The following is a print feature that first appeared in MReport's February 2015 issue, available now.
A whole generation of consumers has emerged from the Great Recession with varying degrees of damage to their personal finances and credit.
With today's tighter underwriting and regulatory requirements, these families will need credit remediation and rehabilitation in order to re-enter the housing market. Whether a first-time homebuyer, a current borrower seeking refinancing, or an at-risk borrower pursuing a loan modification, anyone seeking a mortgage will find housing counseling services to be a significant help in attaining and maintaining homeownership.
Research shows that borrowers who participate in housing counseling have better repayment and lower default rates and find that these programs often provide a pathway to sustainable homeownership. To get the housing market moving in 2015, it's time for mortgage companies and nonprofit credit counseling agencies to come together, pool their resources and decades of experience, and collaborate to help the millions of people who have been denied access to buying a home.
It's not just a new approach. It's the right approach.
Statistics show that more than 7 million households lost their homes to foreclosure or short sales when the financial crisis hit in 2008. This group includes millions of people who now have flawed financial histories damaging their credit and locking them out of the mortgage market. Others face a variety of other barriers: unemployment (or underemployment), too much student loan debt, divorce, and bankruptcy. Additionally, there's now a group of people younger than 35 that—at least up to now—has decided to postpone the purchase of their first home.
With this ready market of people seeking help, collaboration is the key. Lenders are adept at finding those who want to own a home but cannot qualify. Credit counselors have the resources to educate consumers about the financial realities of homeownership and what it takes to become qualified borrowers.
It's a perfect match.
By developing a new kind of service that enables mortgage companies to identify and refer willing, unqualified applicants to a third party, we can use the same technology to match homeowners with credit counseling agencies approved by the Department of Housing and Urban Development (HUD). And by aligning the interests of homeowners, mortgage companies, and nonprofit credit counselors, we can open up homeownership for those previously shut out of it.
"We need to find new ways to help the people who have stumbled financially qualify for a loan," said Stacey Jackson, CEO of IE Settlement Services, a San Francisco-based company that provides solutions for a variety of settlement services to mortgage lenders. "I'm always looking for ways to add value for my clients, and this is one way I can and also bring them a potential base of new clients."
Separate studies in recent years by Freddie Mac, NeighborWorks America, and HUD have found that financial counseling has significantly reduced delinquency rates among first-time homebuyers. In fact, would-be borrowers seek help in droves from nonprofit housing counselors. The National Foundation for Credit Counseling (NFCC) reports that its members provided pre-purchase housing counseling to about 236,000 people over the last five years, including a whopping 73,000 in 2014 alone.
"When a potential homebuyer fails to qualify for financing, working with a nonprofit housing counseling agency may be the difference that helps them reach their goal while becoming better prepared for the financial responsibilities of homeownership," said Susan C. Keating, the NFCC's president and CEO.
Other nonprofit executives echo Keating's opinion.
"The work of housing counseling agencies is based on the simple idea that educated homebuyers are more successful homeowners," said Danielle Samalin, VP of Homeownership Initiatives at Housing Partnership Network and president of Framework Homeownership, an online homebuyer education platform.
"Our goal is to give consumers the knowledge they'll need to cut through the complexity of buying a home, one of the most important steps they'll take in life," she added.
"Over the last five years, HPN's network of counseling agencies has helped 79,000 households prepare for homeownership, with 14,000 of these households going on to become homeowners," Samalin also said. "Studies—and our own experiences—have shown that housing counseling and education supports both homebuyers and lenders and helps to strengthen the overall housing market."
There are more than 1,100 nonprofit credit counseling organizations across the country, many of which have the scale, expertise, and services to handle the large volume of applicants that mortgage companies might refer to them.
Large organizations, such as Money Management International, ClearPoint Credit Counseling Solutions, and GreenPath, provide housing counseling nationally while others offer it regionally.
A typical pre-purchase housing class at one of these agencies often is a day-long event. As part of these classes, candidates learn about the total costs of ownership, from monthly mortgage payments to utility bills, home maintenance fees, and even lawn-care costs. They cover essential household expenses like food, gas, car loans, and payments on other debts. They also teach consumers to put away some savings.
A Unified Technology Platform
While this collaborative approach is very attractive, it will be crushed under its own weight unless execution is cost-effective and barriers for entry are minimal. The variety of stakeholders within each segment—originator, housing counselor, consumer, and respective proprietary systems—demands a neutral, unified communications platform to ensure efficiency, transparency, and accessibility across multiple parties.
The same challenge of moving data, documents, and communications among disparate parties to facilitate processing foreclosure alternative applications may be leveraged to assist originators, housing counselors, and consumers in the new marketplace.
Mortgage companies participating in this partnership stand to see their pool of applicants increase significantly. There are three other key benefits for any mortgage company:
- Better Performance, Fewer Losses. As mentioned before, research shows that people who work with housing counselors have better repayment and lower default rates and suggest that these programs offer a pathway to sustainable homeownership.
- Borrower Loyalty. By referring applicants to credit counselors, the company is offering them a way to help build financial capability and security. They are also building institutional loyalty by showing a commitment to help candidates achieve their goals.
- Improved Underwriting and Credit Quality. This program addresses the challenges posed by regulatory requirements, including the Community Reinvestment Act and the securitization market. It also offers a way to receive an objective third-party assessment of the ability to repay.
Is There Really Any Downside?
This approach offers valuable benefits to lenders, nonprofit credit counseling organizations, and, most of all, consumers. But there are also some barriers that need to be addressed.
Potential borrowers must understand that they need to genuinely improve their finances and spending habits to qualify for a mortgage, as well as closely follow whatever type of budget that credit counselors recommend. Naturally, lenders will want to see a return on their investment. If they send potential borrowers counseling agencies and few, if any, qualify for a loan, this approach simply won't work. And nonprofit credit counseling agencies need to know that mortgage companies are making concerted efforts to send them a steady stream of candidates before giving these applicants high priority.
Consequently, mortgage companies and counseling agencies can develop strong working relationships that help consumers learn how to finally qualify for mortgages, assist lenders in developing a larger pool of responsible borrowers, and boost the number of people credit counselors serve.
The old way of doing business is not going to help grow the housing market. We have the expertise and the resources to make this new approach work. Rather than accepting the status quo, it's time to consider a new solution that works for mortgage originators, nonprofit credit counselors, and individuals who want to own a home.