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Credit Counseling and Mortgage Termination by Low-Income Households

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  • Hartarska, Valentina M.
  • Gonzalez-Vega, Claudio
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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 help low-income borrowers to handle better debt, and thus prevent default, counseling could also improve these borrowers understanding of their financial positions and thus affect prepayment. This paper shows that evaluations of counseling programs with a narrow focus on default may miss an important effect that counseling may have on prepayment. We use a competing risks framework to study the effects on both default and prepayment of a counseling program implemented in several Mid-West states. Our results indicate that the default hazard was not lower for the graduates of the counseling program but that the prepayment hazard was higher. Overall, counseling seems to affect lenders’ profits but the net effect should be evaluated both in terms of prepayment and default.

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    File URL: http://purl.umn.edu/132518
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    Bibliographic Info

    Paper provided by Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition in its series Proceedings: 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri with number 132518.

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    Date of creation: 2003
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    Handle: RePEc:ags:nc2003:132518

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    Web page: http://www.agfin.ifas.ufl.edu/
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    Keywords: Agricultural Finance;

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    1. Yongheng Deng, . "Mortgage Termination: An Empirical Hazard Model with Stochastic Term Structure," Working Papers _002, University of California at Berkeley, Econometrics Laboratory Software Archive.
    2. John M. Quigley., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Economics Working Papers 93-221, University of California at Berkeley.
    3. 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.
    4. 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.
    5. 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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