Assets

Today's Boston Globe has a good story on how big-sounding state initiatives to help homeowners refinance mortgages have helped hardly anybody:

Eight states including Massachusetts have pledged almost $900 million this year to help borrowers replace unaffordable mortgages, but the states collectively have refinanced fewer than 100 people, a Globe survey found.

In Massachusetts, where the Patrick administration introduced a $250 million program in July as a "big piece" of its efforts to limit foreclosures, not a single loan has been refinanced.

In Maryland, the first state to create a refinancing program, officials have found it so ineffective that they are considering shutting it down. The program has made just nine loans in about a year.

A leading advocacy group said the programs simply aren't able to help most borrowers. "They're very well intentioned," said David Berenbaum of the National Community Reinvestment Coalition, "but these new products aren't fitting the needs of the consumers we see."

The vast majority of the applicants aren't eligible for refinancing. They have either fallen too far behind on their payments, have badly damaged credit, or simply owe more on their loans than the value of their homes, making refinancing effectively impossible.

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The best way to help families who aren't being helped by existing refinancing programs is through Dean Baker's own-to-rent proposal, which would promote neighborhood stability and provide lenders with strong incentives to renegotiate the mortgage terms:

It is possible to help these families without any big bailouts or new bureaucracies. Congress can simply change the rules on foreclosure (just as it changed the rules on bankruptcy two years ago), so that homeowners facing foreclosure will have the option to rent their home indefinitely at the fair market rent. This rent would be determined by an independent appraiser, appointed by the court. The appraiser would determine the fair market rent in the same way that appraisers determine the market value of a home before a bank issues a mortgage.

This measure would ensure that current homeowners could at least keep a roof over their head. If they like the home, the neighborhood, the schools for their children, they would have the option to stay in their home as long as they wanted.

More importantly, this change in the foreclosure rules would give lenders a strong incentive to renegotiate the terms of mortgages. Most lenders will not want to become landlords. They would have the option to sell the home, but the tenant would go with it, substantially reducing the resale value. Since the foreclosure option will be significantly less attractive, lenders will be far more likely to try to negotiate terms that allow current homeowners to remain in their houses as homeowners.

Dean Baker rightly takes issue with the more extreme form that "the ideology of home ownership" took in recent years, with devastating consequences for some:

For years many conservatives, and even some liberals, touted the virtues of homeownership as an end in itself. They argued that this was the way for the poor, and especially minorities, to gain economic security and enter the middle class. This was really bad advice to give people in the middle of a housing bubble.

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We can and should try to help moderate income families facing foreclosure. One possible mechanism, is my “own to rent” proposal. But we should also point a finger at the proselytizers of homeownership. If progressives ever pursued a policy of social engineering that had such negative consequences it would be a highlight of political debates for the next 50 years. We should not allow the blunders of the conservative ideologues to be swept quietly under the rug.

There isn't as much research as there should be on debt and the use of credit by families with low incomes. A conference held earlier this month and sponsored by the National Poverty Center, the University of Michigan, and the Ford Foundation, took a solid step toward addressing the research gap. Of particular note, a paper by John Karl Scholz and Ananth Seshadri of the University of Wisconsin on assets and liabilities held by low-income families, and one by Columbia's Ronald Mann on credit card use by such families.

Conventional wisdom has it that families with low-incomes can't get credit cards, and consequently, that credit card reform is only an issue for families with incomes far above the poverty line. But Mann finds that 31 percent of households in the bottom fifth of the income distribution have credit card debt (less, but not much less than the share of the population overall), and that the typical debt load for these households is about 10 percent of their annual income (much higher than the population overall).

Scholz and Seshadri cover a lot of ground in their paper, which shows, among other things, the growth of inequality in net wealth holding, with increases in net worth among the top 40 percent far outpacing the bottom 60. They conclude by expressing skepticism about the idea, held by Michael Sherraden and others in the asset movement, that "people are [income] poor because of low assets" and that policy shifts are needed to encourage families with low incomes to save more.

In contrast, we think the evidence is most consistent with the view that low-income households are behaving in a manner consistent with rational, forward-looking behavior, maximizing the discounted value of lifetime utility subject to meager lifetime resources.

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We fear that policies that encourage already poor families with children to consume even less than they already do may be counterproductive to the wellbeing of those families. One of the most compelling rationales for social insurance programs is that it is inefficient for individuals to self-insure against, for example, longevity risk (or unemployment, or workplace injuries). By pooling risks, individual households can collectively finance the insurance pool, have higher consumption (and hence well-being) than they would if they have to set aside resources to individually cover an adverse shock, and draw on the social insurance mechanism in the event a bad shock is realized. The same intuition likely applies to the consumption-smoothing needs of disadvantaged populations. We are skeptical that it is efficient for disadvantaged households to self-insure for possible adverse economic events by depressing already low consumption levels. Similarly, given scarce public resources available to support programs targeting low-income households, cost-effective efforts to enhance consumption or human capital are more attractive to us than wealth-building initiatives. Of course, well-being is likely to be enhanced by strengthening social insurance mechanisms, disseminating cost-effective approaches to improving financial education, and promulgating harsh restrictions on predatory lending practices.

Like Democracy: A Journal of Ideas, the new Harvard Law and Policy Review—the official journal of the American Constitution Society, a relatively new progressive counterweight to the conservative Federalist Society—is shaping up to be a great new addition to the progressive ideas infrastructure.

In the inaugural issue of the Harvard Law & Policy Review, scholars and policy commentators considered new approaches to broaden the average American’s share in the gains of globalization and reduce middle-class financial insecurity in an age of job dislocation and rising health care costs. Jacob Hacker highlighted the increasing shift of financial risk onto individual families and offered solutions that spread risk more equitably across society through new social insurance programs. In a similar vein, Michael Lind provided an alternative paradigm to the much ballyhooed “stakeholder society” in what he terms the “smallholder society.”

They've now posted some excellent response pieces to these pieces, including responses to Michael Lind by NELP's Maurice Emsellem and EPI's Max Sawicky. Well worth checking out.

Dean Baker on the causes of the housing bubble:

The NYT endorsed a proposal today for the federal government to put up money to help bail out some of the low-income families that are now in trouble because they paid too much for a home and/or got a mortgage that they could not afford. Certainly these families are in difficult situations and could use some help. But, instead of taking the money from the taxpayers, maybe it could be taken from the politicians and organizations that pushed policies that got these low-income families in trouble in the first place. Also, is there some reason that we don't want to help the low-income families who were smart enough to ignore the experts on wealth building and continued to rent?

It is really tragic that millions of low and moderate income families are suffering because of the social engineering of policy elites. Anything that can be reasonably done to ease their hardship should be done, but the media should be shining a spotlight on the mistaken policies that got us here.

The key point here is that the bubble was not simply caused by the autonomous workings of a "free market"—the housing market in the United States is structured in large part by policy decisions (which isn't to say that those decisions were made democratically). It would be interesting to hear more from Dean about how to raise revenues for a bailout from those organizations that were responsible. One possibility would be to cap the mortgage interest deduction.

The National Center for Public Policy and Higher Education has a great new report out on community college affordability. The report focuses on California, but its findings are relevant nationwide. Of particular importance is the emphasis the report places on the growing burdens that working students face in meeting basic living expenses—the report is an important reminder that access and affordability aren't just about tuition costs:

Today, the historical focus on access and affordability must be reinforced by a renewed emphasis on student success—on the attainment of students' degree, certificate, and employment objectives. Even if students have access to college, their success is too often jeopardized by their need to work excessive hours to meet the costs of housing, food, health care, childcare, transportation, textbooks, and supplies. It is these essential living expenses that have risen most dramatically in California and that comprise the current barrier to community college affordability and student success. In short, the issue of community college affordability must be broadened beyond the traditional preoccupation with student fees. Higher education finance policy must place greater emphasis on student fi nancial aid from federal and state sources. And it must reinforce this emphasis with stable fee policies that are related to the income of Californians and that benefit students—not just the state treasury—when fees are increased.

Federal policy has a role to play here. Some of the legislation that has been introduced so far this year, like the Third Way's proposal to consolidate the Hope Tax Credit and Lifetime Learning Tax Credit and focus them on traditional college students, would actually be counterproductive when it comes to addressing the problems identified in the NCPPHE report. A better approach might still consolidate the two credits (without some of the limitations added in the Third Way proposal), but would make the consolidated credit refundable and increase its value.

In a good piece in the Sunday NYT, Christopher Caldwell argues that a college education isn't something that everyone needs, like we think a high school diploma currently is, and that we shouldn't necessarily aspire to be a nation where everyone has a four-year college degree. I feel strongly that access to college and other forms of higher education and training should be guaranteed to all Americans, but I also agree with Caldwell that college shouldn't be something that everybody has to do, as I'll explain later in this entry.

My one quibble with Caldwell's piece isn't his thesis, but the way in which he weakens it unnecessarily by citing conservative (and many would argue, neo-eugenicist) Charles Murray:

Not long ago, the conservative social scientist Charles Murray wrote a three-part series in The Wall Street Journal in which he attacked the central assumption behind President George Bush’s No Child Left Behind initiative. The idea that “educators already know how to educate everyone and that they just need to try harder” is a costly wrong impression, he wrote. Not all schoolchildren have the intellectual capacity to reach “basic achievement” levels. In college, similar limitations apply. The number of Americans with the brains to master the most challenging college classes, Murray argued, is probably closer to 15 percent than to 45.

This kind of genetic and biological determinism—Murray is basically arguing that the brains that 85 percent of the population are born with essentially determine whether they can "master" challenging subjects—is little more than a rehash of the quickly disproved claims Murray made in his book The Bell Curve, published in 1994 and heavily promoted by AEI. In a piece written for Slate in 1997, Nicholas Lehmann deftly summarizes how Murray misued data to reach the conclusion he had already reached:

... The Bell Curve is a relentless brief for the conservative position in psychometrics and social policy. For all its talk of reflecting a consensus, the sources it draws upon are heavily skewed to the right. Herrnstein and Murray used quasi-nutty studies that support their position (as Charles Lane demonstrated in the New York Review of Books), and ignore mainstream studies that contradict it (as Richard Nisbett showed in the New Republic). The data in The Bell Curve are consistently massaged to produce conservative conclusions; not once is a finding that contradicts the main thesis reported in the text. ....

Despite discrediting of the psedo-science of The Bell Curve, AEI, where Murray was made W.H. Brady Scholar in 2003, still works hard to get his ideas out there, and a few places with extremely low standards, like the editorial page of the Wall Street Journal, still publish them. Meanwhile, most of the rest of the world that's paying any attention to Murray tends to agree with Ezra Klein, who had this to say about Murrayism in a New Republic review of Murray's latest book:

Well, OK, somebody needs to say it: Murray is harebrained. His particular brand of nuttery manifests itself in an obsession with bigness. Other conservatives can propose cutting this or privatizing that. Murray insists on something far more massive and extravagant. (Goldfinger wasn't content just robbing a bank: He wanted to contaminate Fort Knox with a nuclear bomb.) In the Plan, Murray's insistence on bigness has reached its final, loopy culmination.

Instead of citing Murray, Caldwell would have been better off talking to sociologist James Rosenbaum. In his 2003 book Beyond College for All, Rosenbaum lays out a much better case—one that doesn't rely on genetic determinism—for the idea that college isn't necessarily for everyone, particularly immediately after they graduate from high school.

. . . age and experience may give [students older than twenty-four] the experience to make better course choices, the maturity to be more disciplined students, skills that will help them pass some courses, and perhaps even employer-paid tuition benefits. … high school graduates with low grades who are unprepared for college have an 86 percent chance of dropping out (often with zero credits). For these students, postponing college might improve their chances of benefiting from it later.

One of the strengths of Rosenbaum's work is its relevance to public policy. One of the conclusions that Andy Van Kluenen and I have drawn from it is that adults need to have choices of more than one path toward advancement, and these choices need to be available to them throughout their lives. Available paths should include taking time off from work to go to college full-time; obtaining high-quality education and training provided through community colleges, community-based organizations, or local labor unions working with local industries, or; receiving intensive on-the-job or customized training through one’s employer. By contrast, Murray's message is pessimist and negative, not surprising given his basic opposition, as a libertarian, to the idea of the public working together through government.

One final thing to say more generally on the relationship between genetics and ability. For a long time, scientists thought the structure and function of the brain is unchangable, that you basically have the brain cells and neuronal connections that you're born with. There's increasing scientific evidence, however, that brains are changable and adaptable not only in the first few years of life—as has been widely reported—but also throughout people's lifetimes. This newer research deserves more attention in policy circles. In Train Your Mind, Change Your Brain, WSJ science writer Sharon Begley provides an excellent summary of this new research. Begley's publishers make the unfortunate choice of marketing her book in a way that makes it look like a self-help book, but don't let that put you off—it's serious science writing.

Testimony from Thursday's Senate Banking Committee hearing on the credit card industry is now up. There's lots of good stuff, including these recommendations from Elizabeth Warren on some of the things that need to be done to fix current abuses:

There are multiple approaches to repairing the broken credit card market. One starting place is to outlaw the most egregious practices. In no functioning market, should credit card issuers be able to change the terms of an agreement at will or to calculate interest due on money already paid. The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2005 that Senator Dodd introduced is an important first step to reign in abusive lending practices. Recent changes in the law that limit total interest rates charged to military families are another important step. These laws and proposals acknowledge that there are simply some practices that are wrong and should be banned.

Current regulatory oversight is weak, in part because regulators have not chosen to exercise their powers to protect consumers from the financial institutions they regulate. When asked, for example, about why the Office of the Controller of the Currency had not been more aggressive in developing basic consumer protection, the agency spokesperson responded, "We tend not to mandate things." Encouraging more vigorous oversight from regulatory commissions so that they use the tools at their disposal more effectively would make a difference.

The Senate Banking Committee is holding a hearing as we speak—you can watch it live online—on the "billing, marketing, and disclosure practices" of the credit card industry. The witness list—including Elizabeth Warren, Robert Manning, and Tamara Draut—looks great. No testimony up yet, but this should be a good one.

Senator Kennedy is introducing the Student Debt Relief Act of 2007 today. Here's the descrption from his staff:

Need-Based Aid: Immediately increases Pell Grant maximum to $5,100 with mandatory funding; and provides additional Pell Grant increases through enactment of Student Aid Rewards Act (STAR Act), which reforms the student loan programs and generates savings to use for student aid by encouraging schools to use more efficient of the two federal loan programs.

Interest Rates: Cuts interest rates in half (from 6.8 percent to 3.4 percent) for subsidized undergraduate student loans over 5 years.

Debt Relief: Provides borrower option of having federal student loan payments capped at 15% of a monthly discretionary income, and forgives student loans after 25 years.

Public Service Loan Forgiveness: Provides loan forgiveness for public sector employees after 10 years.

Consolidation/Reconsolidation: Allows students to reconsolidate loans, repeals the elimination of in-school consolidation.

Origination Fees: Reduces origination fees in Direct Loan program by 1% to track FFEL program origination fee reduction, and gives Secretary explicit authority to reduce origination fees (as FFEL lenders have).

Direct Loan/Student Aid Administrative Funds: Repeals Reconciliation provision that moved administrative funds to discretionary side of budget to restore funding as mandatory, to ensure continued operation of the student aid programs.

College Tuition Tax Deduction/Student Loan Interest Tax Credit: Extends college tuition tax deduction and increases allowable deduction to $12,000. Converts existing student loan tax deduction into a tax credit.

This basically looks like last year's S. 3593, which Kennedy introduced in the last Congress with Senators Harkin, Dodd, Clinton, Schumer, and Lieberman.

Cindy Zeldin and Demos have an excellent new report on how medical bills contribute to credit card debt:

... low- and middle-income households who cited medical expenses as a factor in their credit card debt had higher levels of credit card debt than those who did not cite medical expenses as a factor. Overall in our survey, 29 percent of low- and middle-income households with credit card debt reported that medical expenses contributed to their current level of credit card debt. Within that group, 69 percent had a major medical expense in the previous three years. Overall, 20 percent of indebted low- and middle-income households reported both having a major medical expense in the previous three years and that medical expenses contributed to their current level of credit card debt.

-Forty-four percent had credit card debt higher than $10,000 and 57 percent had credit card debt higher than $5,000.

-Average credit card debt was higher for low- and middle- income households ($11,623) as compared to households without a major medical expense in the previous three years or medical expenses contributing to their credit card debt ($7,964).

That's the final vote from earlier today on the House bill that cuts student interest loan rates. Looks like the White House opposition didn't get much back up from House R's, 124 of whom voted with the Dems for the interest rate cut. Only 71 R's voted nay. The R vote in favor of the cut is pretty interesting when you remember that just last year the R's increased student loan interest rates in the budget reconciliation package nearly all of them voted for.

And he has an unassailable argument for his position:

The Bush administration rejected a Democratic plan to cut interest rates on federally backed student loans, saying it instead preferred that Congress concentrate on funding direct-aid programs.

"Student debt loads have soared in recent years, and it is not clear that encouraging more loans is a wise course,'' the White House's Office of Management and Budget said in a written statement. The administration instead favors increasing grant aid to low-income students, the OMB said.

I'd find this more convicing if the Administration could roll back time and redo all of its previous budgets, this time including actual proposals to increase "grant aid to low-income students."

But even if they could, and assuming that it didn't get really messed up like the time travel in Back to the Future, where Michael J. Fox ended up dating his mom, which given this Administration's track record on events that have happened in real time, like the Iraq War and Katrina, is no small assumption, but I digress (and date myself) ... student loan debt isn't simply a problem for low-income students, so it makes little sense to argue that the choice is "Pell Grants vs. interest rate reductions." In fact, one can conceive of a comprehensive plan that increases Pell Grants, consolidates, increases, and makes refundable the current higher education tax credits, and reduces interest rates on student loans. It might mean paring back a little in their '08 budget on tax giveaways for the non-working rich, but that's a better tradeoff than playing Pell Grants against loan rate reductions.

Good op-ed in this weekend's NYT on the crazy credit card cartel:

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In today’s strange alternative universe of credit card banks, the term “deadbeat” refers not to the improvident borrower but to the solid citizen who prides himself on paying off his balance every month. As anybody with a mailbox knows, credit card issuers make unrelenting efforts to lure accounts from one another as well as to establish new accounts. And what these lenders seek are “revolvers,” people like R. Z. and T. P., who are likely to pay little more than the monthly minimum — and who eventually find themselves in thrall to mushrooming interest payments, abundantly garnished with late fees.

As for the morality involved in lending money at exorbitant rates, the word “usury” itself has taken on a quaint, archaic sound, like “jousting” or “necromancy.” What happened?

The Project on Student Loan Debt has a new analysis out of the student-loan interest rate cut that the House will be taking up soon (I believe it's scheduled for January 17). The bottom line:

—When fully phased in, borrowers on a 10-year repayment plan would see their payments reduced by 14 percent, saving $4,000 in interest costs on $20,000 in covered loans.

—The five-year phase-in means that borrowers who take out Subsidized Stafford Loans starting in 2012 will benefit the most if this proposal is adopted.

—Loans currently held by students and graduates would be unaffected by this proposal.

So a very good result in the long term for future borrowers. But less helpful for those borrowing right now, or in years previous, some of whom may have reasonably thought that the Dems pledge to cut the interest rate in student loans in half didn't just apply to those who take out loans five years hence.