A first-of-its-kind study uses THDA home loan data to identify the impact of homebuyer education classes on default and foreclosure rates.
The new study shows the odds of foreclosure were 42 percent lower among participants in THDA's down payment assistance program who completed a homebuyer education (HBE) class compared to participants who did not.
THDA began offering down payment assistance as part of its home loan program in January 2002 but did not start enforcing a requirement to attend an HBE class until July of that year.
As a result, study author Scott Brown, a Ph.D. student in the Community Research and Action program at Vanderbilt University's Peabody College, recognized a unique opportunity to compare two sets of otherwise identical homebuyers: down payment assistance recipients from the first half of the year who did not take an HBE class and those from the second half of the year who were required to take HBE.
"This is one of the first studies on the effectiveness of homebuyer education to provide evidence similar to an experiment with a control group," said Mr. Brown.
"Because all of the homeowners in this study qualified for and received a home loan with down payment assistance from THDA in the same calendar year, their demographic, geographic, and financial characteristics are nearly identical. This is very helpful from a scientific perspective because it largely controls for factors other than homebuyer education when comparing one group to the other," he explained.
Mr. Brown's results were recently published in the prestigious Journal of Policy Analysis and Management. According to the study:
By the end of the seven-year study time period, only 10.6 percent of borrowers with HBE had foreclosed compared to 17.6 percent of those without HBE.
After adjusting for borrower, mortgage, and local economic differences, this amounted to 42 percent lower odds of foreclosure. (Please note, the odds of a foreclosure is not the same thing as the foreclosure rate.) Even after adjusting for differences in borrowers, mortgage loans, and local economies, borrowers who took HBE were still significantly less likely to have their mortgage end in foreclosure seven years later.
"There is a dramatic reduction in the likelihood of foreclosure. These classes make a real difference in people's lives," said Ralph M. Perrey, executive director of THDA. "It's important that THDA does more than just provide families with the financing they need to get in the front door. We're also preparing them to be successful homeowners for years to come."
"Foreclosures are expensive and disruptive on all sides, including the borrower, the loan holder, and the mortgage guarantor, and this study shows that HBE classes are a relatively low-cost approach to preventing them in a significant percentage of cases," said Mr. Brown.
The percentage of homeowners falling into default (being at least 90 days behind on payments at some point during the study) was not significantly different between the two groups: 32.6 percent for homeowners without HBE compared to 30.7 percent for those with HBE.
"Both program income limits and need for down payment assistance may have generated a pool of homeowners who are more vulnerable to disruption in their incomes. So these classes may have been more limited in being able to prevent program participants from ever falling a couple months behind on payments," said Mr. Brown. "But HBE may still provide these homeowners with an understanding of how to adapt and be proactive when trouble hits, enabling them to prevent a default from escalating into a foreclosure."
Another factor in the default data may be that homebuyers tend to participate in HBE classes near their loan closing date, long after a house is selected and an offer made. By this point, the opportunity to influence the price range of homes under consideration and down payment amount, and thus the size of the monthly home loan payment, has already passed.
"More research is needed into the timing of HBE classes and when in the buying process they have the strongest influence," said Mr. Brown. "However, there are other approaches that can reduce the likelihood of default, even after the loan is closed. For example, a study by Stephanie Moulton and colleagues suggests that low-cost follow-ups with new homeowners, such as a quarterly call from a financial coach, could also help lower default rates by catching trouble early."
Mr. Brown's report cites research indicating, "Half of low-income first-time homebuyers face significant unplanned home repairs or major increases in utility costs, property taxes, or homeowner's insurance within the first two years of ownership." When facing these or other hardships, homeowners who completed HBE appear to be significantly better prepared to recover and become current on their payments once again. Among borrowers defaulting for the first time, Brown found the odds of foreclosure was reduced 55 percent among those who took HBE compared to those who did not.
"The numbers in this study represent more than just dollars. These are Tennessee families of moderate-to-low income who are trying to make smart decisions about where to raise their kids and how to build up a safe nest egg for their future," said Mr. Perrey.
Additional highlights from the study:
Among borrowers who defaulted, HBE was associated with both an increased probability of becoming current on payments again and of avoiding a later foreclosure. Policymakers should consider the timing and intensity of HBE programs needed to influence default risk and how HBE may promote sustainable homeownership by influencing borrowers' help-seeking behavior and strategies for resolving defaults.
HBE appears to affect both the overall rates and timing of foreclosures. Though borrowers with and without HBE were defaulting at similar rates for the first four years after they received their mortgage, remarkably few foreclosures occurred in the HBE group during this time.
Borrower credit scores were strongly connected to whether they were ever 90 days or more late on their payments. HBE did not appear to be particularly helpful in avoiding default or foreclosure for those with the lowest credit scores compared to those with higher credit scores.
Only 16.7 percent of borrowers with HBE had their first default end in foreclosure compared to 37.8 percent of borrowers without HBE.
The full study as published in The Journal of Policy Analysis and Management is available online at http://onlinelibrary.wiley.com/doi/10.1002/pam.21877/epdf.