July 2012

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FEATURE Footing the Bill depend on the answer to one key question: Who should pay the costs associated with borrowers' access to independent advice? By Bob Calandra Pre-purchase counseling initiatives have endured numerous setbacks, and the success or failure of current programs may A you'll get 10 "yes" or "absolutely" responses. Now ask those same 10 people if they think pre-purchase coun- seling should be mandated or who should foot the bill for it, and chances are opinions will be all over the map. While you may not get a con- sk 10 people associated with the mortgage industry if they think pre- purchase counseling is a good idea for first-time homebuyers, and most likely likely to fall behind in their pay- ments and have fewer foreclosures. "I think the studies done cently released study by the U.S. Department of Housing and Urban Development (see sidebar on page 37) showed that people who go through some form of pre-purchase counseling are less sensus on the latter two questions, most mortgage industry people seem to agree that first-time buy- ers need and should have some form of pre-purchase counsel- ing to help them understand the rigors and responsibilities of owning a home. It is not only the best way to keep people in their homes and out of foreclosure, but it can save everyone, from broker to owner, money in the long run. Want proof? Well, a re- a few interesting questions, like how should counseling be mandatory and who should pay for the program? Those topics are currently being bandied by people inside the industry as well as those working for private counseling groups and govern- ment agencies. But consumers are also tuning around both pre-purchasing coun- seling and the foreclosure part show that it works," says Rich Harper, SVP of the Consumer Credit Counseling Service of San Francisco. The HUD study does raise ing in looking for homebuyer education," Harper says. "They don't like what they have been reading in the newspapers the last five years, and they don't want to be a statistic. They are saying we want to know about this process because we don't want to end up in a foreclosure." Right now, adds Hernandez, want to be better informed about the home-buying process. "We have a lot of people com- pre-purchasing counseling is the child of the foreclosure crisis. Her fear is that once the crisis passes, homebuyer education will once again become an afterthought. Now with ironclad proof that assisting first-time buyers works, she says it should be standard. "This assistance should move to the front end of the process and should be routinely avail- able," she says. in to the discussion. People like Harper and Colleen Hernandez, CEO of the Washington, D.C.-based Homeownership Preservation Foundation, are find- ing that more and more consumers Subprime Killed Counseling T least to the 1990s when low- he roots of pre-purchasing counseling trace back at and moderate-income families, or people considered high risk, used a counseling class to earn a lower interest rate. And it worked—that is, until the era of subprime mortgages. When the subprime mortgage ing low rates and no-documen- tation mortgages to woo away homebuyers. In fact, mortgage giants Fannie Mae and Freddie Mac were losing so much market share that both decided to re- scind their pre-purchase counsel- ing requirements. "So Fannie and Freddie were losing market share and decided to discontinue homebuyer education when they should have been re- quiring it even more, house of cards collapsed, tak- ing the industry and country The subprime mortgage THE M REPORT | 35 " Harper says. debacle descended on the indus- try in 2006, pre-purchase coun- seling was abandoned because it slowed the approval system. With subprime mortgages, there were no requirements. No one even encouraged homebuyers to consider pre-purchase counseling. No one was asking dicey ques- tions about income. Everyone was getting approved. Realtors and brokers were us-

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