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Credit Counseling and Mortgage Termination by Low-Income Households

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  • Hartarska, Valentina M.
  • Gonzalez-Vega, Claudio

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.

Suggested Citation

  • Hartarska, Valentina M. & Gonzalez-Vega, Claudio, 2003. "Credit Counseling and Mortgage Termination by Low-Income Households," 2003 Regional Committee NCT-194, October 6-7, 2003; Kansas City, Missouri 132518, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  • Handle: RePEc:ags:nc2003:132518
    DOI: 10.22004/ag.econ.132518
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    References listed on IDEAS

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    1. Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 99-117, September.
    2. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-331, May.
    3. Paul Bennett & Gordon Monsen & Richard Peach & Stavros Peristiani & Jonathan Raiff, 1997. "Credit, equity, and mortgage refinancings," Economic Policy Review, Federal Reserve Bank of New York, vol. 3(Jul), pages 83-99.
    4. Kau, James B. & Keenan, Donald C. & Muller III, Walter J. & Epperson, James F., 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. 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 279-299, August.
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