The Undeniable Benefits of Housing Counseling are Worth Every Cent
Monday, May 4, 2015
The case for the widespread use of housing counseling in America's residential housing marketplace is both simple and straightforward: virtually everyone who has a hand in the construction, financing and sale of an American home today is made better by the presence of U.S. Department of Housing and Urban Development (HUD)-certified housing counseling at some point within the process, whether it takes place months before the purchase of a home, or even in the weeks and months after moving day.
Pre- and post-purchase housing counseling performed by HUD-certified professionals leads to better-performing loans made to better-qualified borrowers in practically every economic class, and stronger communities with healthier economies and far fewer foreclosures.
For example, HUD's Pre-Purchase Counseling Outcome Study in 2012 tracked 574 participants at 12-to-18 months after receiving pre-purchase counseling. What the HUD study found was stunning, to say the least: only one out of 574 purchasers had fallen at least 30 days behind on their mortgage payments.
If we are at all serious about strengthening our national housing marketplace, while also expanding the opportunity of homeownership to all who legitimately qualify, then these findings cannot be ignored.
An American housing marketplace that does not support and promote the commonplace use of pre-and-post purchase housing counseling as a fundamental step on the road to homeownership is just asking for trouble.
The fact that lenders and lawmakers do not already make the completion of a HUD-certified housing counseling program a prerequisite to obtaining a mortgage, comparable to a home inspection or homeowner's insurance, is really something of a head-scratcher given the demonstrated propensity for such programs to build more-stable loans that are much more valuable to hold, sell and service. The evidence supporting its tangible positive benefits is nothing short of staggering--literally a slam dunk, if such a thing exists in the world of buying a home. Spend pennies on the dollar for competently administered housing counseling on the front end, and save thousands of dollars of unnecessary toil and avoidable tears down the road.
Then again, maybe that's the problem--the cost. Who would foot the bill for large-scale housing counseling in America? We envision two solutions: one solution orchestrated by the government for the "greater good" of all; the other a "private market pay-for" solution that would not require government support.
As for the government-sponsored solution, consider the following: Homeowners lost over $7 trillion in single-family home value from the peak to the trough of the housing crisis. Would the government be willing to invest between $2 billion to $5 billion of counseling money every year to prevent such a loss in the future? This sounds like a relatively easy cost-benefit analysis. Under no circumstances should the opportunity cost of a counseling program that helps protect consumers while also saving lenders, mortgage investors and guarantors, and even taxpayers, thousands of dollars per loan be judged too rich for the federal government, especially when compared to the $7 trillion of home value that was lost to foreclosures without such an initiative.
Just last week, HUD announced the winning provider recipients of its $36 million in competitive housing counseling grants. Real money to be sure, as HUD tells us that more than 336,000 homebuyers received counseling from its intermediaries in the third quarter of 2014 , but still small potatoes when one considers the more than 660,000 in purchase originations also reported by HUD in the fourth quarter of 2014 alone.
Maybe we should look at our friends at the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). We've made no secret of the fact that things are looking up for Fannie and Freddie, at least when one considers their reported quarterly "profits" in isolation. Profits at Freddie Mac were reported at a quite handsome $8 billion last year alone, half of which came directly from steadily increasing guarantee fees, while the overall risk of borrower default approached historic lows, with an aggregate borrower FICO score of 740--a good deal higher than the national average. In a universe where $36 million is allocated to help counsel the nation's mortgage borrowers, just a thin slice of the taxpayer-financed profit of $8 billion at Freddie Mac alone could counsel the majority of emerging first-time homebuyers (as well as a good number of other non-first-time buyers) at no additional cost to the taxpayer public.
Like so many things in life, the simplest solution is also often the best one.
The Federal Home Loan Banks already seem to have caught on, as just last week, the Federal Home Loan Bank of San Francisco announced the allocation of $9 million to fund matching grants for low- to moderate-income, first-time homebuyers in programs that include a counseling requirement for the borrower in states like Arizona, California and Nevada.
At the risk of sounding more than a little cliché, everyone really does win: the builder of the home, the professional selling the home, the lender financing the home, the insurer safeguarding the transaction, the community surrounding the home, the investor purchasing the mortgage loan or a mortgage-backed security containing this type of home loan, and even the taxpayer by way of the continued conservatorship of Fannie Mae and Freddie, both of which ultimately stand behind the vast majority of all home loans made today - government-insured loans (FHA and VA, for example) and conventional conforming loans purchased by Fannie and Freddie alike.
And finally, let's not forget the new and existing homeowners and the middle-class neighborhoods they're striving to build. HUD-certified housing counseling goes a long way toward reducing the "risk" so often associated with buying a home. Keep in mind, more than nine out of every 10 Americans surveyed, regardless of age, race, gender or economics, still strive to purchase a home at some point in their adult lives --even after the recent upheaval brought by the Great Recession and its related foreclosure crisis.
Perhaps the executives at Freddie said it best in their 2013 study on the benefit of pre-purchase housing counseling:
"We find that [pre-purchase housing] counseling reduces the delinquency rate of first-time home buyers by 29 percent, that counseling's effectiveness is largely insensitive to its method of delivery, and that its effectiveness was greatest in the boom/crisis years of 2005 through 2008. We estimate the dollar benefit of counseling's reduction in delinquency rates to be about $1,000, easily sufficient to pay for its delivery."
This provides the essence of the "private market pay-for" solution. Investors in mortgage-backed securities would surely pay a premium for a "specified pool" of mortgages containing these housing-counseled consumers--given the knowledge that the performance on every loan would be improved by approximately $1,000, as stated by our friends at Freddie. Why not split that improved value with the counseling organizations that provide this public benefit to help pay for the counseling process?
Housing counseling makes homeownership in America a safer bet for almost everyone involved, and there are ways to pay for it that are both practical and cost-effective. What's needed is the results-oriented leadership in both government and the private sector that will, for once, get serious about getting the job done.