07/2013 @ 05:00 PM
Last month, Diane Calmus, Research Assistant in the Center for Policy Innovation at the Heritage Foundation, published a discussion paper titled “Improving Economic Mobility through Increased Savings.” The paper, which you can download here, explores different innovative programs that encourage American households to set aside money for large purchases, unexpected emergencies and comfortable retirements.
Among the innovations explored in Calmus’ report is the Save to Win program. Using the gratification of a lottery to foster longer-term savings, the Save to Win pilot in Michigan gave borrowers entries into the lottery according to how much they had saved. The more a family saved, the higher the odds that they’d win the prize. This notion of prize-linked savings, currently being pioneered by organizations like the Doorways to Dreams Fund, have demonstrated that the potential of winning a prize, no matter how large or small, is a significant incentive to encourage regular saving behaviors. In its first three years, the Michigan pilot yielded a savings of $8.5 million among 11,500 savers.
These and other innovations are the cutting edge of improving financial security at a time when asset poverty is all but pervasive. As Calmus concludes, “saving money is not easy, but it is important. Innovative programs of the sort outlined in this paper, if implemented, can and will engage Americans in setting aside money.”
To read the full range of innovations cited by Calmus, visit the Heritage website.
What Americans Didn't Get from the Fiscal Cliff Tax Deal
By Anne Kim on 01/04/2013 @ 12:30 PM
EDITOR'S NOTE: This post originally appeared in Real Clear Policy and can be read here.
By all accounts, the recently passed tax deal averting the “fiscal cliff” was a big win for the American people.
Among other things, the agreement preserves the full package of Bush-era tax cuts for the middle class and raises rates only on the wealthiest Americans. It also permanently patches the Alternative Minimum Tax so it wouldn’t affect middle-class households.
Moreover, it extends for five more years an expansion of three major tax benefits for lower-income households: the earned income tax credit for low-income wage-earners, the child tax credit and the “American Opportunity Tax Credit,” aimed at helping families defray college costs.
But Americans may end up losing more than they’ve gained if this agreement is all that passes as “tax reform” this Congress. If so, Americans will have been robbed of an opportunity to rebuild a tax code that’s truly in their favor.
This means a tax code that’s not just less complex but whose benefits, as well as its burdens, are distributed more fairly. In particular, middle-and lower-income Americans deserve far more help than they’re getting to save and invest in their economic security.
According to a 2010 analysis by CFED, the federal government spends more than $400 billion a year—mostly in tax breaks—to help American households accumulate assets and build wealth. In addition to the home mortgage interest deduction, this includes tax incentives for retirement savings, college and entrepreneurship.
The problem is that much of this $400 billion goes to the wealthiest taxpayers. For every $1 in tax benefits that middle-income families receive, according to CFED, millionaires get $188. On average, millionaires receive a tax benefit of $95,820 each year for their savings efforts, while families earning $50,000 receive $509. Families with incomes of $30,000 get just $81. (See a related infographic here.)
But despite its current flaws, the tax code is still a principal engine of social policy, particularly when it comes to savings and retirement security. That’s why true, comprehensive tax reform is essential to building a robust savings system that benefits everyone—particularly with entitlement reform, including Social Security reform, still on the table.
In fact, helping middle-class and lower-income Americans save—and save more—will be of paramount and increasing importance. While there’s little doubt that Social Security for future generations will be less generous than it is today, there’s also little doubt that Americans are woefully ill-prepared to take on more of the burden of their own retirement security.
Just 14 percent of Americans say they’re confident of a comfortable retirement, and in fact, many Americans assume they can’t afford to retire. According to Gallup, the percentage of Americans expecting to work past 65 has more than tripled since 1990 (and most people today expect to stay on the job until they’re a ripe 67).
Enhancing savings incentives in the tax code is a critical piece of Americans’ retirement security. Moreover, there’s no shortage of proposals for improving the current system. Rep. Richard Neal (D-MA), for example, has proposed expanding the current Saver’s Credit, which provides a small “match” to lower-income savers, to benefit more taxpayers. Similarly, the New America Foundation and the Aspen Institute have proposed “matched savings” incentives to benefit and reward lower-income savers through the tax code.
Many policymakers also support the idea of an “auto-IRA,” first proposed by Mark Iwry and David John, to benefit workers in small businesses whose employers don’t currently offer a retirement savings plan.
Unfortunately, proposals such as these might have a tougher time getting their day in the sun. The fiscal cliff tax agreement gave both President Obama and Republicans big enough political “wins” that they may not feel compelled to revisit the tax code in the short term.
For President Obama, who defined “fairness” purely in terms of tax rates paid by the wealthy, the deal achieved his political goal of raising taxes on the “top 2 percent” of Americans. For Republicans, the debate now moves to the debt limit and government spending, which is turf they feel comfortable conquering. Moreover, to the extent that tax issues arise again, the likely context will be that of raising revenue, rather than reforming social policy.
Nevertheless, let’s hope that Congress can see past short-term wins and deadlines to the bigger issues of financial security that Americans are facing in the long-term, and the vital role that a sensible tax code can play in providing Americans with more tools to achieve economic security and success.
The Assets & Opportunity Network Welcomes 13 New Lead Organizations
By Jennifer Medina on 01/02/2013 @ 09:30 AM
The Assets & Opportunity Network is excited to announce that 13 new Lead State, Local, and Tribal Organizations will be joining the A&O Network. With these new additions, a total of 35 states and 39 local areas (including two Lead Tribal Organizations) are now represented by Lead Organizations.
The Lead Organizations bring a wealth of knowledge and experiences to the A&O Leadership. Among them, there are organizations that have advocated for payday lending legislation in their states, built broad-based coalitions to promote financial security and self-sufficiency, and administered Volunteer Income Tax Assistance sites and IDA projects to help low-income families maximize their earnings. The new Lead Organizations include coalitions, community action associations, policy think tanks, consumer credit counseling agencies, and other nonprofit institutions. We were impressed with the accomplishments and experience of these new organizations and are confident they will be a strong addition to our growing network.
New Lead State Organizations:
- Maine - PENQUIS
- Nevada - Financial Guidance Center
- Rhode Island - Economic Progress Institute
- Colorado - Colorado Community Action Association
New Lead Local Organizations:
- Lansing, MI - Asset Independence Coalition
- New York City, NY - The Financial Clinic
- Hamilton, OH - Supports to Encourage Low-Income Families (SELF)
- Portland, OR - Innovative Changes
- Charlotte, NC - Crisis Assistance Ministry
- Las Cruces, NM - Community Action Agency of Southern New Mexico
- Montgomery County, PA - Montgomery County Asset Building Coalition
- Montgomery County, MD – Coalition for the Advancement of Financial Education (CAFE)
New Lead Tribal Organization:
- Oklahoma Tribal - Oklahoma Native Assets Coalition
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Promoting New Efforts to Get Kids to Save and Get Kids to College
By Michael Chasnow on 12/19/2012 @ 03:00 PM
EDITOR'S NOTE: This article initially appeared as a guest blog post on New America Foundation's The Ladder. Many thanks to the folks at New America's Asset-Building Program for promoting our exciting new social venture, the 1:1 Fund.
Graduating college is a critical step for children from lower income families aspiring to join the middle class. According to 2012 Postsecondary Education Opportunity Research, only 10% of low-income children living in families in the bottom quartile of income (~$33,000 and below) graduate from college by their mid-20s. This low graduation rate severely limits their future opportunities. According to the U.S. Census Bureau, individuals with a college degree earn on average over $900K more in their lifetime than high school grads, and, as the Lumina Foundation argues, more college graduates in the work force also benefits the U.S. economy by helping to create jobs. Additionally, graduating college increases one’s chances of gaining employment (and thus building wealth), with college graduates’ unemployment rates at 3.8% and workers with high school degrees at 8.1% as of November 2012.
Access to rigorous K-12 education is a critical component to preparing students for college attendance and success, but financial preparedness is a surprisingly powerful factor. Research from the Center for Social Development shows that children who expect to go to college and have savings are four to seven times more likely to attend college, and significantly more likely to complete college. Having tangible savings helps give students better understanding of their finances, and perhaps more important, the act of saving for college, even in accounts with small balances, helps to build college aspirations among parents and their children (which New America Foundation Fellow William Elliott documents here).
Recent Growth of the Child Savings Movement
Fortunately, new initiatives are taking root to enable children from varied socio-economic backgrounds to save for higher education – two- and four-year colleges, technical institutes, etc. For example, KIPP schools are piloting these child saving accounts (CSAs) with 6,500 children, and the U.S. Department of Education is opening 10,000 CSAs in GEAR UP sites across the country. Moreover, school districts in San Francisco, California and Cuyahoga County, Ohio are implementing universal child savings programs (listen to this NPR story), which taken together will include about 20,000 new child savers every year. The 1:1 Fund, a new social enterprise of the Corporation for Enterprise Development (CFED), will support more than 8,500 student savers by raising matching funds to encourage families to save more towards their child’s college education.
One of the key lessons for investors is that a longer time horizon is likely to yield bigger gains. This lesson applies to children as well; now is the time to effectively invest in the next generation, and these kinds of child savings programs are a broad-based and cost-effective way to seed increased opportunity for lower income students to complete higher education programs (see Al Cantor’s Stanford Social Innovation Review blog post Closing the Divide). Child savings accounts, especially when coupled with quality financial education, can be a critical element in dramatically increasing college attendance and graduation rates among low-income families. Supporting and growing these CSA programs should be a key asset-building tool that continues to grow – 20,000 new child savers in 2013 is a great start, but broad access to simple and easy college savings opportunities to all families would be much better for our country’s future.
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Research Symposium — Restoring Household Financial Stability After the Great Recession: Why Household Balance Sheets Matter
By Kim Pate on 12/18/2012 @ 01:00 PM
EDITOR'S NOTE: This event listing originally appeared on the Federal Reserve Bank of St. Louis' website here.
6 p.m. - 8 p.m. | Tuesday, Feb. 5, 2013 - Welcome Reception and Dinner
8 a.m. - 8 p.m. | Wednesday, Feb. 6, 2013 - Symposium
8 a.m. - 2 p.m. | Thursday, Feb. 7, 2013 - Symposium
America’s economic engine—its household sector—is sputtering. The common underlying vulnerability is widespread household financial instability: the inability of millions of Americans to meet their financial obligations, qualify for new credit, or play their traditional roles as consumers and homebuyers driving economic growth. This household financial instability was affirmed by the recently released Survey of Consumer Finances of the Federal Reserve, which showed that, overall, the median net worth of American households declined nearly 40 percent between 2007 and 2010. Particularly hard hit were younger, non-white and non-college-educated households.
Through commissioned papers, keynote speeches and a competitive call for papers, this symposium will highlight the critical role of household balance sheets in restoring household financial stability and national economic growth. Keynote speakers will include Michael Barr, former assistant secretary for financial institutions at the Treasury Department and current professor at the University of Michigan Law School; Christopher Carroll, professor of economics at Johns Hopkins University; and Federal Reserve Governor Jeremy Stein.
Sessions will explore:
- current data and research on household balance sheets as well as a framework for understanding the determinants and implications of household financial stability;
- the links between household balance sheets and attainment of homeownership, economic mobility and educational goals among households; and
- the connections between household balance sheets and macroeconomic outcomes, including economic growth and the transmission of monetary policy to the economy.
This event is free; however, registration is required by Tuesday, Jan. 29, as space is limited.
Sponsored by the Household Financial Stability initiative and Research Department of the Federal Reserve Bank of St. Louis, along with the Center for Social Development at Washington University in St. Louis.
To check out a draft of the agenda, click here.
Savings Bonds: The Season's "Should-Have" Stocking Stuffer
By Anne Kim on 12/14/2012 @ 01:45 PM
EDITOR'S NOTE: This post originally appeared last week on RealClearPolicy. Read the original post here.
For many Americans, the winter holidays are an orgy of shopping and consumption. On Black Friday, a record 247 million Americans—or more than half the country—went to the mall. According to the National Retail Federation, the average shopper spent $423 Thanksgiving weekend, for total sales of $59.1 billion.
Still shopping for holiday stocking stuffers? Forget Pokemon cards—why not a savings bond?
It might be time for a holiday counter-tradition: “Savings Bond Sunday.” That’s when every parent in America gives one $25 U.S. savings bond as a pre-holiday gift to each child. Unlike a check, it doesn’t beg to be spent or require a trip to the bank. And while it might not be as glamorous as a Wii U, it’s far less expensive and infinitely more valuable in the long run.
In addition to bolstering a budding nest egg, the annual gift of a savings bond can help instill in kids the habit and expectation of saving—something that Americans very badly need to do.
In September 2012, the personal saving rate was just 3.3 percent. According to CFED, a stunning 43 percent of Americans don’t have enough cash socked away to make it three months at the federal poverty level. And even as Americans are paying down their credit cards, the average American still owed more than $5,500 on their credit cards as of July 2012, according to consumer site CreditKarma.com. This is on top of other typical burdens on Americans’ household balance sheets: student loans, car payments, and mortgages.
So what better way to help reverse this tide of consumption and debt than by giving savings bonds, the ultimate national symbol of thrift?
Among their virtues, savings bonds are safe, they’re available for just $25, they come with no fees, and they offer interest rates that are relatively competitive compared to bank savings accounts. Moreover, the “Series I Bond” is reasonably liquid. It’s bought and redeemed at face value (you pay $25 for a $25 bond), and can be cashed in with minimal penalties in case of an emergency.
Because of these benefits, savings bonds have in fact proved an ideal savings tool for some Americans, especially “starter” savers with less money to put away or who lack access to a traditional savings account.
For example, the Boston-based Doorways to Dreams (D2D) Fund, a non-profit founded by former Harvard Business School professor Peter Tufano, has long championed savings bonds as a tool for helping low-and moderate-income savers.
In particular, the organization is spearheading an initiative encouraging lower-income taxpayers to save at tax time by buying savings bonds with some of their refunds. In the 2012 tax year, more than 35,000 people participated in the “tax time savings bond” campaign, saving an average of $579 and a total of $20.3 million. In the three years since the program’s launch, the amount saved and the number of community organizations participating has grown exponentially.
Moreover, it’s only been fairly recently that “gifting” bonds has faded as a tradition. After their introduction in 1935 to help finance World War II, Uncle Sam launched an aggressive and successful marketing campaign to make savings bonds a popular holiday, graduation and all-purpose gift.
Like Wheaties, savings bonds enjoyed a string of celebrity endorsers over the decades including Lassie, the Lone Ranger, Superman, Bugs Bunny and Bullwinkle. (One film clip from the 1930s shows Bing Crosby singing a sales pitch for bonds in front of rows of marching sailors. The lyrics: “We’ve got another bomb to buy.”) In 1972, a TV ad presaging the gift-card era shows shoppers returning tacky gifts while a voiceover touts bonds as a gift that works for everyone. Awkwardly-worded dialogue on the benefits of bond-buying even made its way onto such middle-American TV shows as “Father Knows Best,” “Cheers” and “WKRP in Cincinnati.” (Click here for a montage.)
It was only after Congress pulled the plug on marketing savings bonds in 2003 that sales slipped precipitously. In 2011, the U.S. Treasury sold $2.4 billion in savings bonds, compared to $11.3 billion in 2003.
Savings bonds deserve a comeback, if only as a small, retro-chic protest against holiday mass consumption.
As anyone who has been following the “fiscal cliff” discussions knows, the nation is about to embark on a long-term, serious discussion about how to put the federal government’s fiscal house back in order. But an equally important conversation is restoring the personal balance sheets of American households as well.
Reviving a tradition of Christmas-time savings—with the gift of just one savings bond to your child—could be one small step toward that goal.
CFED Notes: "Hope in Concrete Form"
By Anne Kim on 12/13/2012 @ 03:30 PM
CFED Fact File: New Hampshire College Graduates Have the Highest Average Student Debt Burden in the Country.
CFED’s Assets & Opportunity Scorecard finds that college graduates in New Hampshire carried an average student debt load of $31,048 in 2010, significantly higher than the national average of $25,250.
According to the Scorecard, the nation’s next most indebted college graduates are in Maine (average student debt: $29,983), Iowa ($29,598) and Minnesota ($29,058). Meanwhile, the least debt-burdened are from Utah (average student debt: $15,509), Hawaii ($15,550) and New Mexico ($16,399). To see how your state ranks, click here.
“Hope in Concrete Form”: College Savings for Kindergarteners in Cuyahoga County and San Francisco
Local leaders in Cuyahoga County, Ohio, and San Francisco, California, have launched a quiet revolution in college access: they’re opening college savings accounts for every kindergartener to kick-start both college aspirations and savings.
Under a bold new program announced this month, every Cuyahoga County kindergartener will get a college savings account “seeded” with $100. Parents, grandparents and friends can all contribute, and the accounts can only be tapped for educational expenses. A similar effort, San Francisco’s “Kindergarten to College” program, offers $50 in each account.
“Every child in our area will grow up knowing that college is a real and attainable goal,” said Cuyahoga County Executive Ed Fitzgerald at the launch. Research shows that students with savings accounts in their own name are seven times more likely to go to college. Moreover, even small amounts in savings have big impacts. As Washington University researcher Michael Sherraden writes, “Assets are hope in concrete form.”
Cuyahoga County’s program is set to begin in 2013, reaching 15,000 students next fall. San Francisco’s program, launched in 2010, now reaches nearly 8,000 elementary schoolers. With the Cuyahoga County effort projected to cost just $2 million to $3 million a year, children’s savings accounts are a cost-effective investment in both children’s aspirations and the nation’s future growth.
See press coverage of the Cuyahoga County initiative’s launch from American Public Media’s Marketplace; the Cleveland Plain Dealer; the Associated Press; and local affiliates for NBC, CBS and ABC News. Watch remarks from Secretary of Education Arne Duncan here.
Save $25; Win $10,000?
How would you like a chance to win $10,000—just for putting $25 into a savings account? You can in Michigan and a growing number of states.
In CFED’s new policy series on savings innovations, From the Field, we feature an effort by the non-profit Doorways to Dreams (D2D) Fund and credit unions in Michigan to transform savings from a “should do” to pure fun. Their innovation, “prize-linked savings,” rewards savers with a chance to win cash prizes at the same time they are socking away a nest egg. In Michigan alone, these efforts have led to more than 25,000 new savings accounts, along with more than $40 million in savings.
To learn more, click here.
CFED in the News
- In RealClearPolicy, CFED proposes “Savings Bond Sunday” as an antidote to Black Friday consumerism.
- The Cleveland Plain Dealer writes about CFED Senior Researcher Ethan Geiling’s analysis ranking Cleveland the fourth most unbanked city in America.
Give Today to Help Kids Save for College
By Veronica Weis and Michael Chasnow on 12/12/2012 @ 12:30 PM
The holiday season is upon us and as you run around finding presents for your loved ones, we encourage you to consider the gift of giving and investing in education. Earlier this month, the 1:1 Fund, a new online community promoting educational opportunity for low-income students, launched a holiday campaign with the ambitious goal of raising $5,000 in matching funds for students already saving for college. Your donations would go to students in the Bay Area of California or Mississippi to help them and their families save for their education.
Why is this cause so important? Access to rigorous K-12 education is a critical component to preparing students for college attendance and success, but financial preparedness is a surprisingly powerful factor. Research from the Center for Social Development shows that children with savings accounts in their own name are six times more likely to attend college, and significantly more likely to complete college. Having tangible savings gives students more ownership over the college-going process, and perhaps more important, the act of saving for college, even in accounts with small balances, helps to build college aspirations among parents and their children.
Now is the time to effectively invest in the next generation, and these kinds of child savings programs are a broad-based and cost-effective way to seed increased opportunity for lower income students to complete higher education programs. Graduating college is a critical step for lower income families aspiring to join the middle class. Currently, less than 10% of low-income children graduate from college by their mid-20s, severely limiting their future opportunities. Child savings accounts, coupled with quality financial education, can be a critical element in dramatically increasing college graduation rates among low-income families.
Each of us got to where we are today with the support of our families, parents and community. As you shop this month, consider giving in honor of the one person who helped you along your path.
So far, 19 individuals have given over $1,500. Help the 1:1 Fund meet this ambitious goal to raise $5,000 in matching funds during December. To join the movement, go to 1:1 Fund's website, www.1to1fund.org, to safely donate an amount of your choice toward this goal. We hope you'll have a warm and merry holiday season!
The Academic BCS
By Sean Luechtefeld on 12/11/2012 @ 04:30 PM
Today, New America Foundation’s 2012 Academic BCS standings were released. Let me start out by saying that these rankings are far preferable to the actual BCS rankings.
Certainly, I understand that this is a fun way to get people thinking about college success and about the race gap that exists in education. For these purposes, I think New America’s Higher Ed Watch deserves applause. Yet, I think that the Academic BCS rankings call into a question an important point about how we measure college success.
Now, in the interest of full disclosure, I am a proud Florida State grad and was a bit disappointed that my Seminoles came in last place. But, rest assured, that pride doesn’t implicate my bias on this topic; I also worked for three summers at Northwestern and my sister did her undergraduate work at NIU. As a native Illinoisan, I’m actually quite pleased to see the Huskies and the Wildcats at the top of this list.
Nevertheless, the teacher in me takes issue with the methodology here, because it places a lot of emphasis on whether the graduation rate among football players is higher than the graduation rate among the student body more generally. While increased graduation rates is the goal, too often, student-athletes are successful in part thanks to help from programs that, although effective, aren’t accessible to the entire student body.
Rather than focusing on college success for football players, then, the conversation needs to be broadened to focus on primary predictors of college success for all students. One such predictor is whether or not a student – well before they even apply to college – has a savings account for college in their name. Research finds that those students with college savings accounts from a young age are six times more likely to finish a college degree when compared with their non-account-holding counterparts. The benefit: not only can we overcome the race gap in higher education, but we can also begin to address what Jennifer Brooks calls the “aspiration gap.”
Programs that seed accounts for families with young children for the purposes of higher education are gaining steam across the country. Just last month, Cuyahoga County, Ohio announced that it is starting a universal college savings program. Likewise, the State of Colorado is in the process of piloting a program that would create Children’s Savings Accounts for all TANF recipients. Initiatives like these are essential if we are to get serious about the changing nature (read: increase cost) of higher education.
While my Seminole pride makes me wish FSU performed a bit better, I think New America’s Academic BCS rankings are an important starting point to discuss means by which we can improve college access and success, and I applaud their efforts to mainstream this conversation.
Self-Employment IS Job Creation
By Sean Luechtefeld on 12/10/2012 @ 03:30 PM
Twenty-twelve was a banner year for small business. The election, combined with the lingering aftereffects of the Great Recession, brought small business to the forefront of a national conversation about job creation. Indeed, the American public refuses to believe that it’s only large corporations who create jobs.
In fact, not only is it not the case that large corporations create new jobs, but rather, according to research by the Kauffman Foundation, it’s new and small businesses that are solely responsible for all net new jobs that are created in this country.
All net new jobs.
Although this fact is realized by the owners of startups under a year old – those responsible for job creation – the public is yet to embrace a system that supports entrepreneurs who, in essence, create jobs for themselves where employment is otherwise unavailable. Meanwhile, millions remain jobless in an economy that still has a long way to go.
The struggles facing low-income people who turn to self-employment, though real, certainly aren’t insurmountable. For example, one barrier facing the self-employed is that the cost to file the taxes necessary to stay “legal” is high. In many cases, paying to file taxes which themselves come with a lofty price tag simply isn’t viable for business owners who lack liquid capital in the first place. Yet, programs exist to help these filers. Volunteer Income Tax Assistance (VITA) sites – nonprofit programs authorized by the IRS to provide free or low-cost tax filing services – not only defray the cost of filing, but can also help low-income entrepreneurs claim the Earned Income Tax Credit (EITC). Annually, the EITC delivers $7.5 billion in capital assistance to 4.4 million self-employed households.
As a related example, low-income business owners often lack capital and business services that help more established businesses succeed. These services are currently being offered by nonprofits all over the country who help owners of startups access checking and savings accounts or who offer workshops and trainings on homeownership, foreclosure prevention, business development and financial management.
These programs are already proving successful in hundreds of communities throughout the US. To expand on these successes, the federal government should expand programs that help entrepreneurs. Doing so would help more low-income entrepreneurs succeed. When they succeed, we all benefit.
The key, of course, is making the obvious yet overlooked argument: that self-employment IS job creation.
Intuit Wants to Make Your Small Business Dream Come True
By Veronica Weis on 12/07/2012 @ 09:00 AM
Until December 21, Intuit is running the Small Business Big Wishes contest to support local small businesses around the country. Entrepreneurs are invited to apply by sending over a business wish, along with a photo. Since popularity influences the decisions, after hitting submit, they should share it with friends and ask them to vote for their wish. Each weekday they'll grant one for up to $5,000.
Currently reading page 16 of 57.