Borrow

In July 28, 2004, GAO hosted a forum on the role of the federal government in improving financial literacy. Forum participants included experts in financial literacy and education from federal and state agencies, the financial industry, nonprofit organizations, and academic institutions. This report summarizes highlights of participants' discussion on the topics federal efforts should cover, populations that should be targeted, methods of delivering information, and the role of program evaluation.

Abstract: I test the credit-market effects of housing wealth shocks by estimating the consumption elasticity of house price shocks among households in different age quintiles. Younger households face faster expected income growth and hence would like to borrow more than older households. I estimate consumption elasticities from housing wealth by age quintile to be {4; 0; 3; 8; 3} percent. As predicted by theory, the youngest group has a higher elasticity of consumption than the next two age quintiles.

Abstract: Economists disagree whether the recent increase in credit card debt has been detrimental to U.S. households. However, many rely on a measure of revolving credit published by the Federal Reserve, which captures transactions in which a credit card is used because of its advantages over cash or a check. An increase in debt stemming from such convenience use likely would not signal greater financial vulnerabiltiy for households.

This report presents the results of a study that uses a controlled experiment with over 500 recent mortgage customers to examine the mortgage broker compensation disclosure proposed by the Department of Housing and Urban Development (HUD) as part of its July 2002 RESPA reform proposal. The focus of the disclosure is on any “yield spread premium” paid by the lender to the broker for loans originated with “above par” interest rates.

Abstract: This paper explores the significance of unobservable default risk in mortgage and automobile loan markets. I develop and estimate a two-period model that allows for heterogeneous forms of simultaneous adverse selection and moral hazard. Controlling for income levels, loan size and risk aversion, I find robust evidence of adverse selection, with borrowers self-selecting into contracts with varying interest rates and collateral requirements. For example, ex-post higher-risk borrowers pledge less collateral and pay higher interest rates.

Abstract: It is well accepted that households increase consumption of goods and services in response to an unexpected increase in wealth. Consensus estimates of this wealth effect are in the range of 3 to 5 cents of additional consumption spending in the long run for each additional dollar of wealth. Economic theory also suggests that consumption of leisure, like consumption of goods and services, should increase with positive shocks to wealth. In this paper, we ask whether the run-up in equity prices during the 1990s led older workers to retire earlier than they had previously planned.

This article reviews research on the effectiveness of general financial literacy training to draw implications for literacy training related to predatory lending. The article concludes that training offered by high schools and workplaces is associated with improved financial knowledge and behavior, especially for low-income or less-educated recipients. Although evidence on homeowner education and counseling is less clear cut, the article concludes that financial literacy training has the potential to curb predatory lending.