“When consumers use a housing counselor, they are more likely to obtain a mortgage and are less likely to default.”

Housing counselors prime borrowers for the costs of homeownership and help them retain their homes. Through either group or one-on-one sessions, counselors assist prospective buyers throughout the mortgage process, including the pre-application phase, the purchase search and the post-closing period.

Traditionally, housing counselors have played a particularly important role in helping borrowers avoid foreclosure by providing advice in default situations, but assistance is now growing in the pre-purchase space. Housing counselors are partnering with mortgage lenders and originators to help borrowers prepare for homeownership, creating home-ready clients who can work with lenders to fulfill their dream of homeownership.

Trained guidance

Housing counselors aid borrowers on a litany of issues, such as managing debt or improving credit, throughout the homebuying process. Counselors can connect consumers with key parties and give them the tools to become successful homeowners. Most importantly, housing counselors can help borrowers avoid foreclosure once they’re in a home.

On the pre-purchase side, housing counselors are trained to provide guidance on downpayment assistance programs and help the consumer understand the types of mortgages that are available. They help to build and maintain credit, and they also advise on the roles of the real estate agent and lender. They begin by getting an understanding of a client’s financial situation (including income, credit and debt) to best offer advice.

Their primary goals are to instill financial literacy; encourage budgeting and responsible financial behavior; provide information on the homebuying process; and prepare buyers for the unique maintenance challenges associated with owning a home. This information can help to promote the long-term sustainability of homeownership.

Counseling may be the best avenue for consumers who have been denied approval for a mortgage and require customized assistance. While there are many reasons that consumers would connect with a housing counselor, the two most common reasons are to find homebuyer assistance programs and to obtain help in qualifying for specific loan programs.

Inexperienced borrowers

Housing counselors are available to and used by people of all demographics, although they tend to be utilized more often by certain groups. African Americans, Hispanics, women and people from lower-income households tend to turn to a housing counselor more often than the general population.

The higher representation for these groups can be explained by their tendency to more frequently include first-time homebuyers or a limited family history of homeownership. This may also explain why these groups are more frequently subjected to predatory lending tactics.

While housing counselors have helped many consumers access homeownership, many Americans are unaware of these services. Additionally, the word “counseling” can provide a negative connotation to some people, as it indicates a problem that needs to be fixed and can be a deterrent to a consumer soliciting the services of a housing counselor.

Tangible value

Housing counselors play a key role for homeowners and renters alike, which is supported by studies that show the positive effects of using their services. The immediate positive effects of counseling are more responsible mortgage shopping and selection, better home maintenance, lower rates of loan default and more stabilized neighborhoods.

Another positive outcome of working with a housing counselor is support for groups who have historically had a harder time becoming homeowners. In general, counselors help to narrow homeownership gaps based on race, gender and income.

When looking at the tangible value that a housing counselor provides, buyers who receive guidance achieve significantly better loan performance than those who do not, all other factors being equal. Using delinquency rates as a primary measurement of loan performance, the Urban Institute’s 2001 study of mortgages originated through Freddie Mac’s affordable housing program found that individuals who received counseling were 19% less likely to have a 90-day delinquency, and they were 34% less likely to do so when they received one-on-one counseling.

A 2012 study from the U.S. Department of Housing and Urban Development (HUD) also showed that consumers who received pre- purchase counseling had better long-term outcomes. Furthermore, the earlier that counseling is started, the sooner people can do an affordability analysis and determine whether buying a home is the right option. A study released in 2013 through NeighborWorks, a nonprofit that supports community development programs, reported similar findings.

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Housing counselors are an essential resource for many consumers during the home purchase and subsequent ownership processes. When consumers use a housing counselor, they are more likely to obtain a mortgage and are less likely to default. Additionally, historically disadvantaged communities are receiving assistance from counselors.

 In an ideal world, as consumer awareness expands on the benefits of housing counseling, anyone who wishes to consult with a counselor may do so. If you or a client wishes to find a housing counselor, visit the website of HUD’s Office of Housing Counseling. Increased knowledge about the value of this service would enable a larger percentage of the population to understand and feel comfortable using these services. ●

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An affordable program typically has household income requirements based on the median income for the property address, which vary by program. For example, a program may allow for up to 80% of the annual median income for an area, or a maximum income of $80,000 in a neighborhood where the median income is $100,000.

“Despite recent market volatility and other pressing concerns among mortgage professionals, there is increased awareness about the need for affordable housing.”

While it is recommended that households spend no more than 30% of their income on monthly rent or mortgage payments, this target can be challenging for lower-income borrowers. One in every three households is burdened with limited disposable income to spend beyond basic needs, with many resorting to credit cards to stay afloat.

The current economic environment is plagued by rising interest rates, rapidly increasing home prices and inflationary pressures that are making it more difficult for low-income residents to afford housing. This combination of factors has served as the perfect storm to damage affordability metrics. In fact, the monthly mortgage payment as a share of median income has risen to 33.8%, according to the Urban Institute, even higher than the peak of 30.9% before the 2007 market crash. Mortgage originators should understand the challenges facing the affordable housing sector and the efforts to rectify these problems.

Challenges mount

This past July, benchmark interest rates reached their highest level in 22 years, contributing to the rapid rise in mortgage rates. As a result, some borrowers have turned to adjustable-rate mortgages, or ARMs, for affordability. In the first five months of 2022, for example, CoreLogic reported that homes purchased with ARMs increased by 75% compared to the same period a year earlier.

At the same time, active home listings are down across the board and there is far less supply in the lower price ranges. Homeowners are staying put instead of trading up so they can avoid having to take on a higher-priced mortgage. Entry-level construction is only a fraction of what it was in the 1970s and there are only 33 affordable homes available for every 100 needed, according to the National Low Income Housing Coalition.

There continues to be a stall in the construction of single-family homes, which remains below the pre-pandemic pace. And while construction of affordable housing has declined, demand has increased as the number of low- to moderate-income households has grown.

On the upside, there are close to half a million multifamily homes in the production pipeline, representing one of the highest numbers since the 1980s. Additionally, there was a 37% increase in multifamily originations (involving properties with five or more units) between the first and second quarters of this year.

This is important for affordable housing as these multifamily units provide additional options for renters. In a tough market, additional multifamily options provide some good news for households locked out of homeownership. In the background of this difficult landscape for affordable housing, there is action being taken on many levels of the public and private sectors. The federal government plays a key role in the affordable housing ecosystem through a variety of agencies and programs.

Answers pledged

The White House has introduced budgetary plans and Congress is attempting to pass affordable housing bills. The U.S. Department of Housing and Urban Development, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture play key support roles for housing assistance as their primary audiences are first-time homebuyers and low- to moderate-income borrowers.

The Biden administration has allocated $10 billion in its current budget for planning and capital grants, which are designed to reduce barriers for affordable housing projects and implement new tax credits. It has also introduced a Housing Supply Action Plan to advance administrative and legislative priorities. Many affordable housing bills are being introduced at the congressional level.

The government-sponsored enterprises, Fannie Mae and Freddie Mac, have set quotas to purchase certain amounts of their business from low- and moderate-income borrowers. More than half of loans to first-time homebuyers are purchased by the GSEs, so they are key players as they return capital to lenders and positively impact interest rates.

Additionally, state and local housing programs provide capital to push forward affordable housing initiatives. Some jurisdictions are teaming up to realize gains.

One example is a joint affordable housing plan developed by eight jurisdictions in Washington, D.C., Maryland and Virginia, with the goal to provide affordable housing and support services to low- and moderate-income residents. Local housing authorities and state housing finance agencies are doing key work to support tangible gains for communities.

In addition to action by federal, state and local governments, there are many efforts being undertaken by private enterprises. There are hundreds of nonprofits nationwide that support the affordable housing market through development, management and financing, as well as engagement in the latest education, training, networking and advocacy opportunities. Beyond nonprofits, there are many banks and lending institutions that have affordable housing wings. These private institutions pledge considerable time and resources to help the creation of affordable housing.

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The rise of interest rates, rapid increases in home prices and a lack of adequate housing supply creates challenges for low- and moderate-income households to afford homeownership, even as the need for affordable housing grows. Despite recent market volatility and other pressing concerns among mortgage professionals, there is increased awareness about the need for affordable housing.

There never seems to be enough affordable housing to meet demand. But it is encouraging that private organizations and governmental bodies are actively looking for solutions, providing hope for the future of affordable housing. ●

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