Abstract
Pre-purchase homebuyer education and counseling have evolved significantly over the past few decades. While there is much support for homebuyer education and counseling generally, particularly in light of the recent mortgage crisis, less attention has been given to the diversity of interventions, targeted homebuyers, and desired outcomes. Pre-purchase homebuyer education is not (nor should it be) a “one size fits all” strategy; rather, drawing from insights from consumer behavior and financial education, this chapter argues that different approaches and content are appropriate to the decision at hand.
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- 1.
Fannie Mae first instituted HEC requirements with their mortgage products in 1994, and partnered with GE Capital to provide telephone HEC to meet this requirement (McCarthy & Querica, 2000). Other GSEs followed suit, adding HEC requirements to particular mortgage products. Freddie Mac’s Affordable Gold program required HEC for borrowers with incomes below 100% of Area Median Income, with loan to value ratios typically above 95%. The FHA removed HEC requirements in 2000, and Fannie Mae removed the HEC requirement in the spring of 2006, followed by Freddie Mac shortly thereafter (Quercia & Spader, 2008).
- 2.
This is the second effort to develop national HEC standards. In 1996, the American Homeowner Education and Counseling Initiative (AHECI), launched by Fannie Mae, developed core curriculum standards for education and certification standards for housing counselors. However, AHECI dissolved in 2004 (Herbert et al., 2008). The new standards can be accessed online at: http://www.homeownershipstandards.com.
- 3.
Per HUD’s Notice of Funding Availability for FY2009: “Applicants that provide homebuyer education must also offer individual counseling that complements the group sessions” (Section III, C-1(a)(1)).
- 4.
In addition to recommending counseling for all borrowers, National Industry Standards also recommend that both education and counseling be provided in person, through face-to-face education workshops and counseling sessions (NCHEC, 2007).
- 5.
For example, 13% of agencies spent on average less than four hours total per HEC borrower, 72% of agencies spent between four and twelve hours per borrower, and 15% of agencies spent more than twelve hours per borrower (Herbert et al., 2008).
- 6.
For example, while only 17% of HUD-certified counseling organizations are NeighborWorks affiliates (or receive funding from NeighborWorks), 41% report using the NeighborWorks curriculum “Realizing the American Dream” in their HEC program, and 30% report NeighborWorks as the main source of training and certification for their housing counselors (Herbert et al., 2008).
- 7.
In a recent analysis of a statewide homeownership program in Florida, Archer et al. (2009) found that between participating jurisdictions, an increase in the proportion of borrowers receiving HEC after signing the purchase contract is associated with an increase in the default rate of program borrowers.
- 8.
In challenging the validity of financial education, Willis (2008) cautions that required HEC often takes place after the borrower has switched from the decision-making mindset to the implementation mindset. In addition to time constraints after a purchase offer or mortgage application is in process, there are sunk costs to consider that reduce the borrowers potential to reevaluate their decision, referred to as “motivated reasoning.” “Once a consumer has committed to a course of action she will be resistant to learning that the decision she just made was poor, particularly because her sunk costs – the efforts she has just put into hiring an attorney and preparing their documents for bankruptcy or into the home purchase or loan application process – will then be for naught” (Willis, 2008, p. 31).
- 9.
For example, while 72% of prime mortgage borrowers reported being “very familiar” with important mortgage terms such as principle and interest and down payment, only 52% of subprime borrowers reported being very familiar with such terms. When asked how much they searched for the best interest rates for their mortgage, 52% of prime borrowers reported searching a lot, compared with only 32% of subprime borrowers.
- 10.
“Although HEC programs were initially introduced by lenders seeking to reduce default risk, the HEC curriculum also instructs borrowers about how to evaluate the relative costs of alternative mortgage products. In this way, HEC completion may improve participants’ abilities to evaluate the potential benefits of refinancing and thereby induce increased refinancing activity during periods when interest rates decline. These incentives similarly apply to the decisions of households considering the costs of moving and originating a new mortgage” (Quercia & Spader, 2008).
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Moulton, S. (2011). Pre-purchase Homebuyer Education and Counseling: Diverse Strategies for Diverse Homebuyers. In: Lamdin, D. (eds) Consumer Knowledge and Financial Decisions. International Series on Consumer Science. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-0475-0_10
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