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How Counseling Technology Helps To
Guide Consumers Toward Homeownership

by William Reeves, lead expert/manager, Community Affairs Department, OCC

Participants in a pre-homeownership workshop in Montana - sponsored by NeighborWorks®

Participants in a pre-homeownership workshop in Montana – sponsored by NeighborWorks®

Housing counseling agencies are increasingly using technology — and partnering with lenders — to help unbanked consumers, credit-blemished borrowers, and first-time homebuyers. New data collection tools can pull and store credit information, track credit scores going forward, develop budgets, and create step-by-step plans to lead a consumer along the path to homeownership. While counselors typically serve any consumer willing to complete credit education courses and counseling, they especially reach out to borrowers with blemished credit who might otherwise end up with subprime loans. As lenders are learning, would-be borrowers who benefit from homeownership counseling — including financial education and work to improve their credit profile — can often qualify for lower-rate conventional financing.

Data from 40,000 Freddie Mac Affordable Gold® mortgages originated between 1993 and 1998 showed that borrowers who completed counseling were 19 percent less likely to experience a 90-day delinquency than noncounseled borrowers. The most effective counseling was in one-on-one setting with a counselor, which reduced such delinquencies by 34 percent, followed by classroom (26 percent) and home study (21 percent).

Ready to link

Technology plays a key role in helping counseling agencies ensure that their customers get the best-priced mortgage for which they’re qualified. About 400 agencies use Freddie Mac’s CounselorMax® software to track borrowers going through education programs. The program standardizes education and enables counselors to walk consumers through a customized set of action steps that move the client toward a stated objective, such as saving for a down payment or improving a credit score. All clients with a particular issue will follow the same guidelines, and CounselorMax® will track the delivery of those services. Lenders know the type and quality of financial education that the borrower has received.

To strengthen the connection between housing counselors and lenders, Freddie Mac is testing a LoanProspector®-like automated underwriting tool that counselors can use to determine whether a consumer would successfully pass through the GSE’s underwriting system. Among the Freddie Mac products specifically geared to the housing-counseling population are Home Possible™ mortgages, which offer $500 down payments and credit flexibility.

The Federal government's

The Federal government’s “” Web site identifies several government publications that financial institutions and community organizations can use in conjunction with homebuyer education outreach activities.

Fannie Mae’s Web-based home counseling technology, Home Counselor OnlineTM, tracks customers from intake through post-purchase counseling. Launched in 2001, the technology has been used by 1,900 agencies across the country. The software is available in English with key tools also available in Spanish. It enables counselors to analyze how much house a client can afford, retrieve credit profiles, and assess eligibility for loan products such as Fannie Mae’s MyCommunityMortgageTM, which offers $500 down payments, 100 percent loan-to-value ratios and flexible qualifying criteria at conventional rates. Home Counselor Online is fully integrated with the company’s Desktop Underwriter® automated underwriting system via Fannie Mae’s lender partners. Once a consumer is ready to seek a mortgage, the counseling agency can electronically transmit the customer’s file to the lender.

Housing counseling groups have developed similar technology. For example, NeighborWorks’® desktop application, NSTEP, which stands for NeighborWorks® Solutions To Enhance Performance, creates a schedule to guide consumers in paying creditors and alleviating debt. A down payment accumulator calculates how long it will take the consumer to save a down payment. Once the borrower appears mortgage-ready, NSTEP can be linked to a mortgage origination system, which can, in turn, link to the GSEs’ automated underwriting systems.

The time it takes for a consumer to complete the counseling process varies. While a typical beginning homeownership class might run one hour a week for two months, consumers with significant credit challenges may need much more time to complete the process of improving their credit, including tasks such as paying down revolving debt, correcting credit report errors, and saving for a down payment.

These programs demonstrate that housing counselors are upgrading their technological capacity and thus their ability to standardize counseling. As GSEs and counseling groups expand their use of technology and gain better access to automated underwriting, the effectiveness of these groups in aiding borrowers with troubled credit histories will continue to increase.

Putting it all together

The tools, products, and educational services provided by counseling agencies have already generated impressive results, enhancing borrower creditworthiness and reducing lender risk. They’re helping lenders reach market segments that are unexplored or underserved and creating better borrowers in the process. The challenge for the future is how much lenders are willing to use these tools to maximize housing ownership opportunities.