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Does homeownership counseling affect the prepayment and default behavior of affordable mortgage borrowers?

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  • Roberto Quercia

    (University of North Carolina, Chapel Hill)

  • Jonathan Spader

    (University of North Carolina, Chapel Hill)

Abstract

The lack of industrywide data on homeownership education and counseling (HEC) programs has severely limited evaluation. In particular, very little evidence exists on the relationship between HEC completion and loan prepayment, an outcome of interest to both mortgage lenders and consumer advocates. Where mortgage prepayment directly influences the sustainability of affordable mortgage products, it also reflects the ability of underserved borrowers to access lower-cost credit through refinancing. This study uses a uniquely rich data set to examine the impact of HEC completion on prepayment and defaultamongborrowers receivingHECfrom a variety of providers across 42 states. The loans, originated between 1999 and 2003, are observed through the first quarter of 2006, a period in which strong housing appreciation and decreasing interest rates generated substantial refinancing activity. Using a competing risks model of mortgage prepayment and default, we find that HEC programs based on classroom instruction and individual counseling improve a borrower's exercise of the mortgage prepayment option, but that programs based on home study or telephone counseling did not affect borrower behavior. Counseling shows no effect on default propensities. © 2008 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jpamgt:v:27:y:2008:i:2:p:304-325
    DOI: 10.1002/pam.20326
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    Cited by:

    1. Robert Argento & Lariece Brown & Sergei Koulayev & Grace Li & Marina Myhre & Forrest W. Pafenberg & Saty Patrabansh, 2018. "First-Time Homebuyer Counseling and the Mortgage Selection Experience in the United States: Evidence from the National Survey of Mortgage Originations," NMDB Staff Working Papers 18-02, Federal Housing Finance Agency.
    2. Tim Kaiser & Lukas Menkhoff, 2017. "Does Financial Education Impact Financial Literacy and Financial Behavior, and If So, When?," The World Bank Economic Review, World Bank, vol. 31(3), pages 611-630.
    3. Li, Zhiyong & Li, Aimin & Bellotti, Anthony & Yao, Xiao, 2023. "The profitability of online loans: A competing risks analysis on default and prepayment," European Journal of Operational Research, Elsevier, vol. 306(2), pages 968-985.
    4. Ruben Cox & Dirk Brounen & Peter Neuteboom, 2015. "Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 74-112, January.
    5. Ashlyn Aiko Nelson, 2010. "Credit scores, race, and residential sorting," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 29(1), pages 39-68.
    6. 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.
    7. Smith, Marvin M. & Hochberg, Daniel & Greene, William H., 2017. "The effectiveness of pre-purchase homeownership counseling: Evidence from a randomized study," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 36-49.
    8. Erik Hembre & Stephanie Moulton & Matthew Record, 2021. "Low‐Income Homeownership and the Role of State Subsidies: A Comparative Analysis of Mortgage Outcomes," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 40(1), pages 78-106, January.

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