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Prepurchase Counseling Effects on Mortgage Performance: Empirical Analysis of NeighborWorks® America's Experience

IntroductionNeighborhood Reinvesimeni Corporation-doing business as NeighborWorks® America (hereafter, NeighborWorks)-has a nationwide network of affiliates offering prepurchase homebuyer counseling throughout the country'. Although the network members started to provide prepurchase counseling in 1978, the effect of these sendees on mortgage performance has not yet been formally evaluated.Using information on about 75,000 loans originated between October 2007 and September 2009, this study analyzes the effect of NeighborWorks-network-provided prepurchase counseling on the performance of counseled borrowers' mortgages within 2 years after they are originated compared with the mortgage performance of borrowers who receive no such services.1The study hypothesis is that education and counseling help buyers sustain their mortgages by avoiding mortgages with unexpected increases in interest rates over time; borrowing loans within their means to repay; promoting strengthened and realistic budgeting; improving financial management, including maintaining necessary reserves for home maintenance or income downturns; and raising borrowers' understanding of the terms and obligation of mortgage instruments. Those receiving prepurchase counseling may have avoided many of the deceptive practices by mortgage lenders that contributed to delinquency and default in the later 2000s.Our research deals directly with a primary challenge to previous work on the effects of prepurchase counseling: selection bias. The concern is that people who enter counseling may have unobserved characteristics in the way they manage credit that both lead them to counseling and improve (or reduce) their mortgage performance. Without a way to control for the "unobservables," statistical analysis could yield an overstatement (or understatement) of the effect of counseling in statistical estimations. This analysis mitigates the effect of selection bias in two ways.First, Experian, a credit-reporting agency that partnered with us on this study, employed a procedure called propensity scoring to identify and create a comparison group that has the same observable characteristics as counseling clients. Second, we estimated program effects with data from Experian that contain extensive detailed information about borrowers' credit practices and behaviors both at origination and before receiving their mortgage. Many of these oft-unobservable characteristics are, in fact, observed in specific operationalized terms in our study. Given these methodological elements, our findings are based on data and methods that control for factors that may influence both an individual's choice to select counseling and their mortgage performance, significantly reducing any selection bias. We find that prepurchase counseling retains its highly significant and substantial effect after biasing factors have been removed.These means of dealing with selection and missing variables biases are not perfect. It is possible (with anything but a strictly randomized experiment) that unobservable factors are still playing a role in homebuyers' selecting to participate in the prepurchase counseling program-factors that may correlate with the decision to enter counseling and that may bias our analysis of counseling's effect. In addition, as discussed later in the article, there are measures of loan characteristics and of noncounseling assistance to buyers that our study does not account for, which, again, if correlated with entering counseling, could bias these results. Our study, however, does address many of the credit history, attitude, and financial capability variables, which numerous other researchers have highlighted as being prominent among the unobserved factors that might bias their studies. Our research, by drawing on credit data not previously available to others, addresses one of the major limitations of past work.NeighborWorks Prepurchase Counseling ProgramsCongress created NeighborWorks in 1978 to revitalize Americas underserved communities. …