How Housing Counseling Creates More Neighborhood Choice for Buyers

by Marietta Rodriguez
NeighborWorks

The US housing system simultaneously is one of the most efficient markets in the world and one of the most complex.

While the efficiency offers consumers many opportunities, the complexity makes it more likely that consumers will make housing and mortgage choices that are not in their best interests. However, our experience at NeighborWorks® shows that housing counseling programs can greatly increase buyers' ability to find and finance homes that are right for them.

With transparent pricing, multiple participants, and regulations that help ensure its stability and strength, the US housing system has many of the attributes of an efficient market. Moreover, as the papers in this panel describe, new technologies are making it even easier to access information about both homes for sale and ways of financing the purchases of those dwellings.

However, many consumers find the home buying process to be daunting. Illustratively, a recent household survey conducted for NeighborWorks® America found 74 percent of Americans (and more than 80 percent of millennials) think that the home buying process is complicated. The survey also found that while the overwhelming share of Americans (including millennials) consider homeownership a key component of the American dream—especially people of color and millennials—thousands of would-be buyers are shut out of the market because of confusion about down payment requirements, lack of information about credit standards, and the burden of student loan debt. Moreover, the complexity of the housing system creates the possibility that consumers who are in the market may make housing and mortgage choices that are not in their best interests, including limiting their home choices without looking at all of the available options and selecting mortgage products that are unsuitable or too expensive.

Part of the problem may be that when seeking information on buying a home, Americans are most likely to consult a real estate agent, search the web, or talk with friends or family who are homeowners. In contrast, only about 40 percent of adults (and half of millennials) are likely to seek counsel from a non-profit organization, such as the many NeighborWorks® member organizations that provide advice on buying a home (and only a fifth said they were very likely to do so).

This is unfortunate because our experience at NeighborWorks® strongly suggests that working with certified housing counselors (at a NeighborWorks® Homeownership Center or other HUD-approved housing counseling agencies) can help consumers make good choices about whether and what to buy, how to finance those purchases, and how to maintain their new homes. Housing counselors do so by working one-on-one with potential homebuyers, helping them develop a budget and to strengthen their credit so they can maximize their chance of getting the lowest possible mortgage rate. Moreover, because they are tightly connected to the communities they serve, housing counselors are aware of  trends practically on a block-by-block basis, knowledge that can help a homebuyer sift through the mountains of data on everything from traffic patterns, crime statistics, and school ratings to which community is closest to the best green space and other amenities.

Housing counselors also can help consumers gain access to a myriad of down payment assistance programs and mortgage products that can make it possible to either spend less than they had planned on mortgage payments or to purchase higher priced homes in more desirable communities. The down payment assistance programs, for example, can not only reduce the time and amount of cash consumers must save on their own to buy a home, they can also reduce the amount they need to borrow, which can lover monthly mortgage payments. Knowing about these programs may be especially important for non-White consumers. According to the 2017 NeighborWorks® America Housing Survey, the average African-American and Hispanic consumer assumed that the minimum down payment generally was a little more than 20 percent, an amount substantially higher than the typical down payment made by first-time homebuyers or the 3.5 percent down payment requirement for an FHA loan.

Moreover, because the role of a housing counselor is to help a homebuyer make the right choice for themselves, a housing counselor is not limited to a small set of mortgage choices the way a mortgage officer at a particular lender would be. For example, the largest mortgage lenders originate very few loan products that are offered by state housing finance agencies (HFAs). These HFA mortgages often have strong, but more flexible underwriting criteria that can help overcome mortgage denial issues that may happen with standard mortgage products and underwriting policies.

Combined, all this assistance can help ensure that homebuyers are more likely to choose affordable homes and mortgages, according to a 2013 study done for NeighborWorks® by Neil Mayer and Associates. The study, which looked at 75,000 homeowners who received housing counseling from NeighborWorks® organizations, found that compared to similar homeowners who did not receive counseling, homeowners who received counseling were one-third less likely to fall seriously behind on their mortgages. Such data, and other findings from the study, confirm that housing counseling allows consumers—particularly low and moderate-income and minority consumers—to access and remain in affordable homes in a wider and more diverse array of neighborhoods and communities.

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Papers from the A Shared Future symposium are available on the JCHS website. 

Can Homebuyer Counseling Support Sustainable Homeownership?

by Jonathan Spader
Senior Research Associate

HUD recently released a progress report —including a few early findings—from what could be a ground-breaking study of homebuyer education and counseling (HEC). While it will be several more months before the full study sample is ready for analysis, the early findings offer several insights about the value of HEC in helping potential homebuyers prepare for and sustain homeownership. Equally important, they confirm that implementation of the study is on track, successfully completing a field experiment that has the potential to produce detailed evidence about the impacts of homebuyer education and counseling. (Full disclosure: I’m currently an advisor to the study and previously served as its project director.)

The HUD study offers the first large-scale randomized-control trial of homebuyer education and counseling (although existing non-experimental studies  have shown promising estimates of HEC’s impacts). When enrollment closed earlier this year, more than 5,800 study participants were enrolled in 28 cities across the United States, with enrollments primarily occurring between January 2014 and January 2016. These participants were randomly assigned to one of three study groups: 1) in-person HEC offered through local housing counseling agencies; 2) remote HEC offered via internet and telephone, and 3) a no-services control group. For more details about this study design, see the full report. 

Looking forward, the critical tests will examine how HEC influences recipient outcomes, and whether such impacts translate into improved decisions during the home purchase process and, ultimately, into sustained homeownership. To better understand these impacts, the study’s future analyses will examine multiple measures across three domains: financial knowledge and management; home and mortgage search; and, homeownership sustainability.

For now, the early results offer a few data points that focus on the initial steps toward these outcomes, comparing outcomes 12 months after enrollment for a pooled treatment group (which combines the in-person and remote groups) versus the control group. These early analyses find several statistically-significant impacts of HEC:

• Treatment group members performed significantly better than control group members on a four-question measure of mortgage literacy.
• Treatment group members are significantly more likely to indicate that they would proactively contact their lender before missing a payment, a period when the lender has the most options for finding a solution that avoids default or foreclosure.
• Treatment group members are significantly more likely to have credit scores above 620, suggesting that HEC helped participants to correct errors or otherwise improve their credit scores in advance of home purchase.

Not all of the outcomes showed statistically-significant impacts. Treatment group members were not significantly different than control group members with respect to the fourth outcome tested—whether they regularly tracked their spending against a budget. A further caveat to these findings comes from the preliminary nature of the tests, which are based on a subset of the full study sample and examine only a handful of outcomes. Nonetheless, these estimates offer initial evidence that homebuyer education and counseling can play a valuable role in helping people prepare for homeownership. To that end, the early results report includes a couple of statements from study participants that are worth quoting directly:

“Just talking to the [housing counselor], it made me realize… what I could afford and, well, what I was preapproved for… She was adding on other expenses that I had totally forgot to add, you know, ‘cause I thought I had it all together. And I hadn’t. So I ran into a few things talking to her that made me realize that I probably need to just, you know, wait.”

 –Study participant in Chicago, IL

“[HEC] gave us the idea of whether we should go for it right now or not. It is really telling us what the timing [sic] if we are not really prepared and if we don’t have enough credit or other issues …you know, maybe it is not the right time for us. So it is really helping us to make the decision of go or no go.”

–Study participant in Dallas, TX

The full analyses of study participant outcomes at 12 months from study enrollment are is due in 2018, with analyses of longer-term impacts at 42 months from enrollment due in 2020. If the initial results are any guide, these future reports are likely to offer important conclusions about the value of HEC in supporting sustainable homeownership. 

Lessons for Helping Distressed Homeowners - and Avoiding Distress in the Future

by Jen Molinsky
Research Associate

In April of this year, the Joint Center convened a symposium entitled Homeownership Built to Last: Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families. With the financial, psychological, and social costs of the recent housing crisis fresh in mind, the symposium gathered policymakers, industry leaders, housing advocates, and scholars to examine how the nation can move forward to ensure safer homeownership opportunities for low-income and minority families, many of whom suffered disproportionately in the foreclosure crisis. (In an earlier blog, Sarah Rosen Wartell, president of the Urban Institute, presented thoughts she delivered in a keynote address at the event.)

The symposium featured new research and analysis from 15 leading scholars and practitioners on the value of homeownership post-housing crisis; consumers’ tenure and housing choices; ways to balance affordability, access, and risk; the government’s role in the evolving mortgage market; and strategies to help homebuyers sustain ownership over the long term. We have begun posting these papers to the Joint Center for Housing Studies website, starting with three on the theme of sustaining homeownership. In their papers, Mark Cole and Patricia McCoy each explore lessons learned in the housing crisis about helping distressed owners, while Jeffrey Lubell examines shared equity homeownership as a potentially safer and more cost-effective form of homeownership, one that can help individuals sustain homeownership and help communities maintain affordability.

In her paper, Patricia McCoy (Connecticut Mutual Professor of Law and Director of the Insurance Law Center at the University of Connecticut School of Law) draws lessons from a thorough critique of servicer and government foreclosure prevention efforts in the recent crisis. Among her findings, loan modifications that do not lower monthly payments often failed: early in the crisis, the majority of loan workouts increased owners’ monthly payments, a serious difficulty for those whose distress stemmed from disruptions to income such as job loss. In contrast, decreasing monthly payments through interest rate reductions, lengthening of loan terms, or – most effectively – principal reductions, have been shown to lower the chances of redefault. Going forward, McCoy emphasizes the need to rethink servicer incentives; as she notes, “Today, servicers are overpaid for servicing current loans and underpaid for processing delinquent loans.” And loan modifications should not be delayed: McCoy notes that redefaults occur less frequently when homeowners receive loan modifications earlier.

In his paper, Mark Cole also emphasizes the importance of early intervention to help distressed homeowners, in his case through counseling. Cole (former Executive Vice President and COO of CredAbility and now President of Critical Mass Solutions) offers insights learned from CredAbility’s work engaging and counseling distressed homeowners in early intervention and post loan modification support programs. Data gathered from 1.6 million first counseling sessions reveals how the profile of distressed owners changed over the 2007 to 2012 period: by 2012, the average owner seeking counseling was older (51 instead of 44), more likely to be middle class, and less likely to be a minority. Drivers of distress evolved too: at the start of the subprime mortgage crisis, overspending and over-obligation were the top reasons for mortgage delinquency and default, but as the recession took hold, reduction in income became a more important factor. CredAbility is also observing that financial troubles are increasingly stemming from multiple issues rather than single problems. Emphasizing that homeowner distress often originates from more than housing debt, the average CredAbility client over 2007 to 2012 had a 32.5 percent monthly housing cost-to-income ratio but a 54.1 percent total monthly debt payments-to-income ratio. Cole argues that one-time financial transactions such as loan modifications are not likely to change habits by themselves; rather, long-term contact with owners through counseling that takes into account households’ comprehensive financial picture is needed.

Finally, in his paper, Jeffrey Lubell urges us to think beyond the binary “own/rent” decision by considering “shared equity” options that fall somewhere in the middle of the continuum, such as community land trusts, limited equity cooperatives, deed restrictions, and shared appreciation loans to limit owners’ likelihood of becoming distressed. Not only can shared equity approaches limit downside risk, their loans often perform better: Lubell (former Executive Director of the Center for Housing Policy and current Director of Housing Initiatives at Abt Associates) cites data finding that less than half a percent of large sample of Community Land Trust homes were in foreclosure in 2011, while the rate for the broader market was 4.63 percent. In addition, most shared equity approaches involve long-term affordability provisions that can help successive owners. While they require a subsidy and implementation challenges are significant, Lubell estimates that shared equity could assist from two to five times as many households with the same amount of money as current grant programs.

Taken together, the three papers make the case for active, early engagement with distressed owners, with solutions that address their entire financial picture and make sense given the circumstances that have led to delinquency or default. Counseling can play a critical role, as the intervention of a trusted third party who knows the system can go far toward helping owners confront and resolve delinquencies. In the future, shared equity forms of ownership that offer more support and help contain downside risk can offer new opportunities for more affordable and sustainable homeownership.