The Influence of Homebuyer Education on Default and Foreclosure Risk: A Natural Experiment

Abstract

AbstractThe recent housing crisis has generated debate over the benefits and risks of policies and programs promoting homeownership for low and moderate income households. One important facet of this conversation is whether prepurchase homebuyer education (HBE) is effective in reducing default or foreclosure risk. Studies to date have primarily focused on default risk and have faced challenges in accounting for borrower selection into HBE. This study analyzes the outcomes of a natural experiment in the provision of a classroom‐based HBE program during the start‐up phase of a down payment assistance loan program at Tennessee's state housing finance agency in 2002. A competing risks analysis of monthly payment data from 2002 to 2009 for 732 mortgages indicates that, after controlling for borrower, mortgage, and economic factors, HBE did not reduce default risk, but was associated with 42 percent lower odds of foreclosure. Among borrowers who defaulted, HBE was associated with an increased probability of curing a first default and of avoiding foreclosure post‐default. 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.