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
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. The presents study combined different streams of data for a sample of LMI homeowners with mortgages purchased through the Community Advantage Program (CAP). We examine the relationship between the family context of financial socialization of LMI homeowner respondents as children and their current mortgage loan performance outcomes as adults. We hypothesized that, compared with respondents who received little or no parental teaching, respondents who received more parental teaching of money management would exhibit reduced rates of loan delinquency and foreclosure.
Home ownership is integral to the American dream, because it not only marks personal economic achievement but also provides a cushion of financial assets to buffer economic downturns. Unlike in some countries in which mortgages are rare, most U.S. home purchases use a mortgage. From the 1970s through 2007, traditional prime loans saw consistent delinquency rates, hovering just below 4% (Agarwal & Ho, 2007; Mortgage Bankers Association [MBA], 2009), but that rate almost doubled in 2008, increasing to just over 9% by the end of the first quarter of 2009 (MBA, 2009). Delinquency, which is the same as and is also called "default," occurs when a borrower is late making a payment. It is typically measured in 30-day intervals. After a period of loan delinquency, the lender can initiate the foreclosure process if the lender believes it will not receive the principal or the interest on a loan (Mills & Lubuele, 1994). This process is costly for both the lender and the borrower and is often viewed as a last resort for the lender (Avery, Bostic, Calem, & Canner, 1996).
The current study used measures of loan performance to examine the influence of parental financial education on children's financial outcomes as adults. Specifically, we looked at LMI and minority household loan performance, because such households have been the target of subprime mortgages, which carry higher origination fees and interest rates and are often associated with predatory lending practices (Agarwal & Ho, 2007). Although subprime mortgages are intended to help those without access to prime mortgages, subprime loans go into delinquency and foreclosure at higher rates than do prime loans (Gaines, Stilwell, Waddell, & Watt, 2009). According to the National Delinquency Survey for the second quarter of 2008, subprime mortgages represented 12% of loans but accounted for 48% of foreclosures (MBA, 2008).
Beyond the substantial emotional and psychological stress and health-related outcomes that delinquency and foreclosure result in for individuals and families, these events also have serious and long-term financial effects (Bennett, Scharoun-Lee, & Tucker-Seeley, 2009; Kingsley, Smith, & Price, 2009). Households that have defaulted on loans face higher fees for credit and home and auto insurance, and individuals within them are at risk of rejection for employment, rental opportunities, and future borrowing opportunities (Avery, Calem, & Canner, 2004), all of which will make home ownership less attainable in the future (Ambrose & Capone, 1996) and may negatively affect the next generation's prospects. These barriers put additional strain on households and further disadvantage the already disadvantaged.
In an attempt to improve loan performance and reduce the incidence of mortgage delinquency and foreclosure, researchers and practitioners have developed intervention programs designed to deliver financial education and home ownership counseling. These programs target populations with low home ownership rates and aim to facilitate home ownership for underserved populations and to positively affect loan performance (McCarthy & Quercia, 2000). On the basis of the theoretical perspective that financial outcomes have roots in social behaviors that are malleable, these programs do not alter participants' financial situations but, rather, seek to teach participants better decision making within their constraints (Quercia & Spader, 2008). Mortgage counseling programs take multiple approaches to educating and counseling potential and current borrowers to help households make informed choices about home purchases, loan prepayment, and other mortgage decisions (Hartarska & Gonzalez-Vega, 2005, 2006; Hirad & Zorn, 2002; Quercia & Spader, 2008).
Evidence on the effectiveness of these programs is mixed (Homburg, 2004). Several studies suggest that prepurchase counseling may reduce the incidence of default among LMI borrowers compared with that among counterparts who do not receive counseling (Hartarska & Gonzalez-Vega, 2005, 2006; Hirad & Zorn, 2002). In addition, findings have suggested that individual counseling had a greater effect than either classroom- or home-based education (Hirad & Zorn, 2002). However, Quercia and Spader (2008) found that participation in a home ownership counseling program was not related to mortgage default, although LMI borrowers who participated in such programs demonstrated increased knowledge of their mortgage options after participation. Be that as it may, the authors emphasized that few cases in their study entered default, so the lack of a finding is likely due to sample size and does not imply that no effect exists.
Home ownership education and mortgage counseling programs target adults entering or participating in the mortgage lending process; however, people form a great deal of their subjective knowledge early in life (Berger & Luckmann, 1966). Thus, adults approach financial decisions with knowledge, attitudes, and skills learned throughout childhood. This process of childhood financial socialization is based in the theory of consumer socialization, "by which young people acquire skills, knowledge, and attitudes relevant to their effective functioning as consumers in the marketplace" (Ward, 1974, p. 2).
Although financial socialization includes many influences that can...