Does Homeownership Counseling Affect the Prepayment and Default Behavior of Affordable Mortgage Borrowers?

Publication Date

March 2008

Author(s)

Jonathan Spader, Roberto G. Quercia

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Homeownership education and counseling programs based on classroom instruction and individual counseling improve a borrower’s exercise of the mortgage prepayment option; programs based on home study or telephone counseling do not affect borrower behavior.The lack of industry-wide data on homeownership education and counseling (HEC) programs has severely limited evaluation. In particular, very little evidence exists on the relationship between HEC completion and loan prepayment, an outcome of interest to both mortgage lenders and consumer advocates. Where mortgage prepayment directly influences the sustainability of affordable mortgage products, it also reflects the ability of underserved borrowers to access lower-cost credit through refinancing.

This study uses a uniquely rich data set to examine the impact of HEC completion on prepayment and default among borrowers receiving HEC from a variety of providers across 42 states. The loans, originated between 1999 and 2003, are observed through the first quarter of 2006, a period in which strong housing appreciation and decreasing interest rates generated substantial refinancing activity.

Using a competing risks model of mortgage prepayment and default, we find that HEC programs based on classroom instruction and individual counseling improve a borrower’s exercise of the mortgage prepayment option, but that programs based on home study or telephone counseling did not affect borrower behavior. Counseling shows no effect on default propensities.