Housing Counseling Works

Marina L. Myhre, Ph.D.

Nicole Elsasser Watson

Social Science Analysts

U.S. Department of Housing and Urban Development

September 2017

U.S. Department of Housing and Urban Development  |  Office of Policy Development and Research

Housing Counseling Works

This paper briefly summarizes recent research evidence on the modification. The Jefferson et al. (2012) U.S. Department of role of housing counseling to improve housing outcomes for Housing and Urban Development (HUD) study of homeowners

homebuyers, homeowners, and renters.

who sought foreclosure counseling found that counseling helped homeowners obtain a mortgage remedy and become current on Post-Purchase Foreclosure

their mortgages, that early intervention matters, and that tele-Mitigation Counseling

phone counseling provided an important alternative resource for individuals and communities—particularly those living in areas without an in-person counseling provider. Collins and Evidence indicates that housing counseling can be an  effective O’Rourke (2011) reviewed eight earlier studies on the effective-intervention in helping distressed homeowners avoid foreclo-ness of foreclosure intervention counseling—most showed fewer sure. A report by Temkin et al. (2014) sponsored by the Urban completed foreclosures and an increased likelihood of loan Institute reviewed outcomes associated with 240,000 loans, modifications at better terms among counseled borrowers.

one-half of which received counseling under NeighborWorks®

America’s National Foreclosure Mitigation Counseling (NFMC) Early intervention seems to matter. Both the Jefferson et al.

program. Counseled clients were 2.83 times more likely to receive (2012) and Collins and Schmeiser (2010) studies found that bora loan modification and were 70 percent less likely to redefault rowers who received counseling in the early stages of default on a modified loan than were similar borrowers who were not were far more likely to receive a loan modification and/or keep counseled. Counseled clients were given modifications that their homes than those who received counseling when they saved them $732 per year compared with modifications given were seriously delinquent or in foreclosure.

to noncounseled borrowers. Earlier results indicated that the Time spent with homeowners may improve outcomes. Lee monthly payments of households that received modifications (2015) found that longer hours of counseling significantly after counseling were, on average, $267 less than the payments reduced the probability of withdrawing from the loan modifica-of those who received modifications but did not participate tion process. Likewise, a study by Quercia and Cowan (2008) in counseling; borrowers in foreclosure were 70 percent more of the Mortgage Foreclosure Prevention Program in Minnesota likely to get up to date on payments if they received counseling; found that 1 extra hour improved the client’s odds of avoiding and homeowners who received a mortgage modification to

foreclosure by 10 percent and that 8 additional hours doubled resolve a serious delinquency were 45 percent more likely to the odds of avoiding foreclosure.

sustain that modification if it was obtained with the help of housing counseling (Mayer et al., 2009).

Proximity to housing counseling centers may lower the transaction costs of assistance takeup. Lee (2015) found that Other studies also suggest counseling is associated with longer distances to counseling services were associated with the likelihood of obtaining a mortgage remedy. Been et al.

higher rates of withdrawal from counseling. Russell, Moulton, (2013) and Chan et al. (2014) found that foreclosure preven-and Greenbaum (2014) found that Ohio registrants for mortgage tion counseling coordinated by the nonprofit Center for New assistance who lived within 5 miles of a HUD-certified counsel-York City Neighborhoods significantly increased a borrower’s ing agency completed applications for assistance 32 percent of likelihood of receiving a loan modification or coming to some the time. That rate fell to 18 percent for registrants who lived workout other than foreclosure. Collins and Schmeiser (2013) more than 50 miles away from counseling centers.

found that housing counseling predicted a higher likelihood of both receiving a modification and avoiding foreclosure. Coun-Collins and Schmeiser (2013) suggest that the effects of counseling seled borrowers who received modifications were better able duration may be related to the likelihood of counseling takeup.

to avoid repeated default than were comparable uncounseled They found that proximity to mortgage default outreach events borrowers. Comparing subprime mortgagors who contacted a funded by the NFMC program reduced the likelihood of fore-national nonprofit counseling hotline with those who did not, closure, independent of counseling duration. Social networks Collins, Schmeiser, and Urban (2013) found that counseled and neighborhood characteristics may also influence mortgage borrowers were about 6 percent more likely to receive a loan delinquency counseling takeup. An ethnographic analysis of a 1

Housing Counseling Works

HUD-certified housing counseling agency found that working-who enrolled in the Demonstration before December 1, 2014, class homeowners were more likely to learn about housing that is the “early enrollee” sample (DeMarco et al., 2016). Three counseling services through their informal horizontal networks of four 12-month outcomes tested positive and statistically than were middle-class homeowners. Working-class homeown-significant (improved mortgage literacy, greater appreciation ers were also more likely to share relevant information about for communication with lenders, and improved underwriting the loan modification process with their social networks than qualifications). Though the magnitude of the impact estimates were middle-class homeowners, who were embarrassed to be was small, the positive and significant findings for three of the struggling with their mortgage (Owens, 2015). Lee (2015) four outcomes are a good preliminary indication of favorable similarly found that the likelihood of a distressed homeowner outcomes for the full sample and confirmation of the strength seeking counseling services, controlling for distance to the of the randomized experiment and its potential for providing closest provider, declined significantly in neighborhoods with evidence of estimated impact of being offered homebuyer edu-higher median house prices or lower housing burdens. Those cation and counseling on homebuyer preparedness, financial in high-poverty neighborhoods were also less likely to seek literacy and management, and homeownership sustainability.

counseling services.

In 2017, HUD published  The First-Time Homebuyer Education and Counseling Demonstration: Baseline Report, which describes Pre-Purchase and Post-

the study design, implementation, characteristics of the full Purchase (Nondefault)

study sample, and the treatment groups’ experiences with the Housing Counseling

intervention including an analysis of take-up rates and focus group discussions (DeMarco et al., 2017). Initiation rates were good for remote services (63.3 percent) and low for in-person Pre-purchase counseling may help individuals determine if services (25.9 percent), with some differences in completion they are ready for homeownership and connect them with rates for education versus counseling services (higher comple-safer, more affordable mortgage products. Moulton et al.

tion rates for education in the in-person group and higher (2013) analyzed perception bias and mortgage consumption completion rates for counseling in the remote group). Even among low- to moderate-income first-time homebuyers and

when people express a preference for in-person services, they found that nearly one-third underestimated their total house-initiate those services at lower rate (31.5 percent) than do hold debt by $5,000 or more, which was positively associated people who prefer and subsequently take up remote services with higher mortgage consumption. Reid (2006) estimated that (64.3 percent). This report explores reasons for these service 30 to 50 percent of subprime borrowers could have qualified preferences and behaviors and highlights future analyses that for a prime loan before the housing crisis. Prime loans, when will consider the respective impacts of service delivery mode.

well underwritten to low- and moderate-income borrowers, have much lower default rates than subprime loans made

In a natural field experiment of a Tennessee pre-purchase to comparable borrowers, according to Ding, Quercia, and home buyer education program funded by a HUD housing

Ratcliffe (2008).

counseling grant, Brown (2016) found that borrowers who

received education meeting HUD standards had 42 percent

Mandatory pre-purchase mortgage counseling may deter

lower odds of foreclosure compared with the control group, some borrowers from choosing high-risk loans. Agarwal et even though differences in default rates between the two al. (2014) analyzed the effects of a legislative pilot in Chicago groups were not statistically significant.

that mandated HUD-certified counseling for mortgage applicants with low FICOTM scores and applicants applying for risky Eschbach et al. (2016) conducted an evaluation of a statewide mortgages. Low-FICOTM applicants did not materially change homeownership education program in Michigan for a sample their contract choice. Applicants for high-risk mortgages, of 1,561 low- to moderate-income residents. The evaluation how ever, avoided counseling by choosing less-risky mortgages.

showed increases ranging from 26 to 53 percent in self-reported knowledge of the “financial requirements for buying a home Both pre-purchase education and housing counseling

and practices to prevent predatory lending and foreclosure.”

appear to be associated with factors related to  sustainable homeownership. In June 2016, HUD published  The First-Time Li et al. (2016) conducted an extension of the Mayer and Homebuyer Education and Counseling Demonstration: Early Insights Temkin (2013) study of NeighborWorks pre-purchase counsel-report that presented 12-month findings for study participants ing clients. Using a sample of 6,224 loans from 2010 through 2

Housing Counseling Works

2012 for NeighborWorks counseled borrowers, compared

Early research by Carswell (2009) looked at self-reported with a comparison group of 6,224 loans from Home Mortgage changes in behavior from before and after counseling for 1,720

Disclosure Act and CoreLogic, Inc. databases matched using first-time homebuyers 5 years after participating in the City of a two-stage weighting technique. Li et al. (2016) found the Philadelphia’s Down Payment Assistance program. Although NeighborWorks-counseled borrowers had a 16 percent lower the survey was conducted 5 years after the counseling, had 90-day delinquency rate that the comparison group. It is notable a low response rate (24 percent), and found mixed results in that the apparent impact of NeighborWorks pre-purchase

terms of improved self-reported financial performance after be-counseling is smaller than the one-third decrease that Mayer coming homeowners, this study was important in its attempts and Temkin (2013) documented, but the authors attribute much to reach first-time homebuyers after a substantial amount of of that to the tightening of the credit box since the financial time had passed and to measure financial performance after crisis. Li et al. (2016) highlight selection bias and the lack home purchase.

of information on whether any comparison group members

Various pre-purchase counseling delivery methods have received any homeownership counseling through another

been studied. A widely cited study by Hirad and Zorn (2002) provider as limitations to their findings.

found that face-to-face counseling methods were most effective A randomized field experiment sponsored by the Federal Reserve in reducing delinquency among participating homeowners.

Bank of Philadelphia found that pre-purchase homeownership Face-to-face individual and classroom education mitigated counseling had positive long-term effects on credit score, debt delinquency risk by 34 and 26 percent, respectively, and home levels, and delinquencies on debt. No impact on timeliness self-study mitigated risk by 21 percent. After accounting for of mortgage payments was observed (Smith, Hochberg, and

nonrandom assignment and self-selection into counseling

Greene, 2014).

types, however, the authors found that face-to-face classroom education may be more effective than individual counseling.

A study of the 2-year loan performance of more than 18,000

A more recent study of affordable lending outreach programs pre-purchase counseling clients from the NeighborWorks®

by Avila, Nguyen, and Zorn (2013) found comparable rates of America’s network of counseling agencies found that those clients delinquency risk reduction for first-time homebuyers across who received counseling were one-third less likely to become a variety of counseling and education delivery methods, with 90 or more days delinquent in the 2 years since obtaining their classroom, telephone/Internet, and home study each reducing loan than a matched comparison group of similar borrowers who risk by approximately 30 percent. Too few loans received did not receive pre-purchase counseling (Mayer and Temkin, individual counseling for conclusions to be made about its 2013). The study findings held true for borrowers regardless effectiveness in this study.

of loan origination year (October 2007 through 2009) and for both first-time homebuyers and repeat homebuyer borrowers.

Pre- and post-purchase counseling may be combined. In a case study documenting the effectiveness of affordable loan A Turnham and Jefferson (2012) HUD study, which analyzed programs that require homeownership education and counsel-the outcomes of pre-purchase counseling clients 18 months ing, the UNC Center for Community Capital (2012) analyzed after completing counseling, found that 35 percent of the mortgage delinquency rates for more than 15,000 families who participants became homeowners, with only one person falling purchased a home through the Massachusetts’ SoftSecond®

30 or more days behind his or her mortgage payments.

Loan Program from 1990 through 2010. They found that those A review of 10 earlier studies by Collins and O’Rourke (2011) loans performed better than subprime loans and even prime found that pre-purchase counseling can reduce the likelihood loans in Massachusetts. The reasons for the program’s success of mortgage delinquency. Most studies found that pre-purchase seem to be strong underwriting supported by pre-purchase counseling led to positive results, reducing delinquency anywhere and post-purchase counseling for homeowners. Agarwal et al.

from 19 to 50 percent, although some studies reported no effect.

(2010) analyzed the effect of voluntary counseling on low- and The studies examined, however, suffer from methodological moderate-income households and found that improved loan

constraints because none of the studies were randomized

performance is attributable to the type of mortgage contract, experiments; therefore, the effect of the counseling could not budgeting and credit management skills taught by housing be differentiated from characteristics of the individuals who counselors, and active post-purchase counseling to address participated in the counseling services.

early stage delinquencies.

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Housing Counseling Works

Early post-purchase interventions at the time of purchas-pre-approval, or a loan and randomly assign them to three ing or refinancing a home, with or without pre-purchase treatment groups that were offered remote (online  education counseling, also appear to be related to improved outcomes.

and telephone-based counseling), in-person (group workshops Post-purchase counseling helps refinance applicants avoid and individual counseling), or a choice of remote or  in-person higher cost loans. Collins (2014) analyzed variation in state homebuyer education and counseling services, and a control laws regarding risk disclosure and found that refinance ap-group that was not offered any services. Findings from the plications requiring housing counseling made applicants more Early Insights and  Baseline reports are detailed in the  previous likely to reject approved high-cost loan offers. A randomized Pre-Purchase and Post-Purchase (Nondefault) Housing Counsel-field experiment (Collins et al., 2013) that tested free quarterly ing section. The research team completed the 12-month fol-

“telephone financial coaching” for 1 year after home purchase lowup survey , and interim results for the full study sample are found an 11.1-percent reduction in mortgage default rates for expected in early 2018. Final results are expected in mid-2020.

first-time homebuyers with subprime credit histories (credit scores below 680).

Financial Literacy and

Credit counseling is associated with some positive con-Coaching

sumer outcomes.  In a recent review of the National Foundation for Credit Counseling’s national demonstration program, Financial education seems to be related to both financial Sharpen Your Financial Focus, Roll and Moulton (2016) found literacy and financial behavior. 1 Collins and O’Rourke that credit counseling clients have $11,300 less total debt and (2010) reviewed 15 earlier studies of general financial educa-

$3,600 less revolving debt relative to a matched comparison tion programs—most found both knowledge and behavioral

group. Although “clients with weaker credit profiles also demon-improvements. These effects extend to even very low-income strate[d] improvements in payment delinquency metrics,” the individuals. In a randomized field experiment, Reich and statistical matching used to create the comparison group overall Berman (2015) found that a financial literacy course offered to could not control for selection bias, in that clients who received homeless individuals within a nonprofit transitional housing counseling seemed to be more likely to be have experienced program improved both financial knowledge and positive

a financial shock that led to their receiving credit counseling financial behaviors.

services.

Financial literacy may be a factor in the takeup of financial Upcoming Research

advice. A telephone survey conducted in conjunction with the National Financial Capability Study commissioned by the FINRA Investor Education Foundation in 2009 revealed that Additional research is under way to improve the understand-financial literacy was positively correlated with the likelihood ing of the impact of homeownership counseling. Researchers of seeking financial advice from a professional (Collins, 2012).

have employed a variety of methods to examine the effects of Disney, Gathergood, and Webber (2014) expanded on this

homeownership counseling but, to date, have not conducted line of research by accounting for the links between financial a large-scale experimental trial. Research comparing outcomes literacy, an individual’s financial situation, and exposure to for households randomly selected to receive homebuyer

credit counseling. They found that more financially literate counseling against control groups of households that receive individuals are 60 percent less likely to use credit counseling.

information without counseling would make a significant

This finding suggests that credit counseling may provide a contribution to the field.

safety net for those who are less financially literate.

In 2014, HUD  implemented a randomized controlled experi-Financial literacy may be related to responsible financial ment to measure the impact of homebuyer education and

behavior. In a randomized field study of very low-income counseling on a random sample of more than 5,800 low- to housing voucher holders in New York, Collins (2010) found moderate-income and middle-income prospective first-time that a financial fitness course given by a HUD-approved hous-homebuyers for a minimum of 36 months after random

ing counseling agency improved self-reported credit and money assignment. HUD worked with three large national lenders to management knowledge. In addition, savings account balances refer potential customers who applied for pre-qualification, 1 Many housing counseling agencies offer financial literacy, coaching, and credit counseling programs, but unless specified the studies cited were not limited to agencies participating in HUD’s housing counseling program.

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Housing Counseling Works

increased by $362 and the number of credit scores below 680

Mobility Counseling

among participants decreased modestly. Financial education also led to expanded use of credit and lower net worth. For very Housing mobility programs have the potential to encourage low-income households, knowing how to access and manage

moves to opportunity neighborhoods, but few such programs loans may make useful spending, such as automobile financing exist and the body of research on their efficacy is limited that expands job or schooling opportunities, possible. Taking (Cunningham et al., 2010). Some evidence, however, suggests on more debt did not lead to more delinquencies, higher use of that counseling helps low-income families lease up and stay in credit limits, or lower credit scores (Collins, 2013).

opportunity neighborhoods.2

Under certain circumstances, financial sophistication The intensity of counseling is one mechanism through which may be a factor in whether low-income households use

locational goals may be more readily achieved. Shroder (2002) funds for social mobility purposes such as moving, making analyzed data from HUD’s Moving to Opportunity for Fair

home improvements, or saving to buy a house. A randomized Housing demonstration program and found that constraining field experiment in New York by Barnes et al. (2011) found vouchers to low-poverty neighborhoods reduced leaseup by at that financial literacy and having a savings goal significantly least 14 percentage points. Increasing the intensity of counsel-increased the likelihood that cash infusions were used for social ing services to include housing, social, and followup services mobility purposes. Conversely, households that used alterna-predicted nearly closing this gap.

tive banking services were about 25 percent less likely to direct cash infusions toward social mobility.

Further evidence suggests that some mobility counselors have leveraged new ways of increasing counseling intensity Financial coaching that provides a framework for meeting since the desegregation and poverty deconcentration efforts of financial goals seems to be associated with behavioral the Gautreaux program and the Moving to Opportunity (MTO) outcomes related to social mobility, debt paydown, and experiment. The Baltimore Mobility Program (BMP), for example, financial planning. A recent randomized field experiment that pairs intensive mobility counseling and education with the analyzed financial coaching program outcomes (Theodos et requirement that assisted families use vouchers to move to al., 2015) found positive and significant effects on participant low-poverty, racially mixed census tracts for 1 year. Voucher-savings, debt paydown, planning and budgeting, reduced

eligible households participate in large-group informational financial stress, and progress toward financial goals. Collins briefings and workshops and also in one-on-one counseling.

and O’Rourke (2012) similarly reviewed three nonrandomized Beyond providing information about community amenities and financial coaching field studies targeting lower-income clients schools, counselors provide tours of suburban neighborhoods and found coaching was associated with goal setting and with and 24 months of postleaseup home visits to help families positive financial outcomes, such as budgeting, paying bills on remain in high-opportunity neighborhoods. “Second-move

time, and savings behavior.

counseling” assists families who are considering a move out of their original BMP units (Darrah and DeLuca, 2014).

Goal setting combined with external monitoring by a financial coach may help first-time homebuyers avoid default.

Counselors may help some movers reframe residential

A randomized field study by Moulton et al. (2015) found that choices. Darrah and DeLuca (2014) conducted a nonrandom-lower income first-time homebuyers who completed a financial ized qualitative field study of the residential choice frameworks planning module and were contacted quarterly by a financial of those who had moved through BMP compared with eligible coach during the first year of their mortgage were less likely to families who had not yet moved. They found that education and default. Lusardi, Michaud, and Mitchell (2015) also found that counseling broadened the choice set of movers by helping par-financial education with followup had more sizable long-term ticipants imagine thriving in unfamiliar places and highlighting effects on savings than did one-time education programs, the benefits of opportunity-rich neighborhoods. Connecting especially when the education was offered to individuals during movers to local resources like grocery stores and schools helped mid-life peak savings years. This finding suggests that followup movers feel less vulnerable. After participating in the program, to financial literacy programs can help individuals sustain families exhibited higher neighborhood and school expectations acquired knowledge.

and were less likely to discount neighborhood safety problems.

2 HUD housing counseling agencies may provide mobility counseling as part of their services, but unless specified the studies cited did not rely on agencies participating in HUD’s housing counseling program.

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Housing Counseling Works

Research on vouchered families suggests that mobility Avila, Gabriela, Hoa Nguyen, and Peter Zorn. 2013. The Benefits counseling targeting good schools may be especially salient of Pre-Purchase Homeownership Counseling. Working paper.

for families with children about to be of school age. Ellen (Cited with authors’ permission.)

and Schwartz (2015) analyzed a combination of experimental Barnes, Zakia, J. Michael Collins, Cynthia Miller, Nandita and large-scale administrative data sets and found that households Verma, and Karen Walsh. 2011. Save, Spend, or Pay Down

in which the oldest child met the eligibility cutoff for kindergarten Debt: Financial Literacy and Decisions Among Low-Income

were more likely to use vouchers to move to neighborhoods Households. Center for Financial Security Working Paper

with higher-performing schools than were other voucher holders.

2011-CFS.3. Madison, WI: University of Wisconsin-Madison, Housing assistance programs that combine intensive mobility Center for Financial Security.

education and counseling with desegregation and poverty Been, Vicki, Mary Weselcouch, Ioan Voicu, and Scott Murff.

deconcentration requirements may achieve related educational 2013. “Determinants of the Incidence of U.S. Mortgage Loan benefits. DeLuca and Rosenblatt (2009) analyzed moving Modifications,”  Journal of Banking and Finance  37 (10): 3951–3973.

patterns among BMP participants and found that the average family moved from a neighborhood that was 81 percent Black Brown, Scott R. 2016. “The Influence of Homebuyer Education to one that was 21 percent Black. Likewise, the average family on Default and Foreclosure Risk: A Natural Experiment,”  Journal went from living in a neighborhood that was 34 percent poor of Policy Analysis and Management  35 (1): 145–172.

to one that was 8 percent poor. BMP movers also reached

neighborhoods with higher quality schools, as measured by Carswell, Andrew T. 2009. “Does Housing Counseling Change student academic performance and teacher qualifications

Consumer Financial Behaviors? Evidence From Philadelphia,”

(DeLuca and Rosenblatt, 2011; McKoy and Vincent, 2011).

Journal of Family and Economic Issues 2009 (30): 339–356.

Desegregation and poverty deconcentration efforts combined Chan, Sewin, Claudia Sharygin, Vicki Been, and Andrew

with mobility education and counseling may enjoy endur-Haughwout. 2014. “Pathways After Default: What Happens to ing effects with ongoing support. About 80 percent of BMP

Distressed Mortgage Borrowers and Their Homes?”  Journal of families remained in their new neighborhoods 1 to 4 years after Real Estate Finance and Economics  48 (2): 342–379.

moving. Families who made second moves went to neighbor-

Collins, J. Michael. 2010. “Effects of Mandatory Financial hoods that had a somewhat higher minority population and Education on Low-Income Clients,”  Focus  27 (1): 13–17.

were poorer on average but that were still less segregated and less poor than their original communities (DeLuca and

———. 2012. “Financial Advice: A Substitute for Financial Rosenblatt, 2009).

Literacy?”  Financial Services Review  21 (4): 307–322.

Second-move counseling has the potential to further leverage

———. 2013. “The Impacts of Mandatory Financial Education: these results. Later followup with BMP participants revealed Evidence from a Randomized Field Study,”  Journal of Economic that more than 74 percent of families who had moved from Behavior & Organization  95 (November): 146–158.

their initial BMP unit were still living in low-poverty neighbor-

———. 2014. “Protecting Mortgage Borrowers through Risk

hoods 1 to 8 years later (Darrah and DeLuca, 2014).

Awareness: Evidence from Variations in State Laws,”  The Journal of Consumer Affairs  48 (1): 124–146.

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