MyMoney Resources - Researcher

Conventional wisdom holds that individuals who have gone bankrupt face difficulties getting credit for at least some time. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy and its dependence on the credit cycle. Using data from one of the largest credit bureaus in the US, this paper makes three contributions. First, we show that individuals who file for bankruptcy are indeed penalized with limited credit access post-bankruptcy, but we find that this consequence is very short lived. Ninety percent of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 75% are given unsecured credit. Second, we show that those individuals who have the easiest access to credit after bankruptcy tend to be the ones who have shown previously the least ability and least propensity to repay their debt. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing. We interpret the widespread post-bankruptcy credit access and the differential credit provision across borrower types as evidence that lenders target riskier borrowers. Employing a simple theoretical framework we show that this interpretation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status. This interpretation is also in line with survey evidence that shows lenders repeatedly solicit debtors to borrow after bankruptcy, especially with offers of revolving credit. Finally, we show that our findings depend heavily on the aggregate credit environment: the ease of credit and limited bankruptcy credit cost observed in the initial period of our data (2003-2004) become much less significant when we repeat the analyses in 2007, as the recent credit downturn began.

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small, and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors

Abstract: This paper assesses the quantitative importance of a number of sources of income risk for household welfare and precautionary saving. To that end I construct a lifecycle consumption model in which household income is subject to shocks associated with disability, health, unemployment, job changes, wages, work hours, and a residual component of household income. I use PSID data to estimate the key processes that drive and affect household income, and then use the consumption model to: (i) quantify the welfare value to consumers of providing full, actuarially fair insurance against each source of risk and (ii) measure the contribution of each type of shock to the accumulation of precautionary savings. I find that the value of fully insuring disability, health, and unemployment shocks is extremely small (well below 1/10 of 1 percent of lifetime consumption in the baseline model). The gains from insuring shocks to the wage and to the residual component of household income are significantly larger (above 1% and 2% of lifetime consumption, respectively). These two shocks account for more than 60% of precautionary wealth.

Abstract: Despite news reports suggesting a rise in 401(k) borrowing in recent years, we find that the share of eligible households with 401(k) loans in the 2007 Survey of Consumer Finances was about 15 percent, roughly what it has been since 1995. We find that the best predictors of 401(k) borrowing appear to be the presence of liquidity or borrowing constraints and the size of 401(k) balances relative to income. Since the ongoing financial crisis has likely caused these factors to move in opposite directions, the predicted effect of the crisis on 401(k) borrowing is ambiguous. More fundamentally, we find that many loan-eligible households carry relatively expensive consumer debt that could be more economically financed via 401(k) borrowing. In the aggregate, we estimate that such households could have saved as much as $5 billion in 2007 by shifting expensive consumer debt to 401(k) loans. This would translate into annual savings of about $275 per household—roughly 20 percent of their overall interest costs--with larger reductions for households that carry consumer debt at high interest rates or who hold larger 401(k) balances. We posit that households might utilize 401(k) loans less than expected due to risk-aversion, self-control problems, and confusion about the potential gains, and suggest better financial education that clarifies the conditions under which 401(k) borrowing is advantageous. Finally, we note that allowing households to repay 401(k) loans gradually even after separation from their employers could improve household welfare by reducing the risks of 401(k) borrowing.

Abstract: A large literature has examined factors leading to filing for personal bankruptcy, but little is known about household borrowing after bankruptcy. Using data from the Survey of Consumer Finances, we find that relative to comparable nonfilers, bankruptcy filers generally have more limited access to unsecured credit but borrow more secured debt post bankruptcy, and they pay higher interest rates on all types of debt. We also find that credit access and borrowing costs improve as more time passed since filing. However, filers experience renewed debt payment difficulties and accumulate less wealth, even many years after filing, suggesting that for many bankrupt households, debt discharges fail to generate an effective fresh start as intended by the law. Our estimate also provides empirical guidance for calibrating the equilibrium models of household credit.

The Assets for Independence Act of 1998 created the Assets for Independence (AFI) Program— a program that enables community-based nonprofits and government agencies to implement asset-building programs for low-income families. This program, which is administered by the Administration for Children and Families (ACF) of the U.S. Department of Health and Human Services (HHS), uses special-purpose matched savings accounts, called individual development accounts (IDA), to incentivize asset accumulation among low-income individuals and families. In line with the legislative mandate, AFI has been evaluated using both a quasi-experimental three-year longitudinal study and a qualitative process study. While this evaluation answered a number of key research and policy questions, including the effect of AFI program participation on short-term savings and asset accumulation, it did not address noneconomic outcomes (e.g., civic, psychological, and social), long-term effects, or the cost-effectiveness of the AFI program.This report informs the development of the next phase evaluation of the AFI program through a review and assessment of existing data sets that could be either directly used in a future study or inform the design of such a study. The report identifies the strongest of these data sets based on a set of explicit criteria, identifies gaps in information, and presents recommendations for filling those gaps. It also presents a discussion of lessons learned concerning data issues in IDArelated research projects and how those lessons can inform the next phase of the AFI evaluation.

Based on our review and synthesis of the individual development account (IDA) literature, findings in this this report include that IDA accounts (in the short-term, five years after program entry) help low-income families become homeowners, start or expand a business, or pursue secondary education. Studies to date have found no relationship between IDA program participation and net worth. The report reviews empirical evidence on the effect of IDA program participation and project design features on outcomes and highlights remaining gaps in the literature.

This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. We use an economic model to focus on two key decisions: the borrower’s choice to default on the mortgage and the lender’s choice on whether to renegotiate or “modify” the loan. The theoretical model and econometric analysis illustrate that “unaffordable” loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. Rather, the typical problem appears to be a combination of household income shocks and an unprecedented fall in house prices. Regarding the small number of loan modifications to date, we show, both theoretically and empirically, that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events, rather than modifying loans to make them more “affordable” on a long-term basis.

In 2003, the Financial Literacy and Education Improvement Act created the Financial Literacy and Education Commission, which comprises 20 federal agencies and which the Department of the Treasury’s (Treasury) Office of Financial Education coordinates. Responding to a mandate in the act, GAO assessed the Commission’s effectiveness and in December 2006 recommended that the Commission (1) incorporate additional elements into its national strategy to help it serve as a true implementation plan, measure results, and ensure accountability; (2) expand current efforts to cultivate sustainable partnerships with states, localities, nonprofits, and private entities; (3) obtain independent reviewers for the required assessments of overlap in federal activities and the availability and impact of federal materials; and (4) measure customer satisfaction with its Web site and test its usability. This statement discusses the Commission’s progress in implementing GAO’s recommendations and key challenges the Commission faces. To address these objectives, GAO reviewed annual reports, meeting minutes, budget, and other information from the Commission, Treasury, and related entities, and interviewed selected representatives. GAO found that while progress has been made in fostering partnerships, the National Strategy remains largely descriptive. Resources and coordination across agencies are significant challenges.