Study Implies Homebuyer Education, Counseling Have Questionable Impact

Despite evidence that some home prepurchase education and foreclosure prevention programs are working, inconsistent proof of the effect of counseling indicates the industry cannot quantify their level of efficiency.

In summary, the authors of a study sponsored by the Mortgage Bankers Association wrote, the short answer to whether the industry knows what works is “no."

The “Homeownership Education and Counseling: Do We Know What Works?” study, conducted by J. Michael Collins and Collin O'Rourke of the PolicyLab Consulting Group for MBA's Research Institute for Housing America, confirms that in practice, the results from education and counseling programs “vary significantly.”

Results were based on reviews of 18 separate sample evaluation studies, most of which are plagued by biases, the authors wrote. There are, however, a few encouraging findings.

For example, while many studies found no positive effects from prepurchase programs, some of these programs helped reduce “the incidence of any form of mortgage default” by 34%. And at least one study suggests programs may result in accelerated prepayment of mortgages.

Over 2.1 million clients received varied types of one-on-one housing counseling from HUD-approved agencies in fiscal year 2010, the method that is widely recognized as the most effective approach to loss mitigation.

About 245,000 received prepurchase education, of which about 17% purchased a home and another 26% were reported as individuals who were anticipating to buy within three months.

Up to 1.4 million received foreclosure prevention counseling. According to the study, those who participate in default counseling are more likely to have their loans modified. HUD data suggest “counseling agencies were involved” in more than 301,000 loan modifications in FY 2010.

HUD reports also show that 205,000 received help with home repair or a reverse mortgage, 278,000 received help related to rental housing and 37,000 received counseling on homelessness.

Over the past decade, long before the current housing downturn, concerns about whether Americans "are sufficiently financially literate to make the complex decisions" required by a changing marketplace helped proliferate prepurchase homeownership education and counseling programs, researchers wrote. Going forward, the drive to expand homeownership education or counseling nonetheless should continue to support a more stable homeownership and prevent the negative impacts of market factors such as drops in property values.

MBA executives recognize that beyond the unavoidable differences between the outcome in theory and practice, reasons to expect that education and counseling could and should be effective derives from the fact that evidence showing the effectiveness of these programs is not there primarily because of problems with the design of existing studies.

According to Collins, in theory formalized homebuyer education and counseling could help in three ways: It can lower the costs of obtaining information about how to obtain a mortgage and sustain homeownership, avoid emotional judgments, and reduce the level of support needed from real estate and mortgage professionals.

In practice, he argues, personality differences between borrowers who accept counseling assistance and those who do not make attempts to quantify the effects of these programs are very challenging.

So far the industry does not have any “compelling indication” regarding which methods of counseling might work best, said MBA's vice president of research and economics, Michael Fratantoni. “Future studies should adhere to more rigorous research designs.