Lehman Sisters, a Bankers’ Hippocratic Oath, and Shrugging Off Housing Bubble Woes
Beyond the Headlines: Personal finance news and research you may have missed
It’s too early to tell, but events of the last week may be remembered for corners turned. The number of people initiating claims for unemployment insurance fell to a three-month low, consumers’ bank accounts received a big infusion of cash, the engine of American business began to rev harder, and the cold winds of increasing mortgage rates sent a shiver through the toasty-hot housing market.
On the public policy side, President Joe Biden and Democratic lawmakers pushed ahead with his ambitious $1.9 trillion rescue plan, despite a setback in hopes to increase the federal minimum wage to $15. Meanwhile, the Biden administration continued to rebuff his predecessor’s administration, with the Consumer Financial Protection Bureau focusing its first big lawsuit of the Biden era on racial equity and the Small Business Administration giving the smallest businesses priority over all other prospective borrowers for a two-week period.
Other trends were steady-as-she-goes. Interest rates on savings accounts got even lower and the unflappable Federal Reserve Chair Jerome Powell stayed committed to the central bank’s easy-money policies.
But here’s what you may not have heard: Did you know that despite all the frenzy, the country has built formidable defenses against another housing crash, or that after this pandemic, it may make a lot less sense to try to include rent and utility payments in credit score calculations?
To reach beyond the biggest headlines, we scoured the latest research, surveys, studies, and commentary to bring you the most interesting and relevant personal finance news you may have missed.
What We Found
Why You Shouldn’t Be Worried About Another Housing Bubble
In defiance of the general economic downturn of the pandemic, home prices continue to balloon. But are we headed for another major correction after the 2006 housing bubble burst? Economists at Wells Fargo Securities are among those who say no, this time is very different.
For one, households are in much better financial shape now than they were then, and higher-income households have been saving and paying down debt during the pandemic. Plus, lenders are more disciplined about who they lend to, and regulations designed to make financial institutions more resilient to economic shocks have done just that, the economists said in a special Feb. 22 report on the housing outlook.
What’s more, the rise in sale prices hasn’t been driven by wild speculation, but real demand (those telecommuters can live anywhere), and a constrained supply.
For those pessimists out there, here’s an even bigger silver lining. For all those reasons, even if the bubble does burst, it’s not the end of the world, according to Wells Fargo.
“The fallout on the overall U.S. economy likely would be far less debilitating than it was when the housing bubble imploded over a decade ago,” the economists wrote. “Households are not nearly as leveraged as they were back then and financial institutions are far better capitalized and more tightly regulated.”
Pandemic Casts New Light on Reflecting Rent in Credit Scores
It’s one of the most counterintuitive trends of the pandemic economy: despite widespread unemployment and economic disruption, the average credit score has actually increased, in large part because of all the special relief from the government: cash payments as well as options to skip mortgage and student loan payments without penalty (and still keep your credit score intact). It’s also the fact that the economy is bifurcated, with higher earners actually benefiting from the pandemic in some cases, and lower-wage workers falling farther behind.
But here’s another irony: Consumer advocates and policymakers including the president have pushed for factoring in rent and utility payments as a way to help more people establish credit and make scores more equitable across races (part of Biden’s campaign proposal to wipe the slate clean with a new public credit reporting agency.)
But one advocacy group, the National Consumer Law Center (NCLC), is now saying the absence of rent and utility payments from credit reporting is a blessing in disguise. (Currently, because landlords and utility companies are not considered creditors, late payments to them are not automatically reported to the credit bureaus unless a debt proceeds to a collection agency.)
While credit scores have been rising, millions are struggling to pay rent and utilities during the pandemic, the NCLC points out.
“Having a negative credit report can be a bigger problem than being credit invisible,” the NCLC said in a paper published this month.
“The experience of the pandemic should plant a big red caution flag on the idea of using utility and rent payments in credit reports,” the group wrote. “Even for rent payments, which had previously looked like a promising source of ‘alternative data,’ this experience reinforces the need to be incredibly cautious and ensure that such reporting is always truly voluntary on the part of the consumer.”
Are You Sure You Want to Do That? Remember Your Banker’s Oath!
You’ve heard of the Hippocratic oath for doctors, but what about financial advisors? They often face conflicts of interest as they balance duties to their employers and their customers, and unlike more transparent industries, it’s particularly hard for customers to know whether they’re being well-served. The Netherlands tried to alleviate this problem by imposing the first oath of ethics in the financial sector, and according to new research, it really can help keep them on the straight and narrow.
The Netherlands, in the wake of the financial crisis, implemented the first-of-its kind law in 2015, legally requiring every financial worker to take the oath and sign a document in a special ceremony arranged by their employer. In the oath, a financial worker swears to be trustworthy, follow the law, and act in their customer’s interests.
Researchers at the University of Innsbruck in Austria wanted to know if the oath was effective, so they put Dutch bankers to the test in an undercover experiment, according to a paper released this month by the university.
In 2019 and early 2020, 51 auditors disguised as customers went to 201 bank branches with a deliberately conflict-of-interest inducing scenario. They asked for advice on taking out a car loan of 8,000 euros, but also disclosed that they had savings of 12,000 euros, and hadn’t earmarked it for anything in particular. Given the bank would make more off a loan, it was a test of how the banker would steer the customer.
The results? When the impersonators curiously asked the bankers to explain the banker’s oath before getting to the loan discussion, the employees pushed loans 29.9% of the time, versus 46.3% when not reminded of their solemn vow.
Things Might Have Gone Differently Had It Been Lehman Sisters
The same events that led to the creation of the banker’s oath—namely, the collapse of Lehman Brothers and ensuing financial crisis—gave financial professionals a uniquely poor public image as a “greedy and dishonest cohort” compared to other professions, according to another new research paper published by the University of Innsbruck in Austria.
This reputation, however, is only half justified, according to the researchers. While it is true that financial professionals are “significantly more risk tolerant, more selfish, less trustworthy, more competitive” and show “higher levels of narcissism, psychopathy, and Machiavellianism” than working adults in the general population, they barely differ from other people of the same socio-economic status, at least among the Swedish professionals who participated in their research experiment.
The researchers used a battery of psychological tests to come to this conclusion, comparing 298 financial analysts, investment advisors, traders, fund-managers, and financial brokers, with 395 people from the general Swedish working population.
In fact, finance professionals may have disproportionately high tendencies to exhibit these traits because they are mostly male and highly educated, the researchers said. They even cited a quote from Christine Lagarde, president of the European Central Bank, who in 2018 wrote: “As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today.”
Don’t Leave Money on the Table This Tax Season
There are a bunch of pandemic-related tax breaks that can save you money, but only if you know to file for them. One commonly overlooked change for the 2020 tax year is the charitable donation tax exemption, which can be taken on up to $300 in donations even when filers don’t itemize. In an online survey conducted for tax preparer Jackson Hewitt this January, 74% of respondents didn’t realize that.
Another way you might inadvertently leave money sitting on the table? Failing to use the earned income tax credit. Twenty-two percent of those who are eligible don’t claim it, according to the IRS, giving up as much as $6,600.
‘Tiny Houses’ Are So 2019
The quest for space. It’s all anyone seems to talk about anymore, what with low mortgage rates and the new work-from-home lifestyle. But how much space are we actually talking about? Millennials—the largest cohort of homebuyers—are seeking homes averaging 2,385 square feet, a 41% increase over a year ago, according to survey findings published this month by Clever, an online real estate service. In fact, millennials now want almost as much space as baby boomers, whose desired homes average around 2,550 square feet, the January survey of 1,000 prospective homebuyers showed.
“They are interested in spaces that allow them to work and play at home more comfortably. With more people working remotely during the pandemic, they're twice as likely to require dedicated office space this year compared to last,” Clever’s report said.
So much for that tiny house movement that’s been trendy in recent years. It might be awhile before Americans are again fantasizing about living a minimalist lifestyle in homes 400 square feet or smaller.