Okay, now that there is talk of reducing down payment requirements and possibly loosening credit standards to help increase the lending pool, we turn to ways to minimize some of the risk associated with this type lending.
One of the tried and true methods is through the use of required buyer/borrower counseling from a qualified housing counseling service. This raises the age old debate; does housing counseling really benefit the homebuyer (Counseling Debate)?
It would seem, based on some studies, that the default rate among those who received this counseling is lower than that of buyers who did not receive counseling. This would lead one to believe the counseling helped. But, do we know if these counseled buyers were already a little better prepared by the mere fact they knew enough to take advantage of the counseling offered.
What about cultural differences, economic differences and language barriers? Do first time homebuyers really get a good understanding of their responsibilities of owning and financing a home, as opposed to renting one? Have they grown up in a home owned by their parents, giving them a somewhat better understanding of all that goes into owning and maintaining a home? It’s one thing to talk or read about the responsibilities of owning and paying for a home, in counseling; it’s another thing to actually live and have to deal with it when times get tough.
Counseling is better than no counseling. Much depends on the counselor, the delivery of the information and the interest of the potential homebuyer to learn. Rather than just receiving a counseling certificate, I’d like to see the prospective home buyer pass a test upon completion comprised of specific questions about their understanding of their responsibilities of owning and paying for a home. Such a test can be administered online by an independent testing service with the results available to any lender to which the consumer may apply for a mortgage after completion. No passing grade; no mortgage.
One other thing, success is how results are measured. There are varying levels. If the industry agrees to implement programs and products to help increase homeownership then the success of such programs depends on expectations for performance.
What are the rewards expected from taking the additional risk. Do we expect that these higher LTV loans, and/or those underwritten with eased guidelines, will perform as well as the higher down payment, stronger credit QM loans we’ve been originating recently? If so, we may be in for some disappointment (as we unfortunately learned in the past).
However, if we go in with realistic expectations, maybe we’ll find that these programs may help in the long run, with continual tweaking of the requirements and guidelines as we learn.
If, by instituting these new programs, we can lend to more consumer households that may not have become homebuyers under current programs, and say 10% fail, that means we helped 90% of these households realize their dream of homeownership, and, as importantly, become future second and third time buyers.
As long as we set a realistic expectation, and the proper reserves for anticipated failures, overall these programs may then be considered a success. If we expect that these loans will perform exactly as the standard QMs we are now originating, we may be doomed to repeat history…and that ain’t a good thing.
Stay diligent my friends.