The Three Percent Solution

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Th e M Rep o RT | 19 Feature A whole generation of consumers has emerged from the Great Recession with varying degrees of damage to their personal finances and credit. With today's tighter underwrit- ing and regulatory requirements, these families will need credit remediation and rehabilitation in order to re-enter the housing market. Whether a first-time home- buyer, a current borrower seeking refinancing, or an at-risk borrower pursuing a loan modification, any- one seeking a mortgage will find housing counseling services to be a significant help in attaining and maintaining homeownership. Research shows that borrow- ers who participate in housing counseling have better repayment and lower default rates and find that these programs often provide a pathway to sustainable home- ownership. To get the housing market moving in 2015, it's time for mortgage companies and non- profit credit counseling agencies to come together, pool their resourc- es and decades of experience, and collaborate to help the millions of people who have been denied access to buying a home. It's not just a new approach. It's the right approach. Statistics show that more than 7 million households lost their homes to foreclosure or short sales when the financial crisis hit in 2008. This group includes millions of people who now have flawed financial histories damaging their credit and locking them out of the mortgage market. Others face a variety of other barriers: unemployment (or underemployment), too much stu- dent loan debt, divorce, and bank- ruptcy. Additionally, there's now a group of people younger than 35 that—at least up to now—has decided to postpone the purchase of their first home. With this ready market of people seeking help, collaboration is the key. Lenders are adept at finding those who want to own a home but cannot qualify. Credit counselors have the resources to educate consumers about the fi- nancial realities of homeownership and what it takes to become qualified borrowers. It's a perfect match. By developing a new kind of service that enables mortgage companies to identify and refer willing, unqualified applicants to a third party, we can use the same technology to match homeowners with credit counseling agencies approved by the Department of Housing and Urban Development (HUD). And by aligning the interests of homeowners, mort- gage companies, and nonprofit credit counselors, we can open up homeownership for those previ- ously shut out of it. "We need to find new ways to help the people who have stumbled financially qualify for a loan," said Stacey Jackson, CEO of IE Settlement Services, a San Francisco- based company that provides solutions for a variety of settlement services to mortgage lenders. "I'm al- ways looking for ways to add value for my clients, and this is one way I can and also bring them a potential base of new clients." The Opportunity S eparate studies in recent years by Freddie Mac, NeighborWorks America, and HUD have found that financial counseling has significantly re- duced delinquency rates among first-time homebuyers. In fact, would-be borrowers seek help in droves from nonprofit hous- ing counselors. The National Foundation for Credit Coun- seling (NFCC) reports that its members provided pre-purchase housing counseling to about 236,000 people over the last five years, including a whopping 73,000 in 2014 alone. "When a potential homebuyer fails to qualify for financing, working with a nonprofit hous- ing counseling agency may be the difference that helps them reach their goal while becoming better prepared for the financial respon- sibilities of homeownership," said Susan C. Keating, the NFCC's president and CEO. Other nonprofit executives echo Keating's opinion. "The work of housing coun- seling agencies is based on the simple idea that educated home- buyers are more successful home- owners," said Danielle Samalin, VP of Homeownership Initiatives at Housing Partnership Network and president of Framework Homeownership, an online home- buyer education platform. "Our goal is to give consumers the knowledge they'll need to cut through the complexity of buying a home, one of the most important steps they'll take in life," she added "Over the last five years, HPN's network of counseling agencies has helped 79,000 households prepare for homeownership, with 14,000 of these households going on to become homeowners," Samalin also said. "Studies—and our own experiences—have shown that housing counseling and education supports both homebuyers and lenders and helps to strengthen the overall housing market." There are more than 1,100 nonprofit credit counseling organizations across the country, many of which have the scale, expertise, and services to handle the large volume of applicants that mortgage companies might refer to them. Large organizations, such as Money Management International, ClearPoint Credit Counseling Solutions, and GreenPath, provide Four Different Levels of Service To help borrowers, nonprofit counselors should implement four different levels of counseling and financial education programs. The level of service will vary based on how much help the each applicant needs. Level 3 Short-Term Issues Completion Time: 1–6 months Applicant Time: 5–10 hours counseling, follow-up on targeted issues Outcomes: Resolution of credit report items, pay off debt, document income Applicant Type: Negative credit report items, debt, or employment issues thin-file borrowers Level 4 Long-Term Rehabilitation Completion Time: 12–18 months Applicant Time: 15–20 hours of comprehensive counseling, follow- up on major issues Outcomes: Higher credit scores, lower DTI, basic savings, stable employment, steady income Applicant Type: Damaged credit, high DTI, poor employment history Level 1 Basic Education & Counseling Completion Time: Individual pace Applicant Time: Online education class (2–8 hours) or 2 hours of counseling Outcomes: Basic knowledge/skills to manage homeownership costs Applicant Type: First-time borrowers, down payment assistance program, thin-file borrowers Level 2 Quality Assurance Completion Time: 1–3 weeks Applicant Time: 2–4 hours counseling Outcomes: Independent third-party assessment and documentation of ability to repay Applicant Type: Non-QM, portfolio or securitized loans risk mitigation, self-employed borrowers, 3-percent down payment Source: Home LoanPort

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