Much has been made about the value of homeowner education and counseling both as a way to make homeowners more responsible about obtaining and maintaining a mortgage and a method to assist those who fall behind in their payments. The Mortgage Bankers Association's (MBA) Research Institute for Housing America (RIHA) has just released a study entitled "Homeownership Education and Counseling: Do We Know What Works?"
The idea that financial education for homeowners could have positive outcomes is compelling. The theory behind providing pre-purchase homeowner education and counseling (HEC) programs for distressed homeowners is based on several suppositions:
- For potential homebuyers, formalized education and counseling programs can lower the costs of obtaining information about how to buy a home and obtain a mortgage.
- Objective, third-party counselors or educators can help clients avoid emotional judgments that many not be in the client's long-term interest.
- HEC programs can encourage more efficient transactions, make more information available, and reduce the level of help the homebuyer needs from real estate and mortgage professionals; and
- If the programs do support stable homeownership expanding these programs is in the public interest.
Pre-purchase education was extremely popular during the housing boom but, in the latter half of the last decade the emphasis shifted to default counseling and foreclosure prevention. Public funding for HEC has increased considerably over the last few years in response to the housing crisis although future funding levels in the current atmosphere of austerity are unclear.
Last year HUD approved agencies provided one-on-one counseling to 2.1 million clients. More than half - 1.4 million - received foreclosure and default counseling.
Pre-purchase counseling was given to about 245,000 persons and 205,000 received counseling regarding home repair or reverse mortgages.
The remainder of the training was related to rental housing (278,000) or homelessness (37,000.) Of those receiving pre-purchase training about 17 percent were reported as purchasing a home and 26 percent anticipated doing so within three months. HUD data also indicates that its counselors were involved in more than 301,000 loan modifications during the year and provided group education and counseling to an additional 870,000 persons
Despite the increase in public funding, there has been little research on the actual effectiveness of HEC. The MBA study reviewed 18 evaluation studies conducted by others. The results were fairly inconclusive. Some pre-purchase programs were found to reduce the incidence of any form of mortgage default by as much as 34 percent, but many studies found no such effects and at least one study suggests programs may result in accelerated pre-payment of mortgages which is not a positive for lenders. Post-purchase counseling was also found to lead to an increase in loan modifications and a decrease in delinquencies and foreclosures
The study did find significant methodological problems associated with measuring the effectiveness of HEC programs. First, the high degree of variation across programs makes it difficult to evaluate the programs' effectiveness and whether results are generalizable across interventions or populations. The most important problem is one of self-selection. Borrowers who participate in voluntary programs almost certainly differ from non-participants in ways that affect loan outcomes, and while statistical strategies exist for addressing these selection effects, it is compounded by the inability to randomly assign participants to services.
"In practice, the results from education and counseling programs vary significantly. A fundamental issue arises when researchers attempt to estimate the effects of these programs- borrowers who participate in these programs are different from those who do not - in ways that do not show up in the data, which makes it difficult to generate robust research results. In summary, do we know what works? The short answer is 'no'," concluded Collins.