The Impact of Missed Payments and Foreclosures on Credit Scores
This paper debunks the common perception that ?foreclosure will ruin your credit score.? Using individual-level data from a credit bureau matched with loan-level mortgage data, it is estimated that the very first missed mortgage payment leads to the biggest reduction in credit scores. The effects of subsequent loan impairments are increasingly muted. Post-delinquency foreclosures have only a minimal effect on credit scores. Moreover, credit scores improve substantially a year after borrowers experience 90-day delinquency or foreclosure. The data supports one possible explanation of this improvement: the absence of mortgage payments relaxes the borrowers? budget constraint, allowing them to restore other forms of credit.
AUTHORS: Demyanyk, Yuliya
Reentering asset poverty after an exit: evidence from the PSID
In order to be successful at improving household's financial self-sufficiency and stability, asset-building policies must be designed to prevent households from falling back into asset poverty once they exit it. This paper uses the Panel Study of Income Dynamics data from 1994 to 2007 to analyze the influence of life events, demographics and financial behaviors on the duration out of asset poverty. We find evidence that suggests there are structural barriers to asset acquisition. Asset accumulation at levels equal to nine months worth of income at the income poverty level or greater is important for improving a family's odds of permanently escaping asset poverty. Additionally, minimizing debt and diversifying the asset portfolio to include more productive assets are important for maintaining assets. This paper provides some insights on policies to help individuals more successfully transition out of asset poverty.
AUTHORS: Di, Wenhua; Leonard, Tammy
Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type
The U.S. housing boom during the first part of the past decade was marked by rapid house price appreciation and greater access to mortgage credit for lower credit-rated borrowers. The subsequent collapse of the housing market and the high default rates on residential mortgages raise the issue of whether the pace of house price appreciation and the mix of borrowers may have affected the influence of fundamentals in housing and mortgage markets. This paper examines that issue in connection with one aspect of mortgage financing, the choice among fixed-rate and adjustable-rate mortgages. This analysis is motivated in part by the increased use of adjustable-rate mortgage financing, notably among lower credit-rated borrowers, during the peak of the housing boom. Based on analysis of a large sample of loan level data, we find strong evidence that house price appreciation dampened the influence of a number of fundamentals (mortgage pricing terms and other interest rate related metrics) that previous research finds to be important determinants of mortgage financing choices. With regard to the mix of borrowers, the evidence indicates that, while low risk-rated borrowers were affected on the margin more by house price appreciation, on balance those borrowers tended be at least as responsive to fundamentals as high risk-rated borrowers. The higher propensity of low credit-rated borrowers to choose adjustable-rate financing compared with high credit-rated borrowers in the housing boom appears to have been related to borrower credit risk metrics. Given the evidence related to loan pricing terms, other interest rate metrics and fixed effects, the relation of credit risk to mortgage financing choice seems more consistent with considerations such as credit constraints, risk preferences, and mortgage tenor than just a systematic lack of financial sophistication among higher credit risk borrowers.
AUTHORS: Takhtamanova, Yelena; Furlong, Frederick T.; Lang, David
Toward Healthy Balance Sheets: Are Savings Accounts a Gateway to Young Adults’ Asset Diversification and Accumulation?
Understanding the balance sheets of today?s young adults?particularly the factors that set them on a path to financial security through asset diversification and accumulation?lends some insight into the balance sheets they will have when they are older. This study uses panel data from the Census Bureau?s 1996 Survey of Income and Program Participation to investigate the acquisition of a savings account as a gateway to asset diversification and accumulation for young adults. Two avenues were considered: The first emphasized ownership of a diverse portfolio of financial products, and the second emphasized the accumulated value of liquid assets. Almost half of the surveyed young adults owned a savings account (43 percent) and approximately 3 percent acquired a savings account over the course of the panel. (Older, nonwhite, or unemployed participants were significantly less likely to acquire an account.) Those who owned or acquired a savings account also had more diverse asset portfolios. Evidence suggests that young adults who acquire a savings account and diversify their asset portfolios may also accumulate more liquid assets over time, which can be leveraged in the future to strengthen their balance sheets.
AUTHORS: Johnson, Paul; Hughes, Robert; Friedline, Terri
Family Economics Writ Large
Powerful currents have reshaped the structure of families over the last century. There has been (i) a dramatic drop in fertility and greater parental investment in children; (ii) a rise in married female labor-force participation; (iii) a significant decline in marriage and a rise in divorce; (iv) a higher degree of positive assortative mating; (v) more children living with a single mother; (vi) shifts in social norms governing premarital sex and married women's roles in the workplace. Macroeconomic models explaining these aggregate trends are surveyed. The relent-less flow of technological progress and its role in shaping family life are stressed.
AUTHORS: Greenwood, Jeremy; Guner, Nezih; Vandenbroucke, Guillaume
Schools and Stimulus
This paper analyzes the impact of the education funding component of the 2009 American Recovery and Reinvestment Act (the Recovery Act) on public school districts. We use cross- Sectional differences in district-level Recovery Act funding to investigate the program's impact on staffing, expenditures and debt accumulation. To achieve identification, we use exogenous variation across districts in the allocations of Recovery Act funds for special needs students. We estimate that $1 million of grants to a district had the following effects: expenditures increased by $570 thousand, district employment saw little or no change, and an additional $370 thousand in debt was accumulated. Moreover, 70% of the increase in expenditures came in the form of capital outlays. Next, we build a dynamic, decision theoretic model of a school district's budgeting problem, which we calibrate to district level expenditure and staffing data. The model can qualitatively match the employment and capital expenditure responses from our regressions. We also use the model to conduct policy experiments.
AUTHORS: Dupor, William D.; Mehkari, M. Saif
We Are All Behavioral, More or Less: Measuring and Using Consumer-Level Behavioral Sufficient Statistics
Can a behavioral sufficient statistic empirically capture cross-consumer variation in behavioral tendencies and help identify whether behavioral biases, taken together, are linked to material consumer welfare losses? Our answer is yes. We construct simple consumer-level behavioral sufficient statistics??B-counts??by eliciting seventeen potential sources of behavioral biases per person, in a nationally representative panel, in two separate rounds nearly three years apart. B-counts aggregate information on behavioral biases within-person. Nearly all consumers exhibit multiple biases, in patterns assumed by behavioral sufficient statistic models (a la Chetty), and with substantial variation across people. B-counts are stable within-consumer over time, and that stability helps to address measurement error when using B-counts to model the relationship between biases, decision utility, and experienced utility. Conditional on classical inputs?risk aversion and patience, life-cycle factors and other demographics, cognitive and non-cognitive skills, and financial resources?B-counts strongly negatively correlate with both objective and subjective aspects of experienced utility. The results hold in much lower-dimensional models employing ?Sparsity B-counts? based on bias subsets (a la Gabaix) and/or fewer covariates, illuminating lower-cost ways to use behavioral sufficient statistics to help capture the combined influence of multiple behavioral biases for a wide range of research questions and applications.
AUTHORS: Zinman, Jonathan; Stango, Victor
Tax Credits and the Debt Position of U.S. Households
This paper investigates the effect of tax credit receipt on the outstanding indebtedness of households. In particular, we use data on zip code level indebtedness to explore whether debt levels and past due amounts change more dramatically during tax refund season in those zip codes where households receive greater Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) refunds. We see a substantial decline in debt past due in high tax credit zip codes during tax refund season indicating that some recipient households use tax refunds to repair their balance sheets. At the same time, we see increases in both auto and credit card debt during tax refund season showing a link between tax refunds and asset accumulation and consumption.
AUTHORS: McGranahan, Leslie
The Long-Run Effects of Neighborhood Change on Incumbent Families
A number of prominent studies examine the long-run effects of neighborhood attributes on children by leveraging variation in neighborhood exposure through household moves. However, much neighborhood change comes in place rather than through moving. Using an urban economic geography model as a basis, this paper estimates the causal effects of changes in neighborhood attributes on long-run outcomes for incumbent children and households. For identification, we make use of quasi-random variation in 1990-2000 and 2000-2005 skill specific labor demand shocks hitting each residential metro area census tract in the U.S. Our results indicate that children in suburban neighborhoods with a one standard deviation greater increase in the share of resident adults with a college degree experienced a 0.4 to 0.7 standard deviation improvement in credit outcomes 12-17 years later. Since parental outcomes are not affected, we interpret these results as operating through neighborhood effects. Finally, we provide evidence that most of the estimated effects operate through public schools.
AUTHORS: Baum-Snow, Nathaniel; Hartley, Daniel; Kwan Ok , Lee
Have Consumers Been Deleveraging?
Since its peak in summer 2008, U.S. consumers? indebtedness has fallen by more than a trillion dollars. Over roughly the same period, charge-offs?the removal of obligations from consumers? credit reports because of defaults?have risen sharply, especially on loans secured by houses, which make up about 80 percent of consumer liabilities. An important question for gauging the behavior of U.S. consumers is how to interpret these two trends. Is the reduction in debts entirely attributable to defaults, or are consumers actively reducing their debts? In this post, we demonstrate that a significant part of the debt reduction was produced by consumers borrowing less and paying off debt more quickly?a process often called deleveraging.
AUTHORS: Lee, Donghoon; Brown, Meta; Van der Klaauw, Wilbert; Haughwout, Andrew F.