Homeownership Counseling: Although Research Suggests Some Benefits, Implementation and Evaluation Challenges Exist
Published: 2011-09-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Homeownership counseling can help consumers learn about buying a home and give them tools to deal with setbacks that could keep them from making timely mortgage payments. The Department of Housing and Urban Development (HUD) approves and provides grants to housing counseling agencies and has also implemented a requirement that borrowers seeking federally insured reverse mortgages through the Home Equity Conversion Mortgage (HECM) program receive counseling before taking out a HECM. The U.S. Department of the Treasury (Treasury) has also implemented a counseling requirement as part of its mortgage modification efforts under the Home Affordable Modification Program (HAMP). This statement discusses (1) what research suggests about the effectiveness of homeownership counseling and the challenges of conducting such research, (2) shortcomings that prior GAO work found in federal agencies' implementation of homeownership counseling requirements, and (3) the status of efforts to establish an Office of Housing Counseling within HUD. In preparing this statement, GAO relied on its past work on homeownership counseling, including a review of research and interviews with federal agency staff on implementing and evaluating counseling programs.
section_title: What GAO Found
paragraphs: The body of literature on homeownership counseling does not provide conclusive findings on the impact of all types of counseling. Recent research on foreclosure mitigation counseling--which helps financially distressed homeowners who are delinquent on payments--suggests that it can help homeowners avoid foreclosure and prevent them from lapsing back into default. Findings on prepurchase counseling--which helps potential homebuyers learn about buying a home and explains the financial responsibilities of homeownership--are less clear. One study concluded that such counseling lowered the default rate for new homeowners, but other studies showed no effect. Efforts to measure the impact of homeownership counseling have been hampered by a lack of data, as well as by challenges in designing studies and creating effective performance measures. Further studies are under way at HUD and Fannie Mae that are designed to overcome some of these limitations. Prior GAO work identified shortcomings in the implementation of homeownership counseling requirements for two federal programs. A 2009 study of the HECM program found that HUD's internal controls did not ensure that counselors were complying with program requirements. HUD later made improvements to the HECM program to address GAO's recommendations. Another GAO study from 2009 found that Treasury did not effectively track whether borrowers required to seek counseling under HAMP actually received it or whether counseling reduced the rate of redefaults. Treasury officials said that they had not implemented a monitoring process because it would be too burdensome for Treasury and mortgage servicers. They also did not plan to assess the effectiveness of counseling in limiting redefaults, in part because they believed that the benefits of counseling on the performance of borrowers with high debt burdens were well documented. GAO continues to believe that monitoring and assessment would provide valuable information on whether the counseling requirement is having its intended effect. HUD is establishing a new Office of Housing Counseling, as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act). According to HUD, the agency is developing a reorganization plan but is unable to estimate when it will be submitted to Congress. Budget constraints could affect the new counseling office. Although the Dodd-Frank Act authorized $45 million per year through fiscal year 2012 for the operations of the new office, HUD has not received appropriations for this purpose. In addition, appropriations for fiscal year 2011 eliminated HUD's housing counseling assistance funds, which are primarily grant funds for approved counseling agencies.
section_title: What GAO Recommends
paragraphs: GAO has made recommendations to HUD and Treasury to improve oversight and evaluation of their homeownership counseling requirements. HUD implemented the recommendations, while Treasury said that implementation would be too burdensome.

section_title: Letter
paragraphs: I am pleased to be here to participate in today’s hearing on housing  counseling. As you know, housing counseling can help consumers  determine whether and when to purchase a home, how to manage a  mortgage, and how to deal with setbacks that could limit their ability to  make timely mortgage payments. This subcommittee’s focus on such  assistance is critical, given that the number of homes in foreclosure and  of homeowners in financial distress remains at historically high levels. In  the second quarter of 2011, more than 3.4 million home mortgages were  90 or more days delinquent or in the foreclosure process, and estimates  indicate that more than one in five mortgage borrowers owe more on their  mortgages than their homes are worth. The Department of Housing and  Urban Development (HUD) approves and provides grants to housing  counseling agencies. It has also implemented a requirement that federally  insured reverse mortgage borrowers participating in the Home Equity  Conversion Mortgage (HECM) program receive counseling before getting  their mortgages. The U.S. Department of the Treasury (Treasury) has  also implemented a counseling requirement as part of its mortgage  modification efforts under the Home Affordable Modification Program  (HAMP).
My statement today is based on recent work we have conducted related  to housing counseling and will discuss (1) what research suggests about  the effectiveness of homeownership counseling and the challenges of  conducting such research, (2) shortcomings that our prior work found in  federal agencies’ implementation of homeownership counseling  requirements, and (3) the status of efforts to establish an Office of  Housing Counseling within HUD.
In preparing the reports on which this testimony is based, we reviewed  research and conducted interviews with appropriate researchers and  agency staff on the impact of homeownership education and counseling,  HUD’s controls over reverse mortgage counseling, HUD’s plans for  creating an Office of Housing Counseling, Treasury’s processes and  documentation for the Financial Education and Counseling Pilot Program,  and Treasury’s implementation of a counseling requirement under  HAMP. We also interviewed selected homeownership counseling  providers and mortgage market researchers as well as HUD and  Treasury officials.
We performed the work for the reports underlying this testimony as part of  our ongoing oversight responsibilities from April 2008 through July 2011.  We performed our work in accordance with generally accepted  government auditing standards. Those standards require that we plan  and perform the audit to obtain sufficient, appropriate evidence to provide  a reasonable basis for our findings and conclusions based on our audit  objectives. We believe that the evidence we obtained provides a  reasonable basis for our findings and conclusions based on our audit  objectives.
subsections: section_title: Background
paragraphs: Homeownership counseling refers to prepurchase and postpurchase  counseling of homeowners and is a subset of housing counseling, which  can also include assistance to renters and homeless populations.  Prepurchase counseling generally refers to counseling for potential  homebuyers to learn about whether and when to buy a home and how to  manage a mortgage, budget for repairs, and fulfill other financial  responsibilities of being a homeowner. Postpurchase counseling primarily  refers to foreclosure mitigation counseling, which focuses on helping  financially distressed homeowners avoid foreclosure by working with  lenders to cure mortgage delinquency but can also include subjects such  as home maintenance. Counseling can take place in person, over the  telephone, via a self-study computer module, or with a workbook, and can  vary in length from a single session to several sessions spread over a  period of weeks or months.
The federal government funds homeownership counseling through a  number of programs at HUD, Treasury, the Department of Defense, and  the Department of Veterans Affairs. Congress has also provided targeted  support for foreclosure mitigation counseling. For example, in recent  years, Congress has appropriated funds to the National Foreclosure  Mitigation Counseling (NFMC) Program, which was designed to rapidly  expand the availability of foreclosure mitigation counseling. NFMC is  administered by NeighborWorks® America, a government-chartered,  nonprofit corporation with a national network of affiliated organizations,  which competitively distributes NFMC funds to other recipients.
section_title: Findings from the Limited Research Available on Homeownership Counseling Are Mixed
paragraphs: The limited body of literature on homeownership counseling does not  provide conclusive findings on the impact of all types of homeownership  counseling. Some studies suggest that foreclosure mitigation counseling  can be effective in improving mortgage outcomes (e.g., remaining current  on mortgage payments versus defaulting or losing the home to  foreclosure). However, findings on prepurchase counseling are less clear.  Research on homeownership counseling is limited in part because of data  limitations and other challenges.
subsections: section_title: Although Research on Foreclosure Mitigation Counseling Suggests Benefits, Results on Other Types of Counseling Are Mixed
paragraphs: Recent research on foreclosure mitigation counseling suggests that it can  help struggling mortgage borrowers avoid foreclosure and prevent them  from lapsing back into default, especially if the counseling occurs early in  the foreclosure process. A 2010 evaluation of NFMC found that  homeowners who received counseling under the program were more  likely to receive loan modifications and remain current on their mortgages  after counseling, compared with a group of non-NFMC borrowers with  similar observable characteristics. Specifically, the authors estimated that  borrowers who received NFMC counseling were 1.7 times more likely to  “cure” their foreclosure (i.e., be removed from the foreclosure process by  their mortgage servicer) than borrowers who did not receive NFMC  counseling. The authors also estimated that loan modifications received  by NFMC clients in the first 2 years of the program resulted in monthly  mortgage payments that averaged $267 less than they would have paid  without the program’s help. Additionally, the study found that in 2008,  borrowers who received NFMC counseling before a loan modification had  an estimated 53 percent better chance of bringing their mortgages current  than borrowers who did not receive premodification counseling. Other  studies of foreclosure prevention counseling have also found that the  timing of the counseling was critical and that the earlier in the foreclosure  process borrowers received counseling, the more likely they were to have  a positive outcome.
The findings on the impact of prepurchase counseling are less clear. For  example, a 2001 study analyzed data on the performance of about  40,000 mortgages made under a Freddie Mac program for low- to  moderate-income homebuyers, a large majority of whom received  prepurchase counseling. The authors compared the loan performance of  program participants who received different types of prepurchase  counseling to the loan performance of participants who did not. The study  found that borrowers who underwent individual and classroom counseling  were 34 and 26 percent less likely, respectively, to become 90 days  delinquent on their mortgages than similar borrowers who did not undergo  counseling. However, subsequent studies have found either no effect on  loan performance or effects that were potentially attributable to other  factors. For example, a 2008 study of about 2,700 mortgage borrowers  found that prepurchase counseling had no effect on a borrower’s  propensity to default. A 2009 study examined a legislated pilot program  in 10 Illinois ZIP codes that mandated prepurchase counseling for  mortgage applicants whose credit scores were relatively low or who  chose higher-risk mortgage products such as interest-only loans.  Although the authors found that mortgage default rates for the counseled  low-credit score borrowers were lower than those for a comparison group,  the authors attributed this result primarily to lenders tightening their  screening of borrowers in response to stricter regulatory oversight.
Additional empirical research on the impact of housing counseling is  under way at HUD and Fannie Mae. HUD’s Office of Policy Development  and Research issued a broad overview of the housing counseling industry  in 2008 and is currently conducting two studies on mortgage outcomes  related to foreclosure mitigation and prepurchase counseling programs.  The foreclosure mitigation study will follow 880 individuals and evaluate  mortgage outcomes 12 months after counseling ends. HUD officials said  that they expected the study to be published in 2012. The prepurchase  counseling study will track 1,500 to 2,000 individuals who receive different  types of counseling (one-on-one, group, Internet, or telephone) or no  counseling. HUD officials said that they expected data collection for this  study to begin in 2012. In addition, Fannie Mae is conducting both  prepurchase and postpurchase counseling studies. According to Fannie  Mae officials, the prepurchase study will track over a 2-year period the  loan performance of borrowers who received counseling prior to  purchasing a home. The postpurchase study will evaluate the impact of  telephone counseling on existing homeowners who receive loan  modifications through HAMP.
section_title: Measuring the Effectiveness of Homeownership Counseling Presents Challenges
paragraphs: Conducting research on homeownership counseling outcomes is  challenging for a variety of reasons, and limitations in the methodologies  used in existing studies make it difficult to generalize the results or  compare outcomes across various studies. According to housing  counseling researchers we spoke with, the primary barrier in the study of  housing counseling is a lack of data. Long-term data on counseling  outcomes are limited because of the difficulty of tracking counseling  recipients after the counseling ends. In addition, many counseling  agencies are hesitant to request sensitive personal information from  clients. One researcher we spoke with told us that the ability to track loan  performance over time is critical to an effective assessment of housing  counseling programs. For this reason, some counseling researchers have  begun working with lenders and mortgage servicers to access information  on the payment status (e.g., current or delinquent) of counseling  recipients and the long-term outcomes of their mortgages. Another  limitation of the current research is the lack of experimental research  design, which is considered the best approach for evaluating differences  in an intervention such as counseling and comparing it to no  intervention. We did not identify any published studies that evaluated  homeownership counseling using an experimental design. For this and  other reasons, researchers have been hesitant to draw firm conclusions  from the published literature. For example, differences among counseling  programs—in terms of curriculum, intervention method (e.g., one-on-one,  telephone, or classroom), level of intervention (e.g., intensity or amount of  time spent counseling), and outcome measures—make it difficult to draw  broader conclusions about the impact of housing counseling.
Establishing meaningful measures of the impact of homeownership  counseling programs is also a significant challenge. Our recent evaluation  of Treasury’s Financial Education and Counseling Pilot Program  illustrates this point. As a condition of receiving grant funds under the  program, grantees are required to report on the results of five  performance goals within 6 months of disbursement and annually  thereafter. We found that some grantees were calculating the results of  their impact measures in erroneous or misleading ways or were not fully  capturing meaningful information, potentially limiting the usefulness of  these data for assessing program effectiveness. For example, one  grantee inaccurately calculated the average percentage increase in  prospective homebuyer savings. According to the grantee’s calculation, a  participant who began a financial education and counseling program with  no savings but subsequently saved $500 was shown to have a 50,000  percent increase in savings. In fact, a percentage increase cannot be  meaningfully calculated from zero savings because any percentage  increase on zero is infinite. We also identified alternatives to the methods  of calculating impact measures that the grantees were using. For  example, we noted that instead of just measuring changes in clients’  savings, it might be advantageous to focus on net savings—that is,  savings minus debt—to provide a more complete picture of an individual’s  financial situation.
Treasury officials told us that they had discussed the specific impact  measures with each grantee in the pilot program but had not provided  guidance on how to calculate the results. We recommended that Treasury  provide additional guidance or technical assistance to the grantees on  how to accurately and meaningfully calculate the results of the impact  measures. Treasury stated that it concurred with the observations in our  report and plans to provide grantees with supplemental guidance on  impact measures before the next reporting deadline.
section_title: Our Work Has Identified Shortcomings in the Implementation of Some Homeownership Counseling Requirements
paragraphs: In prior work, we found shortcomings in HUD’s and Treasury’s  implementation of homeownership counseling requirements for the  HECM and HAMP programs. In 2009, we evaluated HUD’s  implementation of the counseling requirements associated with the  HECM program and found that HUD’s internal controls did not provide  reasonable assurance that counseling providers were complying with the  program requirements. GAO’s undercover participation in 15 HECM  counseling sessions found that while the counselors generally conveyed  accurate and useful information, none of the counselors covered all of the  topics required by HUD, and some overstated the length of the sessions  in HUD records. For example, 7 of the 15 counselors did not discuss  required information about alternatives to HECMs, and 6 of the 15  counselors overstated the length of the session. HUD had several internal  controls designed to help ensure that counselors conveyed required  information to prospective HECM borrowers but had not tested the  effectiveness of these controls and lacked procedures to help ensure that  records of counseling sessions were accurate. Because of these  weaknesses, some prospective borrowers may not have received all of  the information necessary to make informed decisions about obtaining a  HECM.
We recommended specific changes that HUD should make to improve  the effectiveness of the agency’s internal controls so that they provided  reasonable assurance of compliance with HECM counseling  requirements. Since our report, HUD has implemented our  recommendations by creating additional internal controls and guidance  for counselors on how to comply with program responsibilities, as well as  developing a “mystery shopping” initiative to better evaluate compliance  among HECM counselors.
In 2009, we also evaluated Treasury’s implementation of the foreclosure  mitigation counseling requirements of HAMP. We found that Treasury  did not plan to systematically track borrowers with high debt burdens, who  were required to obtain foreclosure mitigation counseling, to determine  whether they actually received counseling or if it was effective. Treasury  officials told us that they made this decision because they did not want to  deny a loan modification to borrowers who successfully made modified  payments during a 90-day trial period but did not obtain counseling.  Treasury also did not want to delay modifications under the program until  servicers had arranged to coordinate with counselors to track whether  borrowers obtained counseling. We noted that without knowing whether  borrowers who were required to obtain counseling actually did so or  evaluating the performance of counseled and noncounseled borrowers,  Treasury would not know whether the requirement was meeting its  purpose of reducing redefaults among borrowers with high debt burdens.
We recommended in 2009 that Treasury consider methods of monitoring  whether borrowers required to receive housing counseling as part of  HAMP modifications did receive it and seek to determine whether the  counseling did limit redefaults. Treasury staff said in 2010 that they had  considered options for monitoring the proportion of borrowers that  obtained counseling but had determined that implementing a monitoring  process would be too burdensome for Treasury and mortgage servicers.  Additionally, Treasury officials said they had no plans to assess the  effectiveness of counseling in limiting redefaults, in part because they  believed that the benefits of counseling on the performance of borrowers  with high debt burdens were well documented. We continue to believe  that monitoring the extent to which borrowers receive counseling and the  redefault rates for counseled and noncounseled borrowers would provide  valuable information about whether the counseling requirement is having  its intended effect.
section_title: HUD is Creating a New Office for Its Housing Counseling Activities, but Funding Is Uncertain
paragraphs: To enhance consumer protections for homebuyers and tenants, the  Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) requires HUD to establish an Office of Housing Counseling.  This office is mandated to perform a number of functions related to  homeownership and rental housing counseling, including establishing  housing counseling requirements, standards, and performance measures;  certifying individual housing counselors; conducting housing counseling  research; and performing public outreach. The office is also mandated to  continue HUD’s role in providing financial assistance to HUD-approved  counseling agencies in order to encourage successful counseling  programs and help ensure that counseling is available in underserved  areas.
Currently, HUD’s housing counseling program operates out of the  Program Support Division within the Office of Single-Family Housing.  HUD supports housing counseling through the division in two ways. First,  it approves and monitors housing counseling agencies that meet HUD  criteria and makes information about these agencies available to  consumers on HUD’s website. According to HUD officials, as of August  2011, about 2,700 counseling agencies were HUD-approved. Second,  HUD annually awards competitive grants to approved agencies to help  them carry out their counseling efforts. HUD’s housing counseling  program provides funding for the full spectrum of housing counseling,  including prepurchase counseling, foreclosure mitigation counseling,  rental housing counseling, reverse mortgage counseling for seniors, and  homeless assistance counseling. HUD-approved agencies report to HUD  on the number and type of service interactions (e.g., counseling sessions)  they have with clients. Self-reported data on homeownership counseling  conducted by these agencies indicate that service interactions for  foreclosure mitigation counseling rose from about 171,000 in 2006 to  more than 1.4 million in 2010, while service interactions for prepurchase  counseling declined from about 372,000 to about 245,000 over the same  period.
Besides these two main functions, the Program Support Division and  other HUD staff perform other counseling-related activities, some of which  are similar to the functions the Dodd-Frank Act requires of the new  counseling office. For example, HUD has developed standards and  protocols for reverse mortgage counseling, certifies individual reverse  mortgage counselors, is conducting research on the impact of  homeownership counseling, and recently launched a public awareness  campaign on loan modification scams.
A working group within HUD is in the process of developing a plan for the  new counseling office. According to HUD officials, the primary change  needed to create the new office is the reassignment of staff who spend  time on housing counseling activities but also have other responsibilities.  In July 2011, we reported that HUD expected the new office to consist of  approximately 160 full-time staff members, but HUD has indicated more  recently that the office may be considerably smaller. In order to move  forward with the establishment of the office and the appointment of a  Director of Housing Counseling, HUD must submit a reorganization plan  to Congress. According to a HUD official, HUD is still developing its  proposal for the new counseling office and is unable to estimate when it  will be submitted to Congress.
HUD officials told us that the new counseling office would have  advantages over their current organizational structure. They indicated that  having dedicated resources, staff, and leadership would raise the profile  of the housing counseling function and help the agency build a more  robust capacity in this area. One official noted that getting sufficient  information technology resources for housing counseling had been  difficult and said that a separate counseling office might be able to  compete more effectively with other parts of the agency for these  resources. HUD officials also indicated that the new office would be  organized to help the agency better anticipate and respond to changing  counseling needs and improve interaction with counseling industry  stakeholders. For example, the officials said that the new office would be  organized around functional areas such as policy, training, and oversight,  making it easier for industry stakeholders to direct their questions or  concerns to the appropriate HUD staff. Additionally, HUD officials told us  that the office would work with the Bureau of Consumer Financial  Protection’s Office of Financial Education to coordinate the housing  counseling activities of both organizations.
Mortgage industry participants, consumer groups, and housing  researchers we spoke with were supportive of the new housing  counseling office and believed that it offered opportunities to enhance  HUD’s role in the housing counseling arena. For example, some of the  consumer groups stated that the office could help standardize counseling  practices and publicize best practices, further elevating and  professionalizing the counseling industry. In addition, representatives  from several of the consumer groups and researchers with whom we met  stated that the office could help enhance coordination among counseling  agencies by providing opportunities for improved training, networking, and  communication. Furthermore, they said that the office could potentially  support improved data collection for research on the impact of housing  counseling.
Budget constraints could affect the establishment of the new counseling  office and reduce the scale of HUD’s housing counseling activities.  Although the Dodd-Frank Act authorized $45 million per year through  2012 for the operations of the new office, HUD had not received any  appropriations for this purpose as of August 2011. In addition,  appropriations for fiscal year 2011 eliminated HUD’s housing counseling  assistance funds, which are primarily grant funds for approved counseling  agencies. HUD officials said they planned to award and obligate about  $10 million in unspent fiscal year 2010 counseling assistance funds in the  2011 fiscal year. However, the officials said that some counseling  agencies had already reduced the level of services they provided due to  the elimination of the fiscal year 2011 funds. Housing counseling groups  we spoke with said that the cuts in HUD funding, which they use to  leverage private funds, ultimately could result in fewer counseling  services for prospective and existing homeowners unless private funds  make up the difference.
Chairman Biggert, Ranking Member Gutierrez, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy  to answer any questions you may have at this time.
section_title: Contact and Staff Acknowledgments
paragraphs: For further information on this testimony, please contact me at (202) 512- 8678 or cackleya@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this statement. Key contributors to this testimony include Steve  Westley, Assistant Director; Randall Fasnacht; Alise Nacson; and Emily  Chalmers.
section_title: Related GAO Products
paragraphs: Financial Education and Counseling Program. GAO-11-737R.  Washington, D.C.: July 27, 2011.
Mortgage Reform: Potential Impacts of Provisions in the Dodd-Frank Act  on Homebuyers and the Mortgage Market. GAO-11-656. Washington,  D.C.: July 19, 2011.
Troubled Asset Relief Program: Treasury Actions Needed to Make the  Home Affordable Modification Program More Transparent and  Accountable. GAO-09-837. Washington, D.C.: July 23, 2009.
Reverse Mortgages: Product Complexity and Consumer Protection  Issues Underscore Need for Improved Controls over Counseling for  Borrowers. GAO-09-606. Washington, D.C.: June 29, 2009.
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