Do Housing Counseling Results Justify the Taxpayer Expense?

Funding for housing counseling represents a minuscule fraction of total federal spending on housing-related initiatives. Still, some question whether taxpayers are getting the best bang for their buck, particularly as public budgets come under strain.

Housing counseling is funded through a mix of federal and state government funds, consumer and business expenditures. It also is a condition of and funded by several mortgage-related legal settlements, said Brian Sullivan, a spokesperson for the Department of Housing and Urban Development.

HUD's housing counseling assistance budget request for the 2015 fiscal year was $60 million, up 33% from FY 2014. HUD's total requested budget was up 2.6% to $47 billion — meaning general counseling assistance accounts for less than 13 cents out of every $100 of the HUD budget.

Another recipient of federal housing counseling funding is NeighborWorks America, which receives an annual appropriation for Congress. The group helps local communities establish public-private partnerships that are independent, tax-exempt nonprofits, and requested $182 million for the 2015 fiscal year; $132 million for core activities, plus $50 million for foreclosure prevention. That's down from FY 2014, when NeighborWorks requested $136.6 million for core activities and $67.6 million for foreclosure prevention.

"Despite the decline in foreclosure, demand for foreclosure counseling is still strong. For each round of foreclosure counseling grants that we've made since 2008, the demand for money has exceeded the supply by more than two to one in many cases," said NeighborWorks spokesman Doug Robinson.

"Also, although there is a lot of talk about people not wanting to become first-time homebuyers, our homebuyer education and counseling classes are reaching more people, but the money to pay for classes and materials is not keeping up," he said.

The general counseling line item in HUD's 2015 budget does not include spending on the Federal Housing Administration's Homeowners Armed with Knowledge, or HAWK, initiative. The proposed pilot program would offer FHA borrowers discounts on their mortgage insurance premiums if they participate in counseling before closing their loans. Sullivan said HUD is currently retooling HAWK after reviewing feedback on the concept.

Fannie Mae and Freddie Mac require housing counseling (typically provided in conjunction with mortgage insurers) on higher-risk mortgages. This week, the government-sponsored enterprises announced the details of their low-down-payment mortgage products, which in certain instances require borrowers to receive housing counseling.

Cost-Conscious Alternative?

Despite a growing number of studies that support housing finance counseling's ability to boost loan performance, some argue alternatives exist that are just as effective at improving loan performance without the added time and expense of third-party resources.

"I'd rather err on the side of caution and do things that are going to directly reduce risk rather than these indirect, third-party interventions," said Edward Pinto, co-director of the International Center on Housing Risk at the American Enterprise Institute.

Pinto has long believed a residual income test — like what's used to qualify borrowers for mortgages insured by the Department of Veterans Affairs — is a more cost-effective method of providing the true benefit of housing counseling.

"We know what works. Do an ability-to-repay based on residual income," he said. "That's going to work. It's going to protect the consumer at the same time."

Lender-provided residual income tests, like the ones used in VA originations, eliminate the additional cost of third-party counseling. But like counseling, the tests provide more extensive consumer budget analysis than standard underwriting, Pinto said.

VA loans typically perform better than FHA mortgages. While the residual income tests are just one contributor to VA loans performing better than FHA mortgages, it's an influential one, Pinto said.

The FHA does perform some residual income analysis in line with manual underwriting on certain loans, Sullivan noted.

But a more exhaustive, lender-initiated review of additional consumer financial obligations during the underwriting of an FHA mortgage would diminish options for the lower-income borrowers that the FHA aims to serve, said Clem Ziroli, president of Ontario, Calif.-based lender First Mortgage.

If a counselor reviews detailed budget information with a consumer, it's the basis for a choice the borrower makes. If a residual income test is an underwriting requirement that determines loan eligibility, the borrower doesn't have a choice in the matter, he said.

All Counseling is Not Created Equal

A housing counseling study published by Freddie Mac in April 2013 found serious delinquencies within the first three years of origination were lower when borrowers received housing counseling. But it also showed that the different types of counseling are not created equal.

Borrowers who received housing counseling either individually over the phone or one-on-one in person had delinquency rates of 8.05% and 9.34%, respectively. Borrowers who received counseling in either a classroom group setting or through self-guided home study had delinquency rates of 13.3% and 15.08%, respectively.

The quality of housing counseling by organizations or individuals is difficult to statistically measure, but it's an important question when establishing a counseling requirement as part of a loan program, said Peter Zorn, a vice president specializing in housing analysis and research at Freddie Mac, and one of the authors of the study.

Relative to existing agency mortgage requirements, demand for counseling has fallen short at times, Zorn said. Freddie Mac once had a time-consuming face-to-face counseling requirement, but relaxed it somewhat to accommodate a shortage of available counselors, particularly in remote areas, he said.

The same can be said in the reverse mortgage universe, where counseling is a requirement for all loans in the FHA's Home Equity Conversion Mortgage program.

"There are counseling outfits that do solid work spending an average of two hours per borrower. Others are doing it by phone in 30 minutes," said Atare Agbamu, president and CEO of the advisory firm ThinkReverse. He fears phone-based counseling has more consumer fraud risks than in-person counseling, and added that part of the challenge in maintaining quality control can be a lack of funding.

Third-party reviews of consumer budget data is valuable because counselors don't have the same conflict of interest with consumers that FHA lenders do, said Ellen Seidman, a former director of the Office of Thrift Supervision, who's currently a senior fellow at the Urban Institute's Center for Housing Finance Policy Center who co-authored a study entitled, "VA Loans Outperform FHA Loans. Why? And What Can We Learn?"

Requests for counseling in conjunction with loan programs that require it have increased slightly, said Ed Campbell, a vice president of operations at private mortgage insurer Radian.

Certain GSE loan products require third-party housing counseling, which is often paid for by PMI firms. But between 2010 and 2012, Radian went months without fielding any counseling requests for loans, Campbell said. The following year, when a period of record-low rates ended and it became more difficult for lenders to make loans, the company began getting a handful of inquiries per month, he added.

Neither Campbell nor NeighborWorks' Robinson are aware of any PMI firms that have offered borrowers discounts on their coverage in exchange for receiving counseling like the HAWK program aims to do. And they said PMI firms typically do not track whether borrowers received housing counseling when analyzing the performance of their loan portfolios.

Steve Calk, chairman and CEO of The Federal Savings Bank in Overland Park, Kan., is open to testing the MI discount proposed in the HAWK program, but also would like to see further efforts to develop more quantitative insight into whether third-party counseling is worth its cost. Still, he dismisses concerns about counseling requirements prolonging the origination process or whether face-to-face counseling creates an excessive inconvenience for borrowers.

"I'm not worried about the speed with which it takes for the buyer to get a loan," he said. "I'm worried about the accuracy."