The First-Time Homebuyer Education and Counseling Demonstration
Homeownership is often seen as the cornerstone of the American Dream. However, the homebuying process can be confusing and difficult to navigate for first-time homebuyers. To ease this potentially difficult process, The Department of Housing and Urban Development (HUD) supports and oversees a network of nonprofit and governmental housing counseling agencies. Congress and many researchers and practitioners in the field of housing counseling have asked whether pre-purchase homeownership counseling for higher risk borrowers leads to better borrower outcomes and reduced lender risk relative to no counseling. Prior research has suggested there are benefits of pre-purchase homeownership counseling, but those benefits have been questioned for over 20 years by concerns that those who choose counseling may be different than those that who do not choose to get counseling (selection bias). HUD designed The First-Time Homebuyer Education and Counseling Demonstration as a large-scale randomized controlled experiment to definitively answer the question about the relative efficacy of homebuyer education and counseling for prospective first-time homebuyers.
Using a novel approach, HUD’s Office of Policy Development & Research partnered with 3 national lenders and more than 60 housing education and counseling agencies across 28 metropolitan areas to better analyze the program by implementing The First-Time Homebuyer Education and Counseling Demonstration. Between September 2013 and February 2016, HUD enrolled a diverse sample of more than 5,800 prospective first-time homebuyers in the Demonstration, which is expected to run for 42 months and will collect broad and deep primary and administrative data in order to isolate the impact of HUD homeownership education and counseling on first-time homebuyers.
The Demonstration is designed to provide potential first-time homebuyers with free access to education and counseling that could increase access to credit, build wealth, expand homeownership, and minimize the potential for foreclosure, or to a control group that receives no services. The criteria for participating in the Demonstration included the following:
- Participant resided in 1 of the selected 28 metropolitan areas.
- Participant sought preapproval or prequalification for financing or applied for a home loan.
- Participant would be a first-time homebuyer (defined as not having owned a home in the previous 3 years).
- Participant was a low-, moderate-, or middle-income households (defined as earning less than 120 percent of the local Area Median Income).
Homebuyers who were a part of any downpayment assistance program or any other program that required homebuyer education or counseling were excluded from the demonstration.
After enrolling, participants who were referred to homebuyer education and counseling services were randomly assigned to one of three treatment groups: the “remote” group, which received online education and telephone-based counseling; the “in-person” group, which participated in group workshops and individual in-person housing counseling; or the “choice” group, whose members were permitted their choice of remote or in-person homebuyer education and counseling services; or a control group that received no referral for services. Fifty-five percent of the study participants who were offered homebuyer education and counseling initiated services. Sixty-three percent of study participants who were offered remote homebuyer education and counseling initiated at least one of those services, only about 26 percent of those offered in-person homebuyer education and counseling had done so as of August 2016.
The study goes beyond quantitative data collection and included qualitative analysis as well. A study team hosted 14 focus groups in 4 of the Demonstration cities. Some focus group participants reported that homeownership education and counseling taught them important lessons about the homebuying process, such as properly examining a credit report and score, selecting a home, hiring a real estate agent, choosing and financing a home, negotiating the closing process, and many other financial behaviors. They were also provided with ways to reach their financial goals and cut expenses. Other participants found that learning about home maintenance issues and foreclosure prevention was very helpful. A few participants found it helpful to realize that they were not yet ready to purchase a home — for example, because they had not planned their budget carefully or because they were unable to afford a home in their preferred area. Participants who received services reported being influenced by the perceived value of the services’ effect on their behaviors and decisionmaking.
Results from the focus groups concluded that scheduling conflicts were a primary reason for nonparticipation in homebuyer education and counseling services. Most focus group participants did not know these services were available before participating in the study. Whether they completed services or not, most said the services were or would be helpful and valuable in navigating the home purchase process. The major benefits cited include: increased knowledge and confidence about the homebuying process, terminology used, and long-term costs of homeownership, and the associated stress reduction.
Outcomes for the Early Enrollees After 12 Months
Since full study enrollment occurred from January 2014 through January 2016 and 12 months had passed for the subsample of 2,377 study participants who enrolled through December 2014, the study team was able to analyze select outcomes and presented those preliminary findings in the Early Insights report. The research team tested four short-term outcomes for the early enrollees, and found positive and statistically significant impacts on three of the four outcomes tested: Improved mortgage literacy, Greater appreciation for communication with lenders, and Improved underwriting qualifications.
Improved Mortgage Literacy
The early enrollee treatment group scored an average of 2.8 out of 4 points on a financial literacy quiz in contrast to 2.74 by the control group. While this is a small increase, it indicates that homebuyer education and counseling seem to be improving mortgage literacy.
Early indicators from the study imply that the home buying experience can lead to better overall financial management skills if it includes homeownership education and counseling from a HUD approved housing counseling agency. If funding permits, the effects of homebuyer education and counseling will be documented over the 42-month analysis period to evaluate the effectiveness of the demonstration.
Greater appreciation for communication with lenders
The treatment group members are 3.9 percentage points or 10.4 percent more likely, relative to their control group counterparts, to report that they would contact their lender before missing a mortgage payment. This indicates that homebuyer education and counseling successfully encourage participants to proactively communicate with lenders in times of financial hardship.
Improved credit and underwriting qualifications
The treatment group members are 2.7 percent more likely than the control group to have a credit score of more than 620, which brings their scores above an important underwriting threshold. This outcome may indicate that homebuyer education and counseling is helping study participants correct credit report inaccuracies or repair damaged credit.
No evidence of improved budgeting practices
There is no evidence that treatment group members were more or less likely to compare a budget with their actual spending as compared to control group members. While this finding is surprising since budgeting is emphasized in homebuyer education and counseling and the use of a written budget was high at enrollment in the Demonstration (76 percent) and lower at 12 months (56 percent), it is possible study participants could increase their use of a written budget only when they are about to purchase a home.
While it is still early to assess the mortgage performance metrics for the early enrollee sample, whether a homeowner has been 30 or 60 days late on a mortgage payment at least once in a 12-month period is a critical indicator of homeownership sustainability. Of the 58 percent of the demonstration’s early enrollees who had purchased a home during the 12-month follow-up period, the 30- and 60-day delinquency rates were 3.1 percent and 1.0 percent, respectively. Further analysis of the outcomes presented here, as well as additional outcomes of interest in the three outcome domains (preparedness and search; financial literacy, management and capability; and homeownership sustainability) will be forthcoming in the Interim report expected in early 2018.