Real Estate: Making Mortgage Loan Counseling Mandatory

More than 13 years ago my then-fiancée and I spent a long Saturday and Sunday sitting in the living room of a big house on a hill in Westchester County. Alongside us were other engaged couples who listened as a priest held forth from the front of the room. Today I have scant recollection of what was actually said during the process known as Pre-Cana, in which couples who are to be married in a Roman Catholic church must participate in a workshop-style preparatory course. I surely didn't agree with everything he had to say. But I do remember thinking that in an age of Vegas-style quickie weddings, when celebrity magazines pay big dollars for photos of stars’ hurried nuptials, there is something to be said for placing a speed bump on the way to the altar, and for an intermediate step that calls for some thought and reflection.

There's a similar process that new homebuyers can engage in. It's called prepurchase counseling, and it has a similar aim: to get would-be buyers to better understand and reflect on the commitment they're about to make. The goal, as with Pre-Cana, is to help everyone make sure they're not getting into a situation they might regret.

Homebuyer counseling has been around since at least the 1960s. It's generally available from consumer credit counseling agencies, and it's often required for borrowers who are participating in specialized loan programs for low-income buyers. Writing in NEWSWEEK a few weeks ago, my colleague Temma Ehrenfeld and I described how the ongoing foreclosure crisis has led to the creation of a presidential commission to try to improve Americans' financial literacy. For new homebuyers, prepurchase counseling can be one way to boost this knowledge.

But with thousands of Americans now facing the possibility of foreclosure, the mortgage industry is focusing on folks who are already in trouble. Most counseling programs are designed for existing homeowners who have fallen behind on their mortgages and need professional help to sort out their options and advocate on their behalf with a mortgage lender. In an ironic twist, The Wall Street Journal recently reported that many of the people being hired for this job are out-of-work mortgage brokers, some of whom sold homeowners the problematic loans in the first place.

But in the wake of the credit crisis, it's clear that more homebuyers would benefit from counseling before they sign that mountain of mortgage documents.

Typical is the program offered by Acorn Housing, a company focused on community reinvestment. Would-be homebuyers attend a group session where an instructor goes over the basics of real estate purchase. Attendees fill out some financial information forms, give a counselor permission to pull their credit reports, and sign up for a one-on-one session. "We'll look at your income and expenses, figure out what you can afford, figure out if you have problems and what would be a strategy to fix it," says Bruce Dorpalen, Acorn's director of housing. While some people who come in for counseling are right on the brink of a home purchase, Acorn recommends that homebuyers come in before they even start house hunting, in order to give themselves time to fix mistakes on their credit reports and gain a better understanding of what they can really afford. Oftentimes these counseling programs are paid for via grants from the U.S. Department of Housing and Urban Development and provided to consumers at low or no cost.

For Qiana Johnson, who bought her first home—a studio condo in Chicago's Lakeview neighborhood—earlier this spring, the time spent in prepurchase counseling was well spent. At an evening seminar a real estate attorney, a lending officer and a real estate agent walked participants through the homebuying process. They talked a bit about the risky types of mortgages that "predatory lenders" sometimes offer to naive homebuyers. In her one-on-one session, Johnson and her counselor went over her credit report and talked about issues such as private mortgage insurance payments and how the monthly escrows for taxes and insurance would be different for a house versus a condominium. Johnson, a university librarian, had done a lot of her own homework on homebuying before taking the seminar, so none of this was a revelation. "I heard a lot of things that I knew already, but it was a great kind of reminder," she says.

Does it work? Steven Hornburg is an independent housing consultant who has examined decades' worth of existing research into the programs' effectiveness. He says the research doesn't offer unambiguous proof that buyers who undergo counseling are less likely to have trouble paying their mortgages, but the programs still appear beneficial. "There's not any one piece of research that solidly demonstrates an impact, and there's been very little really solid research done, but a lot of it is suggestive of an impact," he says. More evidence may be coming soon; Hornburg says HUD is currently conducting a long-term study to see how much benefit prepurchase counseling delivers to buyers.

From a buyers' standpoint, however, these programs are a great way to boost your homebuying and mortgage IQ before signing on to the biggest financial commitment of your life. "A lot of the special programs require counseling beforehand, but there are people out there who are going to be applying on the regular market who will benefit from prepurchase counseling," Hornburg says.

Just like getting out of a marriage, getting out of a bad mortgage can be extremely costly, in both financial and emotional terms. It's a commitment best entered into soberly and advisedly, and if counseling helps achieve that, it can be worth spending an evening or two back in the classroom.