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Pre-purchase Counseling Is Getting Better All the Time

SVP of Models, Mission & Research Robert TsienPre-purchase financial counseling may reduce, by an average of 29 percent, the likelihood of a first-time homebuyer becoming seriously delinquent, according to the initial findings of a new analysis of 38,000 Freddie Mac mortgages made to first-time homebuyers and low- to moderate-income families between 2000 and 2008.

By contrast, an earlier study of similar mortgages Freddie Mac financed in the 1990s estimated that pre-purchase counseling for first-time buyers reduced serious delinquencies by an average of 19 percent. In other words, the new findings suggest that pre-purchase counseling’s effectiveness has been steadily increasing over the years.

What’s more, the new analysis [the current working paper is available here] estimates the reduction in delinquency risk also means effective pre-purchase counseling for first-time homebuyers can save the lending industry an average of $1,000 per loan.

The study was presented at an April symposium organized by the Federal Reserve Board by Freddie Mac senior economic researchers Hoa Nguyen and Gabriela Avila and Vice President of Housing Analysis & Research Peter Zorn. They studied affordable mortgages that required originators to provide pre-purchase homeownership counseling for most borrowers either through one-on-one counseling co, classroom counseling, home study or the Internet/telephone. (The sample did not allow for an analysis of one-on-one counseling’s impact.)

The economists found that the number of 90-day delinquency rates were reduced by an average of 33 percent through home study, 32 percent by phone or Internet counseling, and 28 percent by classroom counseling. Since the margin of error was plus or minus five percent, it would seem all three types of counseling are equally effective for first-time homebuyers.

The findings about phone/Internet counseling are especially striking since the earlier study found no evidence that phone counseling reduced credit risk at all. This may be especially significant because Freddie Mac is rolling out an online CreditSmart® tutorial for current, and aspiring, homeowners. CreditSmart is Freddie Mac's award-winning financial literacy curriculum that helps teach families to manage their money, build credit, and make wise financial choices.

The new findings also suggest pre-purchase counseling has a significantly larger impact on 90-day delinquency rates among first-time homebuyers compared to repeat buyers. For repeat borrowers, counseling reduced serious delinquency rates by six percent.

The bottom line: pre-purchase financial counseling is a smart move for first-time homebuyers and the industry that finances their mortgages.

Pre-purchase Counseling Benefits: Going Up?

Pre-purchase Counseling2001 Analysis2013 Analysis
  Est. Reduction in 90-Day Delinquency Rates
Individual 34% N/A*
Classroom 26% 28%
Home Study 21% 33%
Phone/Internet < 5%** 32%
Overall Impact 19% 29%

Source: Freddie Mac

*   Insufficient sample size
** Not statistically significant


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