The value of housing counseling has long been a hotly-debated topic in part because concrete data is limited on whether counseling is more effective than other methods of preparing borrowers to get a mortgage.
A growing number of studies support housing finance counseling’s ability to boost loan performance. And advocates of housing counseling maintain borrowers benefit more from third-party resources that don’t have an interest in whether a consumer ultimately gets a mortgage.
“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.
But others argue alternatives exist that are just as effective at improving loan performance without the added time and expense of third-party resources. Edward Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute, has long believed a residual income test like what’s used to qualify borrowers for mortgages insured by the Department of Veterans Affairs is a more cost-effective method of providing the true benefit of housing counseling.
“The VA uses residual income and it works great,” said Pinto, noting that VA volumes have been one of the few loan sectors to consistently increase following the housing crash and perform better than FHA loans. “You collect the data, the underwriter underwrites it and you get your answer. It’s pretty straightforward.”
Fannie Mae and Freddie Mac require housing counseling (typically provided in conjunction with mortgage insurers) on higher-risk mortgages, like the low-down-payment products the government-sponsored enterprises plan to resume offering. And the Department of Housing and Urban Development is planning a pilot program to incentivize Federal Housing Administration borrowers with discounts on their mortgage insurance premiums if they receive counseling.
Lenders have mixed views on housing counseling.
Third-party counselors take an education-focused approach with consumers and play a key role in reducing loan-performance concerns, rather than the sales-based relationship that exists between loan officers and borrowers, said Clem Ziroli, president of Ontario, Calif.-based lender First Mortgage. “They understand the risks and are better equipped to cover all the bases with the borrower,” he said of counselors.
Still, skeptics question whether available data on housing counseling really confirm that improvements in loan performance stem from third-party education, as opposed to the analysis of consumer budgets that goes along with 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 Overland Park, Kan.
And he questions whether there is enough quantitative research to prove a third-party counselor is central to that benefit.
“I want to see more statistical analysis,” he said.
Limited Data is Optimistic
In detailing the rationale for its Homeowners Armed with Knowledge, or HAWK, pilot program, HUD cites numerous housing counseling studies, including one published by Freddie Mac in April 2013, which found serious delinquencies within the first three years of origination were lower when borrowers received housing counseling.
Between 2000 and 2008, loans with counseling had an average 90-plus-day delinquency rate of 11.8%, while nearly 21% of the loan sample without borrower counseling had serious delinquencies, according to the study. (The overall average delinquency rate is higher than historic norms because of the effect of the mid-2000s market downturn.)
The study also found that first-time homebuyers benefited more from counseling than repeat buyers. Delinquency rates also varied by the type of housing counseling that borrowers received.
Borrowers who received housing counseling either individually over the phone or one-on-one in person had delinquency rates of 8.05% and 9.34%, respectively. Borrowers who received counseling in either a classroom group setting or through self-guided home study had delinquency rates of 13.3% and 15.08%, respectively.
A Federal Reserve Bank of Philadelphia study published in April 2014, but not cited in HUD’s HAWK proposal found individual counseling increased consumers’ credit scores roughly twice as much as classroom instruction, said author Marvin Smith, a senior community development economic advisor.
Despite the promising results, both studies have their limitations. While the Freddie Mac study spans several years and adjusts for loan-to-value ratios in ways other studies haven’t. But it has small sample sizes for certain time periods as well as self-selection bias.
The Philadelphia Fed study addressed the self-selection bias with random assignment. But it examines broader consumer credit performance relative to homeownership counseling, rather than mortgage performance specifically.
The research about counseling and loan performance can be improved upon, and some is mixed, said Peter Zorn, a vice president specializing in housing analysis and research at Freddie Mac, and one of the authors of the GSE’s study. Academic research should continue, he said.
“There are a lot of people talking about this sort of thing, and it’s an important public policy question,” said Zorn.
But existing studies showing counseling improves loan performance are strong enough “for business purposes,” he said.
For its HAWK initiative, HUD is proposing lowering its standard 175-basis-point upfront loan fee by 50 basis points and lowering its 135 basis point annual premium by 10 basis points at closing if a first-time borrower completes counseling requirements. If the loan is still performing after 18 months, the FHA will reduce the annual premium by another 15 to 110 basis points.
While HUD is confident in the available research showing the effectiveness of housing counseling, a key component of the HAWK pilot program will be to gather and analyze data, and HUD also routinely gathers more and better data on counseling, said spokesman Brian Sullivan said.
“I think that the body of research out there leaves no confusion in terms of the impact housing counseling has in improving loan performance,” Sullivan said.
Footing the Bill
Housing counseling is funded through a mix of federal and state government funds, consumer and business expenditures. It also is a condition of and funded by several mortgage-related legal settlements, Sullivan said.