Academic journal article Social Work Research

Loan Performance among Low-Income Households: Does Prior Parental Teaching of Money Management Matter?

Academic journal article Social Work Research

Loan Performance among Low-Income Households: Does Prior Parental Teaching of Money Management Matter?

Article excerpt

Financial literacy and financial education play a central role in asset accumulation, shaping individuals' attitudes, behaviors, and decisions in ways that, ultimately, affect their financial and social well-being. The acquisition of financial skills begins with parental teaching and role modeling, which provides children with their first exposure to concepts of saving and money management. Because such parental instruction is crucial to children's later financial outcomes, children whose parents lack basic financial literacy may be further disadvantaged by the absence of financial instruction at home. This study uses a sample of low- and moderate-income homeowners to test the hypothesis that parental teaching of money management influences children's asset-building outcomes in adulthood. The empirical analysis examines the likelihood of delinquency and default among low- and moderate-income homeowners with mortgages purchased through the Community Advantage Program. The results are consistent with a long-term impact of parental teaching on children's later asset outcomes: greater parental teaching is found to be associated with reduced loan delinquency and foreclosure. Implications for intervention programs to close the financial literacy gap are discussed.

KEY WORDS: financial education; financial socialization; foreclosure; loan performance; low-income mortgages

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The past few years have shown too clearly the havoc that home mortgage delinquency and foreclosure can visit upon individuals, families, and society. These events undermine the benefits that accrue from stable home ownership, such as the ability to accumulate wealth and assets. Moreover, stable homeowners benefit communities through economic growth and positive social outcomes, such as increased civic involvement (Retsinas & Belsky, 2002; Rohe & Stewart, 1996; Shlay, 2006). Delinquency and foreclosure have harmed low- and moderate-income (LMI) households in particular because these households, even in a healthy economy, face multiple barriers to successful home ownership. Barriers faced by LMI households include poor credit scores, low savings, high debt-to-income ratios, and being steered toward high-cost loans (Barakova, Bostic, Calem, & Wachter, 2003; Grinstein-Weiss et al., 2008; Rosenthal, 2002; Santiago & Galster, 2004). The toll exacted by subprime lenders and faulty mortgage products is more than a temporary setback for these families and could have negative repercussions that resonate across generations. As seen in the recent financial crisis and supported by empirical research (Firestone, Van Order, & Zorn, 2007), LMI and minority households are more likely than other households to default on their mortgages.

Because home ownership is a common pathway toward building financial stability, but delinquency and foreclosure exact a high toll on individuals and communities, it is imperative to fully understand the factors that predict these outcomes and the social experiences and financial skills that may minimize the risk of experiencing them. Although we agree that poor loan outcomes are closely related to the nature of loan products (Kaplan & Sommers, 2009) and the financial health of borrowers (Doms, Furlong, & Krainer, 2007), we suggest that the decision process leading to these events may be embedded in the social context of the individual (Granovetter, 1985). We argue that early financial education--usually by parents-imparts durable dispositions and attitudes that manifest in better decision making and, ultimately, better financial and social outcomes. From this perspective, parental teaching of financial skills early in life may serve as a protective factor and may be a vehicle for the intergenerational transmission of financial knowledge.

Although loan performance is certainly influenced by material factors, this article demonstrates that early financial socialization, in the form of parental financial teaching, may have an important relationship with financial outcomes later in life. …

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