Tag Archives: Andra Ghent

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Study: Young Credit Card Users Are MORE Responsible

If you think young people don’t know how to manage money and pay down their credit cards, then you should think again. A new study from the W. P. Carey School of Business at Arizona State University and the Federal Reserve Bank of Richmond shows young borrowers – 18 to 25 years old — are among the least likely credit card users to have a serious default on their cards. Not only that, they’re also more likely to be good credit risks later in life.

“Young credit card users actually default less than middle-age borrowers,” says Assistant Professor Andra Ghent of the W. P. Carey School of Business. “Also, those who choose to get credit cards early in life are more likely to learn from any minor defaults and move on, avoiding major credit card problems in the future. Plus, they’re more likely to be able to get a mortgage and become a homeowner at a young age.”

The new research by Ghent, as well as Peter Debbaut and Marianna Kudlyak of the Federal Reserve Bank of Richmond, is now a Federal Reserve working paper. In it, the researchers analyzed consumer data from the New York Federal Reserve Bank Consumer Credit Panel/Equifax to determine whether young borrowers are worse credit risks than others and to estimate the effect of individuals choosing to get a credit card at a young age.

The results demonstrate that part of the Credit Card Act of 2009 may not have been necessary. The act made it illegal to issue a credit card to individuals under 21 unless the person has a cosigner or submits financial information indicating an independent means of repaying the debt. It also includes a provision banning companies from recruiting credit card users within 1,000 feet of any college campus or at college events.

“Letting students apply for credit cards may actually make sense,” says Ghent. “These students are the people who want credit, need to build up a good credit history, and have a steeply sloped income profile. If they don’t have a student loan, then a credit card may be the only way they can establish a decent credit history.”

The researchers found that while people in their early 20s are more likely to experience minor delinquencies (30 or 60 days past due), they are much less likely to experience serious delinquency (90 days or more past due). In fact, someone age 40 to 44 is 12 percentage points more likely to have a serious delinquency than a 19 year old.

However, the Credit Card Act of 2009 has clearly had an impact on how many young people are getting credit cards. Individuals under 21 are 18-percent less likely to get a credit card following passage of the act, and that’s not necessarily a good thing.

“You can’t learn by just watching credit card use,” adds Ghent. “You have to get a card, pay it down every 30 days, and experience, in order to learn. It’s also hard to get a mortgage if you can’t get a credit card to build up your credit history.”

The full study is available at http://www.public.asu.edu/~aghent/research/DebbautGhentKudlyak_July2013.pdf.

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Why Different States Are Getting Out of the Housing Crisis Faster

America’s housing market is finally starting to really recover from the Great Recession, but some areas of the country are fighting back faster than others. New research from the W. P. Carey School of Business at Arizona State University indicates one reason: Different states have dramatically different mortgage laws, and some make it easier to push through tough times.

“The laws across states use different legal theories as the basis for mortgages, and they balance the rights of creditors and borrowers very differently,” explains Assistant Professor of Real Estate Andra Ghent of the W. P. Carey School of Business. “The variations started early in America’s history, and they’re not really based on economic reasons, but they’re still having a major influence on what’s happening now with the housing market.”

Ghent runs through a few main issues playing a role in whether a state has already gotten through the worst of the housing crisis or whether it’s still plodding along:

Some states require judicial involvement in foreclosures, while others don’t.
Some states require a massive amount of paperwork, including the original promissory note, in order for a lender to foreclose.
Some states require a longer “redemption period” of time, during which the borrower can be behind on payments, before a foreclosure can happen.

Ghent says, in general, many of the states that don’t require judicial involvement or tons of paperwork have already run through the bulk of their foreclosures and are finally seeing rising property values. That’s because the flood of cheap, foreclosed properties onto the market has stopped.

Arizona is one of the states in which the damage happened relatively quickly, and there’s no longer a big backlog of foreclosures to go through the process. Phoenix-area home prices have been rising dramatically since last fall.

“The key is quick resolution of the situation,” says Ghent. “For example, if a state requires a longer period before foreclosures can happen, then that generally means the homes deteriorate more as the borrowers realize they’re going to have to leave and stop taking care of the property. This is bad for the neighbors and the property values.”

Ghent adds she doesn’t see much renegotiation during the times leading up to the foreclosures. The rules just allow for drawing out the situation.

“New York and Florida, for example, have very slow foreclosure processes,” Ghent says. “Properties can sit around without any maintenance for two to four years while they work their way through the maze, before they finally get a new owner.”

Ghent also doesn’t think that making more foreclosures go through the judicial process will help prevent problems like robo-signing. That’s where some lenders didn’t properly review all the individual details of the cases or follow all of the required procedures.

“In most of those cases, the borrowers were really behind on their payments and would eventually have lost the homes, anyway,” Ghent says. “Fraud is unacceptable, but it was also a case of sheer volume. If those particular states had required less paperwork, that’s what might actually have helped prevent more robo-signing.”

Ghent emphasizes that getting rid of the patchwork of different state laws would ultimately benefit the housing market as a whole.

“Can you imagine how much money, time and resources we could save, if we didn’t have 50 different sets of laws, paperwork and legal-expertise requirements?” she asks. “Again, there appears to be no real economic reason for the differences. Many of these laws date all the way back to the 1800s, and some were changed just after the Great Depression.”

Overall, Ghent has one big message for those who can influence the process in the future.

“Nobody pays attention to mortgage laws for 50 to 60 years at a time,” she says. “They only examine these laws after a major event, so the time to change is now.”

Ghent’s research on the history of America’s mortgage laws can be found online at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166656.