Pooled Assets

Three Ways for Coping in Hard Times

By Susann Rohwedder, Jinkook Lee, and Craig Evan Pollack

Economist Susann Rohwedder is associate director of the RAND Center for the Study of Aging. Jinkook Lee is a RAND economist focusing on aging and household behavior. Craig Pollack is a physician and RAND natural scientist.

The effects of the global economic crisis continue to dominate the headlines. In the United States, high unemployment rates persist, house values remain depressed, and retirement savings — while somewhat recovered since the onset of the crisis — still are substantially below their pre-crisis levels.

The economic downturn has left few Americans untouched.

A collection of studies done by RAND researchers has addressed the economic crisis. One ongoing study has sought to understand how American families are faring in these times. Other studies have sought to identify ways that U.S. households might improve their situation, focusing on the promise of credit unions and the potential for public health practitioners to reach homeowners in distress.

Repossessed vehicles sit beneath ominous skies in front of the Oregon Community Credit Union in Eugene, Oregon.
AP IMAGES/THE REGISTER-GUARD, CHRIS PIETSCH
Repossessed vehicles sit beneath ominous skies in front of the Oregon Community Credit Union in Eugene, Oregon. Car repossessions have risen as owners have lost jobs and faced other financial hardships.

Meet the Parents

The economic downturn has left few Americans untouched. As of March 2009, nearly 80 percent of U.S. households said they had been affected, and almost 30 percent reported having been affected “a lot,” according to the first two of several nationally representative surveys that RAND has administered to some 2,500 households since the onset of the financial crisis in the fall of 2008. Designed to track how households weather the economic crisis over time, the surveys include questions about patterns of giving and receiving financial help in response to the crisis. Among the key findings so far are that many more households are giving help rather than receiving it and that the help most frequently flows from parents to children.

Nearly 30 percent of the households responding to the nationally representative surveys said they had given more than $500 to family, grown children, relatives, or friends as a means of helping them cope with the economic crisis, whereas only about 13 percent reported having received help of this sort. This discrepancy is most likely due to the fact that help can be received from multiple parties. For example, a younger household is likely to have two sets of living parents — his and hers — and consequently might receive financial assistance from two households.

Figure 1 —The Older Were More Likely to Give; the Younger Were More Likely to Receive

The Older Were More Likely to Give; the Younger Were More Likely to Receive
SOURCE: Helping Each Other in Times of Need, 2009.

Figure 2 —Most Often, Help Flowed from Parents to Children

Most Often, Help Flowed from Parents to Children
SOURCE: Helping Each Other in Times of Need, 2009.

Figure 3 —Since 2000, the Growth Rate of U.S. Credit Union Membership Has Been Mostly Falling

Since 2000, the Growth Rate of U.S. Credit Union Membership Has Been Mostly Falling
SOURCE: Consumer Use of Banks and Credit Unions, 2009.

Figure 4 —While Bank Users Focus Mostly on Convenience, Credit Union Members Focus Mostly on Prices and Fees

While Bank Users Focus Mostly on Convenience, Credit Union Members Focus Mostly on Prices and Fees
SOURCE: Consumer Use of Banks and Credit Unions, 2009.
NOTES: “Convenience” includes branch convenience, ATM convenience, availability of online services, and availability of a variety of products. “Prices” include fees, loan interest rates, and deposit interest rates. “Reputation” includes image and recommendations from family or friends. “Safety” includes deposit insurance and confidentiality. “Customer service” includes consumer service and communication.

The older the household, the less likely it was to have received help. The percentage receiving help was largest among the youngest — respondents 18 to 34 years old and people living with them (see Figure 1). The propensity for the younger households to be on the receiving end and the older ones to be on the giving end appears to be related to parents helping their children. Indeed, almost 60 percent of those who reported giving someone financial help said they were parents who had assisted grown children. Likewise, the vast majority of those who received help reported that it had come from their parents (see Figure 2).

Credit Unions, Unite!

In the current financial climate, it is increasingly important that the U.S. public be made aware of the availability of credit unions. As cooperatively owned, not-for-profit financial institutions, credit unions generally offer competitive interest rates and favorable fee structures compared with those offered by commercial banks.

Despite these advantages, the nationwide growth rate of credit union membership has been falling in recent years (see Figure 3). From 1992 to 2006, the market share of credit unions has remained at a constant 6 percent of total assets in America’s financial depository institutions.

In a national Internet survey of more than 1,500 people conducted on behalf of the California and Nevada Credit Union Leagues, a RAND team found that consumers choose their financial service providers based primarily on the convenience of branches, the convenience of automated teller machines (ATMs), and bank fees. While bank users focus mostly on convenience, credit union users focus mostly on prices. However, both are concerned about convenience and prices.

For bank customers, convenience is more important than prices and fees, with almost 50 percent of bank customers naming convenience as their number one priority when selecting their financial institution, compared with only 19 percent of credit union members. Conversely, credit union members were generally more interested in prices. Forty-four percent of credit union members listed fees or the interest rates on savings or loans as their top reason for choosing their current financial institution, compared with only 30 percent of bank customers (see Figure 4).

The survey also found that credit union members stay with their credit unions because they offer low fees, competitive interest rates, and high-quality services. Members leave their credit unions primarily because of a change in residence or because they desire more-convenient branch locations.

A lack of understanding about credit unions is the primary barrier for new members. Bank users are more likely to believe the following three myths: Credit union members must belong to a labor union, credit unions lack data security, and credit unions offer limited services. While these are misperceptions, it is true that, by current federal statute, credit unions cannot serve the general public. Nevertheless, people can qualify for a credit union membership through their employer, through organizational affiliations like churches or social groups, or by living in a particular geographic area that allows them to belong to a community- chartered credit union. Community-chartered credit unions are open to all residents of a given area.

In addition to membership eligibility, credit unions differ from banks and other financial institutions in four other important respects. The first one is ownership. The members who have accounts in a credit union are its owners. Each member has equal ownership and one vote — regardless of how much money the member has on deposit. Unlike most other financial institutions, credit unions do not issue stock or pay dividends to outside stockholders. All earnings and losses go back to the members in the form of often-low fees and the interest rates on savings and loans.

The second important difference is governance. Credit unions are run by volunteer boards of directors elected by and from the membership itself. Members elect their directors in a democratic one person–one vote system regardless of the amount of money invested in the credit union. The elected board determines the interest rates, fees, and other governing policies.

The third difference is a tax-exempt status. Congress exempts credit unions from federal income taxes. The exemption was established in 1937, affirmed by statute in 1951, and reaffirmed in 1998 in the Credit Union Membership Access Act, which states: “Credit unions, unlike many other participants in the financial services market, are exempt from Federal and most State taxes because credit unions are member-owned, democratically operated, not-for-profit organizations generally managed by volunteer boards of directors and because they have the specified mission of meeting the credit and savings needs of consumers, especially persons of modest means.”

The fourth difference is in rates and products. The tax-exempt status, combined with the absence of stockholders who must be paid dividends, allows credit unions to offer competitive rates on an increasingly broad range of financial products.

Leah Esguerra, a social worker at the San Francisco Public Library, goes over a list of homeless people who had checked in there with grounds patrolman Paul Little.
AP IMAGES/MARCIO JOSE SANCHEZ
Leah Esguerra, right, a social worker at the San Francisco Public Library, goes over a list of homeless people who had checked in there with grounds patrolman Paul Little on January 29, 2010. In the ongoing recession, libraries are dealing with more people than ever before with mental health problems and basic needs such as food and shelter.

Yet credit unions are typically smaller than banks. As of 2007, the average U.S. credit union had $93 million in assets, while the average U.S. bank had $1.53 billion. To retain existing customers, to attract new ones, and to offer greater convenience, credit unions should do the following:

Target members who are moving to a new residence or job. Even satisfied customers are likely to change financial institutions if they change their residence or place of work. This suggests that targeting customers during a move could be an effective strategy. Credit unions could emulate other vendors, such as hardware stores, that advertise through the U.S. Postal Service mail forwarding system.

Build financial networks. Credit unions could work together, ensuring that a member who leaves one credit union because of a move considers another credit union in the new location.

Increase consumer awareness of rates and fees. To attract new members, credit unions could raise consumer awareness of their high interest rates and/or low fees, emphasizing the competitive terms they offer. Many survey respondents — both bank customers and credit union members — cited free checking, in particular, as a reason to consider switching.

In the current climate of bank failure, cooperative banking provides a unique opportunity for credit union members to police the soundness of their own banking practices.

Create convenience for consumers. Consumers do not perceive credit unions as having widely available ATMs or branch offices. Credit unions could create a cohesive network to overcome the fragmentation of their industry. For example, they could share the use of ATMs, a strategy that has worked well for commercial bank customers. Credit unions could also share branch offices. Developing ATM and branch partnerships would enhance convenience, heighten awareness of the credit union industry, benefit all participating credit unions and their members, and — with a nationwide network of branch offices — perhaps even surpass the convenience of large banks.

Dispel misunderstandings about credit unions. There are common misconceptions about what a credit union is. To define the term more distinctly, the credit union industry could emphasize that credit unions are “cooperative banks” owned by individual members, rather than by stockholders. In the current climate of bank failure, cooperative banking provides a unique opportunity for credit union members to police the soundness of their own banking practices. The fact that the account holders, not the stockholders, have control will be seen as meritorious.

Don’t Foreclose on Health

Despite the magnitude of the mortgage foreclosure crisis, little is known about the relationship between foreclosures and health status. Previous research has linked unaffordable housing (spending more than 30 percent of pretax household income on housing) to reduced health care spending and to a greater likelihood of not having health insurance. Housing instability and mobility have also been associated with nonadherence to health care regimens among low-income individuals. Foreclosure represents the extreme of unaffordable and unstable housing. As such, it might be expected to have similar health consequences.

John TaJalle compares bottles of lower-priced vodka at a Seattle liquor store.
AP IMAGES/TED S. WARREN
John TaJalle, of Federal Way, Washington, compares bottles of lower-priced vodka at a Seattle liquor store on February 1, 2010. The Distilled Spirits Council of the United States has reported that more drinkers switched to cheaper spirits in 2009 to save money in the recession — and that although people drank a little more, they did it at home and away from pricier restaurants.

Conversely, poor health might be an important cause of foreclosure. Media and policy attention have focused on the problems associated with subprime loans, predatory lending practices, and the economic recession. But there is reason to believe that ill health and medical expenses may also contribute to delinquency in housing payments, just as medical debt and ill health cause a substantial portion of personal bankruptcies in the United States.

In partnership with a mortgage counseling agency, a research team conducted a survey of Philadelphia-area residents undergoing foreclosure between July and October of 2008. The goals were to assess the health status of people in foreclosure compared with the general community and to determine how many foreclosures were primarily attributable to health-related causes.

The team recruited 250 people into the study. Relative to members of the community sample, members of the foreclosure sample were more likely to be female, to be black, and to have children living at home. The socioeconomic status of the study participants tended to be lower than that of the community at large, with fewer college graduates, more unemployed individuals, and more individuals with household incomes below 200 percent of the federal poverty level.

People undergoing foreclosure tended to report worse overall health than the general population. Rates of asthma, arthritis, and diabetes did not differ significantly between the foreclosure and community samples. However, members of the foreclosure sample were significantly more likely to be told by a physician that they have hypertension, heart disease, or a psychiatric disorder. Furthermore, homeowners in foreclosure were more likely than those in the community sample to report problems in gaining access to health care — problems that included higher rates of being uninsured and higher likelihoods of skipping needed medical care and prescriptions because of the cost (see Figure 5).

Figure 5 —Those Undergoing Foreclosure Had Significantly Higher Rates of Many Health-Related Maladies and Struggles

Those Undergoing Foreclosure Had Significantly Higher Rates of Many Health-Related Maladies and Struggles
SOURCE: “Health Status of People Undergoing Foreclosure in the Philadelphia Region,” 2009.
NOTES: The data have been adjusted for age, gender, race/ethnicity, education, poverty, unemployment, and Philadelphia residence. The percentage reflects the predicted probability of reporting each outcome. Those with “psychiatric conditions” had a clinician-diagnosed condition, such as depression or anxiety, as opposed to exhibiting symptoms or even meeting the screening criteria for major depression or some other condition.

Figure 6 —Two-Thirds of Those in Foreclosure in Philadelphia Attributed It Mainly to Job Loss, Decreased Income, Increased Mortgage Payments, or High Utility Bills

Two-Thirds of Those in Foreclosure in Philadelphia Attributed It Mainly to Job Loss, Decreased Income, Increased Mortgage Payments, or High Utility Bills
SOURCE: “Health Status of People Undergoing Foreclosure in the Philadelphia Region,” 2009.

When asked about the primary reasons they were facing foreclosure, 53 percent of those in the survey attributed it mainly to a job loss or a decrease in income, while 14 percent attributed it to increased mortgage rates or high utility costs. However, 9 percent of the people did report that their own or a family member’s medical condition was the primary reason for the foreclosure, while an additional 6 percent cited death of a family member as the primary cause (see Figure 6).

For those attributing the foreclosures to poor health, the potential roots of the problem are many: Poor health may lead to job and income loss; illness in a family may force wage earners to forgo income to take care of sick loved ones; and high medical bills may cause people to fall behind on mortgage payments. Nearly 30 percent of the foreclosure sample had medical bills in excess of $1,000 that were not covered by insurance, and 28 percent owed money to medical creditors.

Although individuals undergoing foreclosure have higher rates of certain health problems, it remains unknown whether poor health may result from foreclosure. The study suggests that the financial hardship associated with foreclosure may lead homeowners to cut back on “discretionary” health spending (medications, doctor visits, healthy food). If sustained over time, such cutbacks seem likely to lead to poor health outcomes. Foreclosure is often accompanied by severe stress, which may contribute to health-undermining behaviors as well as physical and mental illness. Although members of the foreclosure sample were not more likely than others to smoke (after socioeconomic factors had been taken into account), a substantial proportion did report an increase in both smoking and drinking after the foreclosure process had begun.

Foreclosure is often accompanied by severe stress, which may contribute to health-undermining behaviors as well as physical and mental illness.

The research team found exceptionally high rates of depressive symptoms among those in foreclosure (47 percent), with over a third (37 percent) meeting the screening criteria for major depression. Because the foreclosure process is lengthy, the stress associated with it is likely to be ongoing in nature. One hypothesis is that the contrast between the dreams of homeownership and the reality of foreclosure may contribute further to the high levels of emotional distress.

If there is an opportunity here, it might be that health care organizations and public health practitioners could leverage the current efforts to connect homeowners with mortgage counseling agencies as a way to increase access to health care. Philadelphia and other municipalities have used letters, telephone hotlines, and advertising campaigns to recruit people into mortgage counseling. Given the medical needs of the population undergoing foreclosure, these efforts should also be used to promote health.

Mortgage counseling agencies and public health practitioners could pool their resources to link people to medical and social services. Mortgage counselors could be trained to give their clients information about the health care safety net, including community health centers and government agencies that may offer enrollment in public health insurance programs. Health crisis counselors or social workers could be placed at mortgage counseling agencies to offer the clients direct assistance and advice. Moreover, physicians and other health care professionals could help direct patients to mortgage counselors approved by the U.S. Department of Housing and Urban Development.

Individuals facing foreclosure are a vulnerable population at risk for poor health. Policymakers need to consider the connection between foreclosure and health as they craft policies in response to the foreclosure crisis. square

Related Reading

Consumer Use of Banks and Credit Unions: Findings from a Survey for the California and Nevada Credit Union Leagues, Jinkook Lee, Teryn Mattox, Kyoung-Nan Kwon, Arie Kapteyn, Tania Gutsche, RAND/TR-672-CCUL, 2009, 48 pp.
“Health Status of People Undergoing Foreclosure in the Philadelphia Region,” American Journal of Public Health, October 2009, Vol. 99, No. 10, pp. 1833–1839, Craig Evan Pollack, Julia Lynch.
Helping Each Other in Times of Need: Financial Help as a Means of Coping with the Economic Crisis, Susann Rohwedder, RAND/OP-269-NIA, 2009, 7 pp.
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