With record levels of borrowers behind on payments and roughly 4 million homeowners likely to face foreclosure over the next 12 months, the housing market is under stress not seen since the Great Depression. To help avoid a repeat of this crisis, fundamental changes in the home buying process should be considered.
One idea is to require financial education for anyone who receives amortgage. A recent report from Zillow indicates that the typical borrower spends more time researching a car purchase than a home loan.
Informed homebuyers can make more educated choices regarding mortgages and avoid inappropriate or potentially predatory ones. They are better prepared for the responsibilities of homeownership and able to develop and maintain a budget that helps insulate them from temporary financial shocks such as short-term job loss. They are also less likely to end up in foreclosure.
There is evidence to support the value of mortgage education. Research from the Federal Reserve Bank of Atlanta found that people who received pre-purchase financial education were significantly less likely to wind up in the types mortgages that triggered the housing crisis. Moreover, data from the National Foreclosure Mitigation Counseling program shows that the vast majority of homeowners in foreclosure and seeking aid did not have any pre-purchase homebuyer education.
So who would pay for all this training? I'd suggest that the costs be covered largely by the borrowers themselves. Yes, this would add to the overall cost of the mortgage, but it's a small price to pay for such a significant investment.
It would be a sea change for the mortgage finance industry, so some important questions would need to be addressed first. Should the requirement only be for first-time homebuyers or everyone obtaining a mortgage? And should lenders share the cost of financial training since they'd benefit from fewer foreclosures and delinquency?
We need to start reframing the home purchase process to advance sustainable, long-term homeownership. Perhaps if consumers had been required to pay for homeownership education, just as they must pay for the home appraisal, they would have better understood the loans they were getting themselves into and this crisis never would have happened.
