Proliferation of Personal Finance Tools and Disclosure Transparency Rules Empower Buyers

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

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Traditional forms of pre-purchase housing counseling are certainly valuable in today’s consumer financial marketplace. For homeowners in default, a good housing counselor can be invaluable and enable families to stay in their homes or at least maneuver a softer landing after experiencing financial distress. Notwithstanding, I imagine the future of housing education and counseling to look very different.

Perhaps due to the five-year housing crisis and its cautionary note on homeownership, I believe more consumers will be further motivated into an era of self-education.

These empowered buyers will draw on a new wealth of data and technology available in the marketplace. Regulations appear to be accompanying this transition with greater emphasis on clarity and transparency in consumer disclosures such as the two RESPA reform efforts in the last four years designed to better clarify the loan application and closing process.

While banking-related technology formerly consisted of basic transaction functions – transfers, bill payments, balance inquiries, and the like – the past few years have seen an evolution in the sophistication of available technology.  

Websites such as www.mint.com offer individually tailored personal finance management tools, including estimates of reasonable mortgage payments based on an individual’s financial profile.   

Mortgage lenders, such as Quicken Loans and PNC, also offer mortgage specific applications to help homeowners calculate mortgage payments, budget for monthly housing-related expenses and make mortgage payments online. These products offer personalized financial advice. 

Whereas in the past homeowners would have had to call up their loan officers for such information, they can now simply sit down to their computer or pull out their smart phone.

Taking homebuying counseling a step further, Wells Fargo, through their Neighborhood Lift program is providing qualified borrowers up to $30,000 in forgivable downpayment assistance grants provided they attend eight hours of financial education classes offered by a nationwide non-profit organization.  

One cautionary note: Given FHA’s dismal experience with down payment assistance programs between 1996 and 2008, there remains little doubt  that borrowers who contribute their own funds toward the downpayment are more likely to not default than those borrowers relying on assistance.  

Zillow is perhaps one of the leading innovators in online financial technology.  Zillow offers a variety of data points and tools to help consumers evaluate homes on the market or properties in their neighborhood. Measurements provided by Zillow, such as rent ratios, allow consumers to calculate the break-even point for renting verses mortgage expenses for a given area.  These kinds of tools inform homeowners about the market conditions and trends for their region.

Even given the existing products available, it is clear that there is still consumer demand for new educational tools, pointing to an expansion of this type of consumer self-education technology in the future.  A study conducted by Market Rates Insight this year found that nearly 70 percent of consumers surveyed indicated that they desired and would utilize enhanced online banking technology including credit score reporting tools.

Beyond the litany of on-line tools available to consumers there is also the pre-purchase housing counseling.  Today there is one government mortgage product that carries a counseling requirement – the FHA-insured Home Equity Conversion Mortgage (HECM).   Given that HECM users must be at least 62 years of age, there has been particular focus on the efficacy of the counseling requirement.  Like all government programs, the counseling program became somewhat of a target as the so-called “tax and insurance” defaults of HECM participants began to mount.

Detractors of the HECM program blamed the lack of detail provided through the counseling on the importance of HECM participants needing to pay homeowners insurance and property taxes.  Given that HECM participants have paid off their initial mortgages (and annually paid property taxes and homeowners insurance) others argued that HECM participants should have been very familiar with these requirements regardless of the level of specificity provided during the counseling.

There is also the sticky subject of who pays for the counseling?  Should it be lenders, consumers, or government sources?  Relative to HECMs, consumer advocates were concerned about the “arm’s reach” issue of the person providing the HECM product also paying for the counseling.  

Some legislators and advocates have also proposed requiring homebuying counseling for all prospective borrowers (and not just those wanting a reverse mortgage), but the question remains – who then would pay the cost?

For many years HUD has provided homebuying counseling grants to more than 2,000 non-profit agencies.  And early in the housing crisis, Congress appropriated additional funds to NeighborWorks America to offer foreclosure prevention and loan modification advice to millions of borrowers in distress.

Perhaps regulators, as well as lenders, have identified the need to proactively educate consumers on mortgages and other consumer financial products. It is likely that consumers have the corresponding appetite to use educational tools and homebuying counseling, especially after the recent housing and foreclosure crises, where many homeowners found themselves in mortgages they could not afford or sustain in the long-term.

Brian Montgomery is the Vice Chairman of The Collingwood Group LLC.

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