Study Indicates Pre-purchase Home Owner Counseling Works

The Neighborhood Reinvestment Corporation which does business under the name NeighborWorks was created by Congress in 1978 and its national chain of affiliates function as independent, resident-led, nonprofit community development corporations that include business leaders and government officials on their Boards. Over 230 local organizations make up the NeighborWorks network, many of them active in promoting homeownership through counseling, lending, and other means.  Since its inception NeighborWorks has provided pre-purchase home ownership counseling consisting of eight hours of group education and individual counseling sessions.  The counseling includes an initial orientation and overview of the home purchase process; an in-depth analysis of the potential homebuyer's personal and financial situation; details about house selection, the financing process, the closing, and other key issues of the home buying process and post-purchase concerns, such as home maintenance and community involvement.

Most clients first attend a one- or two-hour orientation session that allows participants to self- select into the different tracks of homebuyer education according to their readiness.  Individual counseling supplements other kinds of homebuyer education by focusing on problems and issues that are specific to a particular homebuyer such as budgeting, credit issues, or developing a savings plan.

While there have been numerous studies of the effects of pre-purchase counseling, the NeighborWorks program has never been independently evaluated until a study released this month by Neil S. Mayer and Kenneth Temkin of Neil S. Mayer and Associates in conjunction with Experian, a credit reporting agency.

Using information on about 75,000 loans originated between October 2007 and September 2009, this study analyzes the impact of NeighborWorks-network-provided pre-purchase counseling on the performance of counseled borrowers' mortgages within two years after they are originated, compared to mortgage performance of borrowers who receive no such services.

Studies of other programs have suffered from selection bias, i.e. that people who enter counseling may have unobserved characteristics in the way that they manage credit that both lead them to counseling and improve (or reduce) their mortgage performance.  Experian employed a procedure called propensity scoring to identify and create a comparison group that has the same observable characteristics as counseling clients. Then the authors estimated program effects with data from Experian that contains extensive detailed information about borrowers' credit practices and behaviors both at origination and prior to receiving their mortgage.  

The data used in this study consist of information on 18,258 clients who received pre-purchase counseling from NeighborWorks organizations at some point between October 2007 and September 2009 and who also purchased a home within this 24-month period. Experian selected a comparison group of 56,298 borrowers with similar observable characteristics to those of NeighborWorks pre-purchase clients.  Credit file information was augmented with county-level data on unemployment rates and MSA-level measures of changes to house prices. 

The study found that NeighborWorks pre-purchase counseling and education works.  Clients receiving pre-purchase counseling and education from NeighborWorks organizations are one-third less likely to become 90+ days delinquent over the two years after receiving their loan than are borrowers who do not receiving pre-purchase counseling from NeighborWorks organizations. The finding is consistent across years of loan origin, even as the mortgage market changed in a period of financial crisis. It applies equally to first-time homebuyers and to repeat buyers.