Hitting home: Advice improves homeownership outcomes

By Aldo Svaldi
The Denver Post

The more financial counseling consumers receive before buying homes, the better the chances they will make sound purchases and avoid defaulting on their mortgages.

That’s the logic behind the thousands of hours and millions of dollars spent each year on homeownership counseling. But until recently, there weren’t any rigorous scientific studies to prove the point.

“Counseling works, even during the worst of times,” said Marvin Smith, an economist with the Federal Reserve Bank of Philadelphia, who was in Denver on Tuesday to present his findings on the topic.

One weakness plaguing earlier studies on homeownership counseling is that they didn’t control for self-selection, Smith said. People who obtained counseling, not unlike students who get after-school tutoring, were predisposed to do better.

The Philadelphia Fed study resolved that flaw by randomly assigning participants into two groups. A control group received the standard two-hour pre-purchase class, while a study group also received one-on-one counseling.

The study, which started during the depths of the housing downturn in 2007, tracked 632 borrowers for four years. Both groups reported improved credit scores, lower overall debt burdens and fewer late payments, Smith said.

But those who received one-on-one counseling did better on those measures. They waited longer to purchase a home, taking more time to shore up their finances, and bought homes at a lower price.

Borrowers a decade ago, many of them novices, had to deal with a complex mix of loan products and with mortgage brokers more focused on loan volumes than quality.

Lenders, assuming they cared, became reluctant to require borrowers to take classes out of fear they would go elsewhere.

Credit standards are now much tighter, and government-backed lending programs that offer lower down payments usually require some instruction.

Smith said that if consumers don’t understand what they can afford, they are more likely to accept messages urging them to stretch beyond what is prudent.

Many people aren’t comfortable exposing intimate financial details to a counselor in a face-to-face session, but the advice that results tends to be more effective.

“We do one-on-one sessions, but we rarely have people taking us up on it,” said Shannon Peers, director of housing counseling at Brothers Redevelopment in Denver. “When you drill down to that level, you can really help.”

Brothers Redevelopment sponsors four homeownership counseling sessions a month, and the hope is that front-end advice will head off trouble on the back end, Peers said.

“About half the people are now there because they want to be” and not because the lender requires it, he said. And of those who take a class, 90 percent say it is of value.

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