PERSON OF THE WEEK: Financial literacy has taken on a new importance in the aftermath of the 2008 crash. However, a pair of recent surveys that show more Americans are keeping their money out of traditional depositories would seem to suggest that financial literacy outreach has become much more complicated. To understand how the industry can improve its financial literacy efforts, MortgageOrb spoke with Jerry Barbalatt, president of New York-based Parker Allen & Co. LLC, an independent financial planning and insurance/investment consulting firm.
Q: A recent study by the Federal Deposit Insurance Corp. found more than one in four households were either unbanked or underbanked, while a CashNetUSA.com survey found 23% of Americans have less than $100 in savings to cover an emergency expense if it happened today, while 46% report having less than $800 ready. Based on this data, why do you believe fewer Americans are putting money in the bank these days?
Barbalatt: I believe the majority of people who aren't putting money in banks simply don't have enough of it. That is not a surprise, given the current state of the job market and economy. Many people living paycheck to paycheck may not have an understanding of the banking system or may feel they don't have access to that system. Instead, they use check-cashing centers as their ‘bank,’ which could ultimately cost them more in transaction fees than a traditional bank.
If we're talking about people with the means to put money away – and not the people who said they don't have anything in the way of savings – then you need to look at savings inside investment accounts. For many of these people, it makes most sense to put their money – even their emergency, liquid funds – into investment accounts that can give at least a bit of yield.
The younger generation may never walk into a structure called a bank; rather they're using online ‘banks’ that may well be investment companies offering high-yield checking accounts. They, too, could be missing the whole concept of savings.
One common theme is a lack of financial literacy, which impacts the financial industry on the whole. But these are just a few thoughts; the list of reasons could go on for many pages.
Q: How will the lack of bank accounts impact Americans' ability to put together a down payment if they want to buy a new home?
Barbalatt: Mortgage lenders have already had a reality check in recent years. As a result, they've tightened up their requirements, making it more challenging to get a loan. They are requiring larger down payments than in the past.
Not having a bank account means you may not have that cash on hand. Lenders also typically ask for your account statements for several months to look at your savings habits and average balances. Not having bank accounts – or means to do checking and savings at all – could essentially exclude you from even entering the mortgage conversation.
If you move past the down payment, there are a lot of other factors that contribute to whether or not you'll attain a loan. I often counsel clients on how to prevent damage to their credit score to ensure that they remain in a position to attain loans or credit should they need it.
The aforementioned study about a lack of emergency savings makes for an interesting scenario. If one has no emergency savings and an emergency arises, how do they pay for it? Say, it's a car repair and they use a credit card. They still don't have that money, so perhaps they miss some payments or make late payments. What happens? The credit score is damaged, putting another obstacle between the individual and a loan. It's really a challenging cycle.
Q: How would you rate the level of financial education and financial planning outreach being done by today's banking institutions – and if there are problems, how can they be solved?
Barbalatt: I can't specifically rate the activities because I'm not fully aware of what they're doing. But, that raises an interesting point: I'm not aware of what they're doing. I am plugged into the financial services industry, yet I can't cite specifics of the educational outreach banks are conducting. What then, does the average consumer know of them?
As I mentioned earlier, the nation has a problem with financial literacy. The banking industry could lead the charge on a new way to approach the problems and increase their usage as a by-product. I'd suggest they fund non-product, nonpartisan programs for schools across the country. Since there is no one uniform program across America, this would be groundbreaking.
Financial services companies could work on community outreach as well, touching on those individuals who may not have access to traditional education programs or who face language or other barriers to banking. I think banks have been just trying to survive, to a degree, because of the changes in our economy. Now would be a great time to rebuild by educating people in a way that does not endorse specific products or programs – or a single bank – but provides the knowledge to make sound financial decisions.
Q: In view of what has happened to the housing market, do you believe that people will still consider housing as a sound financial investment?
Barbalatt: I believe that people will continue to pursue homeownership. For better or worse, buying a home is something woven into the spirit of Americanism.
That said, our collective psyches have taken a bit of a beating lately and people are likely less inclined to see buying a home as an asset that's sure to gain value over time. Right now, we're seeing signs of a housing recovery, which could impact that thinking.
However, I believe that more people will refocus to see homes not just as investments. A home serves a necessary purpose: shelter. It also provides, for many, a sense of community and a way to put down roots. People who look at homes as an investment in a community will always want to buy homes.
Financially, we should consider that rents may well be more costly than a home bought with a low-rate loan. Add to that the benefits of tax savings and gaining equity, and the case for homeownership has not lessened much, even in the down turn. It has always been the case that buying a home should be considered for long-term plans versus short-term needs (two to three years), in which case it may make most financial sense to rent.
The reality is that there are plenty of things to be optimistic about in the economy, and housing is among them. What needs to change is the education and analysis around this topic so people are buying what they can afford and enjoy over the long-term.