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Credit Counseling and Mortgage Termination by Low-Income Households

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  • Valentina Hartarska

    ()

  • Claudio Gonzalez-Vega

    ()

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    Abstract

    Published research on credit counseling and mortgage termination is surprisingly scarce, despite substantial growth in this industry. While the purpose of counseling is to assist low-income borrowers to improve their handling of debt and thereby reduce default, counseling may also improve the borrowers’ understanding of their financial position and thus induce optimal mortgage termination. Using a competing-risks framework, we study the effects on default and prepayment of a counseling program implemented in several Midwest states. We find weak evidence of that the default hazard was lower for graduates of the counseling program, but that their default behavior was more optimal. The prepayment hazard was higher for counseled borrowers, but their prepayment behavior was not more optimal. Overall, counseling seems to affect the lenders’ profits, but the net effect should be evaluated both in terms of prepayment and default. Copyright Springer Science + Business Media, Inc. 2005

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    Bibliographic Info

    Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

    Volume (Year): 30 (2005)
    Issue (Month): 3 (April)
    Pages: 227-243

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    Handle: RePEc:kap:jrefec:v:30:y:2005:i:3:p:227-243

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    Web page: http://www.springerlink.com/link.asp?id=102945

    Related research

    Keywords: credit counseling; low-income housing mortgages; competing risks; default; refinancing;

    References

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    1. John M. Quigley., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Economics Working Papers 93-221, University of California at Berkeley.
    2. Wayne Archer & David C. Ling & Gary A. McGill, 1995. "The Effect of Income and Collateral Constraints on Residential Mortgage Terminations," NBER Working Papers 5180, National Bureau of Economic Research, Inc.
    3. Robert G. King & Alexander L. Wolman, 2003. "Monetary Discretion, Pricing Complementarity and Dynamic Multiple Equilibria," NBER Working Papers 9929, National Bureau of Economic Research, Inc.
    4. Kau, James B, et al, 1995. "The Valuation at Origination of Fixed-Rate Mortgages with Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 11(1), pages 5-36, July.
    5. Yongheng Deng & John M. Quigley & Robert Van Order, 1995. "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," NBER Working Papers 5184, National Bureau of Economic Research, Inc.
    6. John M. Clapp & Gerson M. Goldberg & John P. Harding & Michael LaCour-Little, 2001. "Movers and Shuckers: Interdependent Prepayment Decisions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(3), pages 411-450.
    7. Ambrose, Brent W & Capone, Charles A, 2000. "The Hazard Rates of First and Second Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 275-93, May.
    8. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
    9. Michael E. Staten & Gregory Elliehausen & E. Christopher Lundquist, 2003. "The impact of credit counseling on subsequent borrower credit usage and payment behavior," Proceedings 881, Federal Reserve Bank of Chicago.
    10. Stavros Peristiani & Paul Bennett & Gordon Monsen & Richard Peach & Jonathan Raiff, 1997. "Credit, equity, and mortgage refinancings," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 83-99.
    11. Chaves, Rodrigo A. & Gonzalez-Vega, Claudio, 1996. "The design of successful rural financial intermediaries: Evidence from Indonesia," World Development, Elsevier, vol. 24(1), pages 65-78, January.
    12. Goldberg, Gerson M. & Harding, John P., 2003. "Investment characteristics of low- and moderate-income mortgage loans," Journal of Housing Economics, Elsevier, vol. 12(3), pages 151-180, September.
    13. Kau, James B, et al, 1992. "A Generalized Valuation Model for Fixed-Rate Residential Mortgages," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(3), pages 279-99, August.
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    Cited by:
    1. Courchane, Marsha & Gailey, Adam & Zorn, Peter, 2008. "Consumer credit literacy: What price perception," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 125-138.
    2. Roberto Quercia & Jonathan Spader, 2008. "Does homeownership counseling affect the prepayment and default behavior of affordable mortgage borrowers?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(2), pages 304-325.
    3. J. Collins, 2007. "Exploring the Design of Financial Counseling for Mortgage Borrowers in Default," Journal of Family and Economic Issues, Springer, vol. 28(2), pages 207-226, June.
    4. Matthew Martin, 2007. "A literature review on the effectiveness of financial education," Working Paper 07-03, Federal Reserve Bank of Richmond.
    5. Miller, Margaret & Reichelstein, Julia & Salas, Christian & Zia, Bilal, 2014. "Can you help someone become financially capable ? a meta-analysis of the literature," Policy Research Working Paper Series 6745, The World Bank.
    6. John M. Barron & Michael E. Staten, 2012. "Is Technology-Enhanced Credit Counseling as Effective as In-Person Delivery?," NFI Working Papers 2012-WP-05, Indiana State University, Scott College of Business, Networks Financial Institute.
    7. Andrew Carswell, 2009. "Does Housing Counseling Change Consumer Financial Behaviors? Evidence from Philadelphia," Journal of Family and Economic Issues, Springer, vol. 30(4), pages 339-356, December.

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