Evaluation White Paper


Within the category of homeownership, there are four distinct groups that could benefit from financial education. First, first time homebuyers who are obtaining a mortgage and potentially checking their credit scores for the first time could benefit from timely education surrounding this decision point. While purchasing a home for the first time can seem like sound investment, fully understanding the costs and benefits of purchasing when compared to renting is an important comparison for all potential homeowners to perform. With nontraditional mortgages prevalent leading up to the Great Recession, understanding a variety of complex mortgage terms was imperative knowledge for all potential homebuyers.

A second group of potential homeowners are low and moderate income (LMI) homebuyers. Historically, this group has held most of its wealth in housing. While LMI homeowners can have an important asset in their housing wealth, this group frequently has less savings in other types of assets in the event of an unforeseen shock. Since housing wealth is less liquid, this could pose future threats to financial stability. Further, LMI homeowners have shown to be the least numerate, with the lowest levels of financial literacy. As they showcase the highest probabilities of making mistakes, financial education is imperative for this group prior to and after purchasing a home.

A third group that would benefit from financial education are those who are in some stage of foreclosure or are at risk of beginning that process (i.e., those who are past due on a mortgage payment). As large drops in house prices pushed borrowers underwater on their mortgages and the unemployment rate doubled, borrowers had difficulty making mortgage payments. By early 2011, the Mortgage Bankers Association reported that roughly 2 million borrowers were in some stage of the foreclosure process, with another 3.6 million borrowers past due. Thus, these borrowers at risk of losing their homes became a target group for financial education, counseling, and coaching to improve their probabilities of obtaining new mortgage terms.

The fourth group are older homeowners. They may need to live on their home equity using reverse mortgages, sale leaseback or some other financial strategy. The complicity of such financial transactions and their immediate or longer-term consequences for these homeowners suggest that the homeowners themselves could benefit from financial education related to the financing change.

8A. Key Programs and Resources

There are several key programs for homeowners and potential homeowners to obtain financial information and education. First, the federal government, through various departments and agencies, offers some resources either for new homeowners before making their first purchase or to current homeowners struggling to pay their mortgage. For example, the U.S. Department of Housing and Urban Development (HUD) has a web portal containing links to resources to assist existing or potential homeowners. Both HUD and the U.S. Department of the Treasury are responsible for a mortgage adjustment program called the Home Affordable Modification Program (HAMP). Additional government resources for homeowners also can be found at state and local governments such as the Minnesota Housing Finance Agency and the Neighborhood Housing Services of Chicago.

Non-profit organizations, private businesses, and banks also provide financial information and education for home buyers or homeowners who need assistance. MGIC has an online program for home buyers. Freddie Mac has online homeowner resources. U.S. Bank is an example of a bank that includes mortgage and home buying education on its banking website. In addition, home buying courses are supplied through extension programs at universities such as the one offered by Utah State.

8B. Major Topics and Literature Review

For all four groups, an outcome of interest will be mortgage default and eventual foreclosure. Homeowners taking on too much debt or not understanding the loan conditions associated with different types of credit are at risk of losing their homes and tarnishing their future credit reputation. For new homeowners, and even older homeowners entering the home equity market for the first time, knowledge-based outcomes are important to study to make sure they understand what they are doing and make proper initial decisions that will mitigate future default or mistakes. Obtaining and understanding credit and calculating net worth is important when deciding what to purchase, how much to invest in a down payment, the length of the mortgage, and what type of mortgage to obtain (fixed or adjustable rate).

The above concerns are often compounded for LMI borrowers because they are likely to have the lowest level of financial literacy of all new homeowners. If this is the case, they may obtain a mortgage that is difficult to finance with their future income due to a lack of financial knowledge about a housing purchase. Financial coaching may be particularly important for this group, as they may benefit the most from continued, not just one time, financial advice in the event that the household experiences a financial shock.

The number of borrowers under financial distress and at risk of losing their homes reached its highest levels from 2008-2012. Subsequently, federal, state, and local governments, non-profit organizations, and private institutions all began providing forms of financial counseling, education, coaching, and a variety of policies and programs to reduce the bleeding. These range from the federally sponsored Homeownership Affordable Modification Program (HAMP), which aimed to provide relief through mortgage modifications, to informal housing counselors at churches and local nonprofits.

The prime outcomes studied to evaluate the range of financial education programs are default, foreclosure filings, and modifications. As formal changes in the terms of the modification were the primary method through which to improve the borrower’s probability of future repayment, this outcome is most likely to benefit the borrower. Policies that increased modification rates were thought to be “successful.” However, many times borrowers could only receive modifications if they were already in default, meaning borrowers had an incentive to be strategic in their missed payments.

Several evaluations have studied the effects of financial education, coaching, and counseling as they relate to home buying. Moulton et al. (2013) examined the ability of LMI first time homebuyers to estimate their borrowing capacities. They used this self-estimate, compared to their actual borrowing capacity, to determine if the borrowers were over-confident in their ability to pay. They then document that this over-confidence measure is negatively associated with the acceptance of free financial coaching. Their results suggest that over-confident LMI borrowers do not self-select into counseling and must be more directly targeted. In a subsequent study, Moulton et al. (2015) employed a randomized field experiment to show that first time homebuyers required to complete a financial planning education module and subsequently received contact from a financial coach were less likely to miss payments or become behind on their mortgages than borrowers who did not.

Agarwal et al. (2010) studied a voluntary counseling program sponsored by the Indianapolis Neighborhood Housing Partnership, Inc. (INHP) that aims to build credit for and educate LMI households. INHP provides financial education that focuses on budgeting and credit management for LMI borrowers at the time of application. After the initial home purchase, INHP continued counseling these homeowners. Those that completed the program had lower default rates than observationally similar borrowers who did not complete the program, even after controlling for selection into the voluntary counseling program.

Collins and Schmeiser (2013) evaluated the effects of National Foreclosure Mitigation Counseling (NFMC) on missed payments and foreclosure filings for at-risk borrowers. Congress provided $508 million for foreclosure counseling from 2008-2011 through the NFMC, which funded nonprofits to counsel nearly 1.2 million borrowers nationwide. They found that after counseling, borrowers were more likely to miss payments when they compared borrowers who received the counseling due to access to events in their local areas to borrowers who were observationally similar in their demographic and mortgage debt characteristics, but did not live in proximity to national events at the time they were in default. Counseling, however, was found to reduce the likelihood that borrowers experience eventual foreclosure, suggesting that financial advice can be beneficial in times of crisis.

Agarwal et al. (2016) provided a sophisticated analysis of the 2009 HAMP program, which provides servicers with financial incentives to modify mortgages. They used a clever counterfactual technique to determine what would have happened in the absence of the policy. They compared borrowers of owner-occupied properties who were eligible for HAMP to borrowers of investor-owned properties who were ineligible. To develop a further counterfactual, they also compared those with remaining housing debt who were eligible for HAMP to those with remaining housing debt who were ineligible for HAMP. They found that the program increased the rate of permanent modification, and subsequently this decreased the foreclosure rate by a modest 0.48 percent, reducing annual aggregate foreclosures.

8C. Evaluation Practices, Strengths and Limitations

Evaluation of financial education for homeowners is challenging, as borrowers self-select into education. Those borrowers who attend a counseling session or obtain financial education are either (1) the most motivated individuals, who are the least likely to miss payments or (2) those who are already behind on their mortgage, who are most likely to miss payments. Thus, evaluation must overcome the selection into the education. Evaluation in this field comes in three forms.

First, studies used randomized control trials that allow some individuals access to financial education, where others do not. While there can be equity-based concerns when all individuals are not given access to a counseling or education that could benefit their situation, there are often not sufficient resources to allow all access to the education. Thus, a lottery is the most equitable way to allocate the education.

Second, analysis used natural experiments to determine what would have happened to borrowers in the absence of a program. This includes comparing borrowers just above and below program cutoffs, or borrowers with access to a local event at their time of default and borrowers without access to local counseling even at their time of default. These methods allow researchers to create a treatment and control group without having to randomly assign treatment in an experimental setting.

Third, researchers used large administrative datasets to match borrowers with similar observable characteristics based on income at origination, race, geographic area, gender, debt levels, house price, and default at a predefined period. While this allowed researchers to match borrowers who look similar, this method is less desirable than the first two, as unobservable characteristics across those who do and do not engage in financial education can drive the differences in outcomes.

8D. Public Communication

As the mortgage crisis has subsided since the 2007-2009 Great Recession, many lessons continue to resonate in the next decade. Some policy responses centered on financial education for borrowers that proved effective in reducing foreclosures and improving borrower outcomes.