The housing industry apparently is flirting with sparking another crisis even before the fallout from the last crisis is successfully cleaned up.
The New York Times recently reported that lending standards are loosening up, allowing homeowners, in some cases, to take out 100% financing for homes. As well, many complicated products, like piggyback mortgages and home equity lines, are again being offered to borrowers.
More ominously, a survey recently released by Zillow Mortgage Marketplace found that one-third of homebuyers are ill-prepared to get a mortgage. The Wall Street Journal, quite rightly, has already sounded warning alarms, opining that "guardrails" need to be put in place to ensure that easy access to financing does not lead us into another housing disaster.
Given what the country has experienced in the housing crisis, it is imperative that the whole mortgage industry, which includes lenders, investors, counselors, regulators and homeowners, be vigilant about formulating new lending standards to produce sustainable homeownership. It is equally imperative that we learn from the lessons of the crisis.
Fortunately, there is a possible solution that could mitigate another housing crisis. There is a growing body of evidence documenting the benefits of independent pre-purchase education from a counselor who helps homeowners understand the terms and ultimate budget obligations of their mortgages, making it much less likely that they will default on their loans. As the chief executive of the Homeownership Preservation Foundation, a nonprofit that provides housing counseling to homeowners via our national HOPE Hotline, I can speak with considerable authority on the perils of consumers not fully understanding the magnitude of their debt obligations.
HUD last May released a study of a diverse group of 573 individuals who completed pre-purchase counseling from various HUD-approved agencies as a prelude to buying a home. Eighteen months later, 35% of the control group had purchased homes and only one individual had fallen more than 30 days behind on their loan payments. No one in the group had a major derogatory event on a mortgage account within this period.
NeighborWorks America, a national network of 240 community development and affordable housing organizations, in March released a study revealing that homebuyers who receive pre-purchase counseling and education are one-third less likely to become seriously delinquent on their loans. A recent analysis from investor Freddie Mac closely mirrored NeighborWorks' finding, reporting that pre-purchase counseling may reduce the likelihood of first-time homebuyers becoming seriously delinquent by an average of 29%. Freddie Mac's analysis also reports that the reduced delinquency rates resulting from pre-purchase counseling saves lenders an average of $1,000 per loan. Given that the cost of a typical counseling session is significantly lower, the return on investment is pretty substantial.
While more research needs to be done, the preliminary evidence documenting the benefits of pre-purchase counseling is quite compelling and could have potential government support. The Bipartisan Policy Center's Housing Commission in its February report, for example, cited data from a 2001 Joint Center for Housing Studies working paper, which found that borrowers who received pre-purchase education and counseling were between 23% and 41% less likely to become 60-days delinquent than those who were not counseled. The Housing Commission concluded that counseling and financial education "for those who may need it" should be part of the formula for sustainable homeownership.
All of the data above makes an excellent case for pre-purchase counseling. However, there is also an innate reason for it, one that will probably resonate with anyone who has purchased a home. Buying a house is typically the investment of a lifetime, and one that can be very emotional – it's where people plan to start their lives, raise their children or settle into retirement. An overzealous broker or that "must-have" backyard can often cloud good financial judgment. To encourage safe drivers, Drivers Ed was introduced. Pre-purchase counseling and education could serve a similar safety purpose for the housing industry.
A loan gone sour does not benefit anyone: not the lender, not the investor and certainly not the people who lose their homes to foreclosure. Making prudent mortgage loans is one instance where the interests of banks and consumers are fully aligned, and pre-purchase counseling is an affordable vehicle by which all interests can potentially be served. It could serve the banking industry well to continue researching this seemingly effective option.
Colleen Hernandez is president and chief executive officer of the Homeownership Preservation Foundation, a nonprofit organization, funded by a variety of government, industry and philanthropic sources, which offers free foreclosure prevention counseling to consumers. HPF has, on occasion, done some contract pre-purchasing counseling for banks and the author previously oversaw major pre-purchase counseling initiatives when she was executive director of the Kansas City Neighborhood Alliance.