Housing Counseling: Certain costs, uncertain benefits

What is the role of housing education and counseling in the future housing economy and finance system?

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One of the sacred cows of consumer financial policy, embraced by both major parties, is that an informed consumer will make better choices, and that those choices will lead to better policy outcomes. This logic, as applied to housing, has driven an ever-increasing amount of federal funding devoted to housing counseling. HUD counseling appropriations increased rather dramatically in 1990s, jumping almost 400% between 1991 and 2001. Funding continued to increase. Some of the largest increases were in the years just preceding the peak of the housing market. In just the fiscal year of 2003, HUD funding for housing counseling doubled from about $20 million to $40 million, later increasing to $50 million in FY 2008.

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As Social Science lacks the luxury of conducting natural experiments, we cannot say with any certainty that the housing crisis would have been worse, or how much worse, if we had not spent $100s of millions in housing counseling.  What we can say, with certainty, is that spending a few $100 million on housing counseling did not stop a financial crisis from occurring.

A common rationale for the use of non-profit housing counseling is that such avoids the potential conflict-of-interest that can arise when financial education is being provided by a for-profit business entity.  Unfortunately HUD surveys indicate that HUD-approved non-profit counselors were heavily dependent upon members of the real estate and mortgage industry.  

Almost 80 percent of non-profit housing counselors used mortgage lenders in their workshops, while over 70 percent used real estate agents.  While there is some obvious advantage to using knowledgeable industry representatives to educate, it does raise the critical question of whether housing counselors were doing little more than prepping and steering consumers toward select lenders and real estate agents.

In terms of effectiveness, evaluations of housing counseling have also been mixed, but have generally shown more success than other forms of financial education.  While some researchers have found no effect of counseling on default rates, these researchers did show some improvement in choice of mortgage characteristics, although their measure was somewhat subjective.   Other researchers have found that the form of counseling greatly matters, where intensive one-on-one counseling reduces default but soft-touch counseling was largely ineffective.   Of course part of the effect of intensive counseling could be driven by screening, that is marginal borrowers are dissuaded from the loan due to the time and cost of counseling.

Given the relatively small budget impact and the intense lobbying efforts of housing counseling, federal funding of such is likely to stay.  If we, however, wish to guarantee the effectiveness of said funding, considerable objective evaluation and research must form the basis of its content.  Currently all we know with any certainty is that large amount of tax dollars have been expended with no clear sense of the benefits delivered. 

Mark A. Calabria is Director of Financial Regulation Studies at the Cato Institute.

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