Freddie Mac and Fannie Mae have long advocated for homebuyer
education but as Freddie Mac points out in this month's edition of Insight and Outlook, it has been
surprisingly difficult to determine how much it actually helps potential
homebuyers. "There is widespread
agreement in the industry that homebuyer counseling can help prevent some of
the mistakes made during the housing boom.
However, early studies of the impact of counseling produced sometimes
conflicting or inconclusive results and raised questions about the effectiveness
of borrower education and counseling."
Most studies have been observational. One, for example reviewed data on 40,000
participants in Freddie Mac's Affordable Gold Loans Program and concluded that
borrowers who received classroom and home study counseling had reductions in
their subsequent rates of serious delinquency of 26 percent and 21 percent
respectively. Borrowers who received
individual counseling averaged a 34 percent reduction.
But such observational studies can't make clear that such
reductions are the result of the education received. The Insights
article says that "Perhaps the borrowers who received counseling also were more
high-educated than the borrowers in the other group. Maybe they had a greater disposition or
ability to apply the information provided by the education course. Maybe they had higher credit scores than the
The advantages of studying the impact of homeowner education
through an experimental study, one in which participants are divided into a
treatment group and a control group, are obvious but such studies are expensive and
in some cases participants differ from the general population by the simple
fact they are willing to participate.
There is also the ethics issue of offering a benefit to one group but not
to another and finally a measurement issue; how does one define the expected
benefit of homeownership counseling? Do
we expect that those who receive counseling will be more likely to purchase a
home or to take on debt or that they will rent longer to build up a larger downpayment. Do we expect that their credit scores will
In 2014 the Federal Reserve Bank of Philadelphia reported on
a five year controlled study on pre-purchase education. The study included only first-time homebuyers
who had not previously have applied for a mortgage, received prior counseling, or
were under contract to purchase a home or in a program that required
counseling. Both the treatment and
control groups received a two-hour pre-purchase workshop and a workbook that included
information on preparing for homeownership, shopping for a home and a mortgage,
applying for a mortgage, and closing and settlement. No further services were
provided to the control group.
The treatment group was given one-on-one counseling on
budgeting, guidance on homebuying and the availability of other services from
the counseling agency. Twenty-nine percent of participants opted to use some of
the extra services.
The credit scores of the control group rose by 8.5 points
following the workshop while the treatment group raised their scores an average
of 16.2 points after completing all of the training. Over the course of the five year experiment
some participants in each group bought houses so the groups were further
divided into homeowners and non-homeowners.
The treatment group, whether homebuyers or not, continued to have credit
score increases about twice that of the two control group cohorts.
Freddie Mac says the increase in non-mortgage debt among the
groups was especially intriguing. Non-homeowners
increased their total debt over the five years but the treatment group
increased more than the control group.
Homeowners decreased their total debt with the treatment group decreased
the most. Freddie Mac said perhaps
non-homeowners felt more able to take on debt without the burden of a mortgage
or homeowners may have reduced their non-mortgage debt to prepare for applying
and taking on a mortgage.
There also appeared to be an effect on credit
performance. The treatment group,
whether homeowners or not, showed greater changes in the share of delinquencies
of all durations than did the control group.
Freddie Mac concluded that the Federal Reserve's study
supports its belief in pre-purchase homeownership counseling but weighed in in
favor of the benefit of the two hour workshop.
It appears to have provided all participants with a statistically significant
increase in credit scores. Both the
workshop and the individual counseling reduced future delinquencies, especially