Prior Parental Teaching of Money Management and Later Loan Performances Among Low and Moderate Income Homeowners: Application of Cox Hazard Model

Background: Financial literacy and financial education play a central role in asset accumulation, shaping individuals' attitudes, behaviors, and decisions that ultimately impact their financial and social well-being. The acquisition of financial skills begins with parental teaching and role modeling, which provides children with their first exposure to concepts of saving and money management. Research suggests low- and moderate-income (LMI) families are at greater risk for passing on deficits in financial literacy. The relative role of parental teaching in predicting financial outcomes, however, is largely unstudied. This article uses a sample of LMI homeowners to test the hypothesis that parental teaching of money management influences their children's asset-building outcomes in adulthood. Using a unique dataset that includes monthly loan transaction data and measures of individual, loan, and neighborhood characteristics, this study explores the relationship between parental teaching of money management in childhood and later mortgage loan performance (default and foreclosure) in adulthood.

Method: This study uses a sample of LMI homeowners (n=2,126) from the Community Advantage Program (CAP), a secondary-market mortgage pilot program for LMI households. The analysis uses data from the annual CAP survey, linked to data on the loan characteristics, monthly loan performance, and loan to value ratio (LTV) for each participant, in addition to U.S. average monthly mortgage interest rate from the Freddie Mac Primary Mortgage Market Survey and neighborhood conditions from the 2000 U.S. Census tract. Loans originated between 1999 and 2003 and monthly loan performance is tracked through March 2009. Prior parental teaching of money management is categorized by three groups: “none” (n=643, the reference category); “some” (n=758); and “a lot” (n=725). We control for individual characteristics (i.e., education, gender, age, race, marital status, income, and household composition) as well as loan characteristics (original housing value LTV, mortgage rate, credit scores) and neighborhood economic conditions (neighborhood disadvantage scale).

For each of three outcome events (30-day delinquency, 90-day delinquency, and foreclosure), we conduct Cox hazard models with time-varying covariates to account for censored cases (no events until March 2009 or until loan termination). Time zero was assigned to the month of the borrower's first loan payment.

Results: Parental teaching in childhood is significantly associated with loan performance in adulthood. Compared to respondents reporting no prior parental teaching in childhood, the respondents reporting a lot of parental teaching had a 25 percent (p<.05), 28 percent (p<.05), and 40 percent (p<.01) lower hazard rate of experiencing 30- and 90-day delinquency and foreclosure, respectively. In addition, this study also found several significant predictors of loan performances among LMI homeowners, such as age, race/ethnicity, number of children in the household, income, housing value, LTV, and current mortgage rate. Conclusions: This study demonstrates that parental financial teaching in childhood is significantly and positively associated with loan performance for LMI borrowers with prime-term loans later in life. This study has important implications for policy and social work practice. Developing policies and programs which encourage and strengthen parental teaching of money management holds promise to improve financial outcomes for the next generation.