Study Finds Counseling Increases Chances for Loan Modification
Homeowners who participate in default counseling are more likely to have their loans modified, according to a study released Tuesday by the Mortgage Bankers Association (MBA).
According to the trade group’s report, policymakers have increasingly turned to education and counseling as a means to help borrowers succeed as homeowners and to remedy problems that impede their ability to make their mortgage payments.
Homeownership education and counseling has existed in the United States for over four decades, according to the report, however the scope of these services began increasing dramatically only recently. In 2010, housing counselors from HUD-approved agencies provided one-on-one assistance to some 1.4 million homeowners at risk of foreclosure.
About one-third of those counseled pursued a solution related to sustaining homeownership, such as forbearance, refinancing, modification, or reconciling delinquent payments, according to the report. HUD data suggest counseling agencies were involved in more than 301,000 loan modifications last year.
Data from federal regulatory agencies indicates that about 1.7 million loan modifications, including permanent and trial period plans, began in 2010. This means counseling conservatively played a role in about 17 percent of modifications, MBA’s researchers explained.
Of those counseled last year, HUD data shows that 2 percent were foreclosed on and 3 percent declared bankruptcy.
MBA’s study entitled, “Homeownership Education and Counseling: Do We Know What Works?”, was conducted by J. Michael Collins and Collin O’Rourke of the PolicyLab Consulting Group and sponsored by MBA’s Research Institute for Housing America (RIHA).
While the data suggests that counseling leads to an increase in loan modifications and a decrease in delinquencies and foreclosures, the researchers say caution is warranted when interpreting these results. They stress that assumptions may be biased simply because people who choose to participate in default counseling to save their home “almost certainly differ” from people who do not.
Still, the researchers at RIHA concluded that it’s safe to say homeowners who opt for foreclosure prevention counseling stand a better chance of receiving a modification, even if it is because they are more ambitious when it comes to finding a solution.
While post-default counseling has been found to be effective in turning willing, delinquent homeowners back into paying, on-time mortgage borrowers, MBA’s study found that the success rate of pre-purchase education provided to homebuyers may not be so compelling in terms of future mortgage performance.
Some industry experts and behavioral analysts might presume that potential homeowners who participate in education and counseling programs prior to buying a home will be more likely to pay their mortgages on time, but MBA’s researchers say the evidence on this point is not consistent.
Some pre-purchase programs were found to reduce the incidence of mortgage default by as much as 34 percent, but many studies found no such effects, according to MBA’s analysis. At least one study suggests such programs may result in accelerated pre-payment of mortgages, which is actually a negative for a lender’s portfolio.
About 245,000 people received pre-purchase counseling through a HUD-approved agency last year. Among them, about 17 percent were reported as purchasing a home and another 26 percent anticipated buying within three months.
“Over the past decade, concerns have been raised about the extent to which Americans as a whole are sufficiently financially literate to make the complex decisions required in the ever-changing financial marketplace,” said Collins, one of the study’s authors.
According to Collins, in theory, homebuyer education and counseling could help in three ways: 1) formalized programs can lower the costs of obtaining information about how to buy a home and obtain a mortgage; 2) objective, third-party counselors can help clients avoid emotional judgments that may not be in their long-term interest; and 3) such programs can facilitate more efficient transactions, make more information available, and reduce the level of support needed from real estate and mortgage professionals.
But again, Collins reiterated the fact that past studies on the true effectiveness of pre-purchase counseling make it hard to draw any strong conclusions.
“In summary, do we know what works? The short answer is ‘no’,” concluded Collins. He stressed though that this doesn’t mean homeownership education and counseling does not work, but drives home the point that future studies should adhere to more rigorous research designs.
MBA’s study comes on the heels of federal budget cuts that have eliminated $88 million in funding for HUD’s Housing Counseling Program.
The full report from RIHA can be found online.