The mortgage system is broken and 2010 marks the moment when as a nation we begin the long, difficult job of fixing it. In the process, we need to remember to keep what works. One of those things is homeownership counseling.
In the years preceding the collapse of the housing market, counseling, including educational classes on budgeting, creditworthiness, mortgage financing and home maintenance and repair, grew as an important component of home lending.
Looking back, there is an indication it played a role in maintaining some safety and soundness within the housing finance system. A recent study by the Center for Housing Policy indicates families who attended homeownership education and counseling significantly increased their credit scores. A study by Freddie Mac found that classroom-style homeownership education and counseling reduced mortgage default rates.
Further, low- to moderate-income homebuyers assisted through the Federal Home Loan banks' Affordable Housing Program have experienced lower-than-average rates of foreclosure, according to a review by the Federal Home Loan Bank of Cincinnati. For mortgages originated in 2003-5, average foreclosure rates of 1.29% on AHP-assisted mortgages were less than those for HUD down-payment assistance programs, at 2.9%, or FHA-insured loans, at 4.16%.
About 90% of those receiving assistance with a home purchase through AHP are first-time homebuyers, and the Home Loan banks require first-time homebuyers complete homeownership counseling. David Hehman, the president and CEO of the Cincinnati Home Loan Bank, attributes the program's success to the predominance of conventional fixed-rate mortgages made by community lenders and the high level of homeownership counseling participation. He says homeownership counseling "helps buyers steer clear of the problems that often lead to delinquency and foreclosure."
The nation today is wrestling with the troubling fact that millions of Americans are facing the possibility of losing their homes. The focus of counseling now is on foreclosure prevention. Faith Schwartz, the executive director of the Hope Now alliance, points out that it is counselors who are "on the front lines" advocating for families facing foreclosure.
It is an apt line. The U.S. continues to slog through a tough domestic battle to preserve homeownership. The efforts of Hope Now and similar initiatives will be crucial to economic recovery because they work to bring counselors and other mortgage market participants together to aid homeowners in distress and help as many as possible stay in their homes.
Looking ahead, we must rebuild a housing finance system that makes homeownership education and counseling a central tenet of good lending practices. Ellen Seidman, the former director of the Office of Thrift Supervision, who is now with the New America Foundation, says that responsible home lending means "working with customers to make them more bankable, helping families find the loan that is right for them and investing in their success … by counseling these individuals on the front and the back end of a loan."
Those in the banking and mortgage industry looking to be part of the solution would do well to take Seidman's words to heart. Combined with solid underwriting and ethical marketing practices, homeownership counseling will play an indispensable role in a rebuilt housing finance system.
In the years leading up the housing crisis, counseling turns out to have been a darn good idea. In the years ahead, it will be downright essential.