Is Housing Counseling as Effective as it Should Be?


Photo Credit: A&M-Commerce


Limited Data Strengthens Debates on Both Sides

Housing counseling has been a hotly debated topic for a while because hard data is limited on its effectiveness. A growing number of studies support the counseling’s effect on boosting loan performance. Advocates of housing counseling also maintain that borrowers benefit more from neutral third-party counseling outfits; they usually don’t have an interest in whether a consumer gets a mortgage.

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Realtors and FHA lenders care a lot about borrowers, but it’s a conflicted conversation because the Realtor and the lender want the deal to happen and they prefer a bigger deal to a smaller deal,” said Ellen Seidman, a former director of the Office of Thrift Supervision.

Others maintain that there are alternatives which are just as effective at improving loan performance without the additional costs and time spent using third-party resources. Edward Pinto, Co-Director of the International Center on Housing Risk at the American Enterprise Institute, has believed for a while that a residual income test is a more cost-effective way of providing true and beneficial housing counseling. The residual income test is what the Department of Veterans Affairs (VA) use to determine if a borrower would qualify for a mortgage.

“The VA uses residual income and it works great,” said Pinto, noting that VA loan volumes have been one of a few loan types which increased following the housing market crash and also perform better than FHA loans. “You collect the data, the underwriter underwrites it and you get your answer. It’s pretty straightforward.”

Typically, along with mortgage insurance, Freddie Mac and Fannie Mae requires housing counseling on higher-risk mortgages such as the low-down payment loan products, which they plan on offering again. The Department of Housing and Urban Development (HUD) is also planning a pilot program to provide incentives to FHA loan borrowers; using mortgage insurance premium discounts if housing counseling is used.

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What do mortgage lenders think?

According to Clem Ziroli, President of First Mortgage, an education-focused approach is taken by third-party counselors in reducing loan-performance concerns, rather than the typical sales-based relationship which exists between borrowers and mortgage loan officers. “They understand the risks and are better equipped to cover all the bases with the borrower,” he said of the third party counselors.

Still, with the limited data on housing counseling effectiveness, skeptics continue to question if loan improvements are a result of third-party housing counseling education or if it’s because of the consumer budget analysis which is a part of it.

“Down payment and borrower reserves/residual income ensure that there’s a better opportunity for the long-term performance of a loan,” said Steve Calk, chairman and CEO of The Federal Savings Bank in Chicago.

Calk also questioned if there’s enough quantitative research to prove if a third-party counselor is beneficial.

“I want to see more statistical analysis,” he said.

Limited Data shows some benefit

HUD cites many housing counseling studies, including one published by Freddie Mac in April 2013. HUD’s rationale behind its Homeowners Armed with Knowledge (HAWK) pilot program is underlined by its findings that serious delinquencies within the first three years of mortgage origination were lower when borrowers received counseling.

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Loans with counseling, made between 2000 and 2008, had an average 90-plus-day delinquency rate of 11.8 percent, compared to a nearly 21 percent rate of the loan sample made without counseling. The overall average delinquency rate is higher than historic norms because of the mid-2000’s housing market crisis.

Freddie Mac’s study also found that first-time homebuyers benefitted more from counseling than repeat buyers. The type of counseling provided also made a difference in delinquency rates. Borrowers who received counseling in a group setting/ classroom had a delinquency rate of 13.3 percent, while those who went through a self-guided home study had a rate of about 15 percent. This compares to borrowers who received counseling individually over the phone or one-on-one in person having rates of 8 percent and 9.34 percent respectively.

Although this was not cited in HUD’s HAWK findings, a Federal Reserve Bank of Philadelphia study supports Freddie Mac’s study in the effectiveness of the type of counseling offered. Marvin Smith, author of the report and a senior community development economic advisor, found individual counseling increased consumers’ credit scores about two times as much as a group or classroom setting did.

Although both studies shows promising results, they have their limitations. The Philadelphia Fed’s study examines broader consumer credit performance relative to homeownership instead of specific mortgage performance and the Freddie Mac study spans several years while adjusting for loan-to-value (LTV) ratios in ways other studies have not. The Freddie Mac study, has small sample sizes represented for certain time periods have self-selection bias, while the Philadelphia Fed randomly sampled study participants to address self-selection bias.

“There are counseling outfits that do solid work spending an average of two hours per borrower. Others are doing it by phone in 30 minutes,” said Atare Agbamu, President and CEO of the advisory firm ThinkReverse. Agbamu fears that telephone-based counseling is prone to having more consumer fraud risks than one-on-one counseling, further adding that lack of funding is part of the challenge in maintaining quality control.


Origination News. New Efforts at Housing Counseling Revive Debate about Its Value


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