Financial Literacy: Is Homeownership Counseling Helpful?

by devteam April 27th, 2011 | Share

Much hasrnbeen made about the value of homeowner education and counseling both as a wayrnto make homeowners more responsible about obtaining and maintaining a mortgagernand a method to assist those who fall behind in their payments.  The Mortgage Bankers Association’s (MBA) ResearchrnInstitute for Housing America (RIHA) has just released a study entitledrn“Homeownership Education and Counseling: rnDo We Know What Works?” </p

The idearnthat financial education for homeowners could have positive outcomes isrncompelling.  The theory behind providingrnpre-purchase homeowner education and counseling (HEC) programs for distressed homeownersrnis based on several suppositions:</p<ul class="unIndentedList"<liForrnpotential homebuyers, formalized education and counseling programs can lowerrnthe costs of obtaining information about how to buy a home and obtain arnmortgage.</li<liObjective,rnthird-party counselors or educators can help clients avoid emotional judgmentsrnthat many not be in the client's long-term interest.</li<liHECrnprograms can encourage more efficient transactions, make more informationrnavailable, and reduce the level of help the homebuyer needs from real estaternand mortgage professionals; and</li<liIfrnthe programs do support stable homeownership expanding these programs is in thernpublic interest.</li</ul

Pre-purchaserneducation was extremely popular during the housing boom but, in the latter halfrnof the last decade the emphasis shifted to default counseling and foreclosurernprevention.  Public funding for HEC hasrnincreased considerably over the last few years in response to the housingrncrisis although future funding levels in the current atmosphere of austerityrnare unclear.  </p

Lastrnyear HUD approved agencies provided one-on-one counseling to 2.1 millionrnclients.  More than half – 1.4 million -rnreceived foreclosure and default counseling. rn</p

Pre-purchase counseling was given to about 245,000 persons and 205,000rnreceived counseling regarding home repair or reverse mortgages.  </p

The remainder of the training was related tornrental housing (278,000) or homelessness (37,000.) Of those receivingrnpre-purchase training about 17 percent were reported as purchasing a home andrn26 percent anticipated doing so within three months.  HUD data also indicates that its counselorsrnwere involved in more than 301,000 loan modifications during the year and providedrngroup education and counseling to an additional 870,000 persons</p

Despiternthe increase in public funding, there has been little research on the actualrneffectiveness of HEC.  The MBA studyrnreviewed 18 evaluation studies conducted by others.  The results were fairly inconclusive.  Some pre-purchase programs were found tornreduce the incidence of any form of mortgage default by as much as 34 percent,rnbut many studies found no such effects and at least one study suggests programsrnmay result in accelerated pre-payment of mortgages which is not a positive forrnlenders.  Post-purchase counseling wasrnalso found to lead to an increase in loan modifications and a decrease inrndelinquencies and foreclosures</p

Thernstudy did find significant methodological problems associated with measuringrnthe effectiveness of HEC programs. rnFirst, the high degree of variation across programs makes it difficultrnto evaluate the programs’ effectiveness and whether results are generalizablernacross interventions or populations.  Thernmost important problem is one of self-selection.  Borrowers who participate in voluntaryrnprograms almost certainly differ from non-participants in ways that affect loanrnoutcomes, and while statistical strategies exist for addressing these selectionrneffects, it is compounded by the inability to randomly assign participants tornservices.</p

“In practice, the results fromrneducation and counseling programs vary significantly.  A fundamental issuernarises when researchers attempt to estimate the effects of these programs-rnborrowers who participate in these programs are different from those who do notrn- in ways that do not show up in the data, which makes it difficult to generaternrobust research results.  In summary, do we know what works? The shortrnanswer is ‘no’,” concluded Collins.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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