Study Shows Housing Counseling May Impact Mortgage Behavior

In light of recent Department of Housing and Urban Development budget cuts to HUD’s housing counseling programs, a Mortgage Bankers Association study shows that potential borrowers who take part in counseling programs and prepurchase education may be more likely to pay their mortgages on time. However, the study evidence is not consistent and compelling, according to MBA.

Other findings of the study, titled, “Homeownership Education and Counseling: Do We Know What Works?” show that those who participate in default counseling are more likely to have their loans modified, than those who do not. Additionally, based on a number of separate evaluation studies, some prespurchase programs were found to reduce the incidence of any form of mortgage default by as much as 34%. (Other studies found no such effects.)

The study report cites data from HUD indicating that 2.1 million clients received one-on-one housing counseling from HUD-approved agencies in FY 2010, covering all services. Broken down into different types of services, 205,000 received help with home repair or a reverse mortgage and 1.4 million received foreclosure prevention counseling.

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“Over the past decade, concerns have been raised about the extent to which Americans as a whole are sufficiently financially literate to make the complex decisions required in the ever-changing financial marketplace,” said J. Michael Collins of The PolicyLab Consulting Group, which conducted the study. “In response to these concerns, pre-purchase homeownership education and counseling programs proliferated before the current housing downturn. To the extent education or counseling supports stable homeownership, the public has an interest in expanding these programs to prevent the negative impacts of unsuccessful homeownership (e.g., drops in property values due to foreclosure).”

View the full report.

Written by Elizabeth Ecker

 

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  • While this study is interesting, it does not address the most fundamental question about HECM counseling. Is HECM counseling effective and can it be made more so? Just like responsible parents and taxpayers are more and more demanding that public education be accountable for its effectiveness, we should be doing the same when it comes to HECM origination counseling.

    The GAO review on HECM counseling was conducted well over a year ago now. It found fundamental flaws in what counseling presented when compared to what it is required to present. As a result there was absolutely no need to determine how effective counseling was in delivering the required information. To measure effectiveness requires independent review far more often than once every two decades. It cannot be assumed that just because protocol has been upgraded and procedural review steps are now in place that suddenly origination counseling is effective or efficient.

    HECM origination counseling needs to be far more than widow dressing or a playing field for social engineering. The primary purpose of counseling should be consumer protection. That requires three things. Counselors need to verify that participants understand the basics about this mortgage, that participants seem competent to contract, and that participants are aware of how funds have been used inappropriately such as funds being used for Ponzi schemes as exposed in the recent Staten Island indictments or funds used in purchasing properties with appraised values far in excess of market values.

    Part of the basics of the program is the responsibility to continue paying insurance and taxes. That requires having a handle on finances. Since this should be a consideration of underwriting this mortgage, a model already exists for gathering that information in the forward mortgage market. HECM originators should gather that information and provide it to counselors BEFORE counseling. The HUD OIG estimated the number of T & I defaults almost a year ago. That estimate seems to be in the ball park if the percentage turns out to be 4% as industry leaders are now indicating. Since the beginning of this calendar year, we have had more than one counseling agency exec providing numbers to the press that are not only outlandish but appear to be little more than self serving.

    Not only should counseling be effective but it should be efficient. Why should taxpayers or seniors be paying for services that are otherwise free? When BCU is added to counseling the cost of counseling rises and the fundamental question of the ability of seniors to retain the amount of information thrust upon them in these marathon counseling sessions must be questioned. Just like the decision to obtain a reverse mortgage should be separated from the decision of acquiring a financial or insurance product, so should HECM counseling be separated from benefit counseling.

    While I am not opposed to discussing budget concerns in counseling, FIT seems worthless. The originator should gather REAL budget data before counseling and provide the counselor with it. While that might destroy the most teachable moment ideal of some when it comes to counseling, it is a practical solution for lender, investor, counselor, and HUD. As currently structured, even some counselors refer to the grueling experience of counseling as “cruel and unusual punishment.” Few seniors are at the peak of their ability to absorb and retain vast quantities of information in a marathon session. While the goal of FIT and BCU may be worthy, their addition to counseling makes the rest of counseling far less effective. Counselors should be required to strongly recommend BCU to seniors but both FIT and BCU should be eliminated from counseling itself.

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