May 01 2008
"The More You Know, The Better Buyer You Become: Financial Literacy For Today's Homebuyers"
Opening Statement: Subcommittee on Economic Policy
Today’s hearing will focus on financial literacy and education efforts for both first time home buyers and existing home owners.
The recent subprime mortgage crisis has put a spotlight on questions regarding the financial knowledge of home buyers and home owners.
Studies have shown that most Americans lack certain knowledge about the basics of buying a home.
Buying a home is perhaps the most complicated financial transaction that most Americans will ever make.
Financial innovation is generally a good thing. We should encourage the ability of markets to become more efficient and better manage risk.
However, the fundamentals of the game never change. Potential home buyers need to determine if buying a home makes good financial sense for them.
Often, potential homebuyer is not sure if they are financially ready to buy a home or how much they can afford to borrow.
Many times, homebuyers seek advice from those also involved in the transaction: their real estate broker or lender.
There is nothing wrong with soliciting the advice of brokers or lenders, but sometimes potential home buyers need more than advice.
Home buyers need to know that they can and should meet with a qualified independent counselor before starting down the path to homeownership.
It is often said that homeownership is the American dream. For many Americans that dream is fast becoming something of a nightmare. The real American dream is sustainable home ownership.
Before sitting down with a lender, some homebuyers should meet with a counselor to look at their credit history, how much debt they have, their income to determine whether they should remain a renter or purchase a home.
Buyers also need to have access to a counselor that can walk them through the many mortgage products available on the market. For some families a fixed-rate product is best and for some families an adjustable-rate mortgage is better.
The best decision depends on each buyer’s personal circumstances. However, buyers should look at their ability to repay the loan regardless of changes in interest rates.
Again, these are things that a potential home buyer should examine before purchasing a home. The more you know, the better buyer you become.
Financial education does not stop once the home is purchased. New home buyers receive loan solicitations every day in the mail. Some of these mailings urge the new home owner to refinance at a much lower rate and have some cash left over.
Refinancing a mortgage can make great financial sense, but a home owner needs to look at more than the new interest rate or how much cash they can pocket.
Homeowners should seek the advice of an independent qualified counselor if they have questions about the pros and cons of refinancing.
Many of the subprime loans now currently in foreclosure were refinanced. The homeowner started off with a fixed-rate mortgage, but opted for the exotic mortgage to pay less in the short-term and get cash out of the home.
As a result, many homeowners have little or no equity in a home that they can no longer afford because their adjustable rate mortgage is due to reset to a much higher rate.
These homeowners must now try to get back to a fixed rate product to keep their homes and avoid foreclosure.
On April 10th the Senate passed the Foreclosure Prevention Act of 2008. This bill included $100 million for housing counseling.
We will hear from our witnesses today about the state of the nation’s financial education efforts. I hope we will hear testimony on not only the importance of financial education, but also ways to improve the many literacy programs across the country. I also hope to hear how we can make financial education more accessible.
I want to welcome our witnesses here today.
Ms. Sarah Bloom Raskin is currently the Commissioner of Financial Regulation for the State of Maryland. She is here today representing the Conference of State Bank Supervisors. Sarah is no stranger to this Committee. She served as Counsel to Senator Paul Sarbanes. It is a testament to his legacy that you are now the Banking Commissioner for the State of Maryland.
Mr. Kenneth D. Wade is the Chief Executive Officer of NeighborWorks. NeighborWorks America is a public nonprofit corporation established as the Neighborhood Reinvestment Corporation by an Act of Congress in 1978.
Ms. Ronni Cohen is the Executive Director of the Delaware Money School. The Money School is part of the Delaware Financial Literacy Institute was created by the State Treasurer Jack Markell.
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