REQUIRED READING: Eighty-eight million dollars earmarked for housing counseling has been slashed from the fiscal year 2011 budget, leaving nonprofits and the industry to ponder what the ripple effect will be on default servicing.
The continuing resolution recently approved by Congress and President Obama cuts, in its entirety, funding that would have gone to the U.S. Department of Housing and Urban Development's (HUD) Housing Counseling Program (HCP). For agencies that rely heavily on the federal money, a top priority now is diversifying funding resources. In some cases, that will mean a combination of private grants and more direct fee-for-service arrangements between servicers and counselors. But for organizations that are unable to close the gap, drastic personnel reductions, or even closure, are very real possibilities.
HUD has been a year behind in its disbursement of counseling funds, which is part of the reason Congress decided to zero out the program for fiscal year 2011. Another explanation given was that the $88 million effort overlaps too much with the NeighborWorks-administered National Foreclosure Mitigation Counseling (NFMC) program. Counselors reject this notion, pointing out that the HUD program covers reverse-mortgage and pre-purchase counseling in addition to foreclosure-intervention counseling. Nonetheless, counseling geared toward delinquent borrowers makes up a large share of HCP expenditures. A whopping 46% of the program's funding is applied to foreclosure intervention, according to testimony from HUD officials.
The loss of HUD funding is "extremely detrimental," especially considering federal funding for the NFMC has dwindled over the past few rounds, says Candace Mason, senior director of housing and national grants at the National Foundation of Credit Counseling. The agency is one of many advocating the reinstatement of federal funding in fiscal year 2012. The starting mark in President Obama's budget proposal is $88 million.
"It's going to be somewhat of an uphill battle, but we have a lot of data on our side in the fact that the housing crisis is not over," Mason says. "There's still a very high demand for loss mitigation and pre-purchase counseling."
Studies from the Mortgage Bankers Association (MBA), NeighborWorks and other entities show that borrowers who receive foreclosure counseling are more likely to receive loan modifications than those who do not. Counselors, however, are also concerned that the hit to pre-purchase counseling could hurt the performance of new-vintage loans made to first-time and low-income home buyers.
"The funds support pre-purchase counseling, which is a way to try to stave off disaster by better educating people," Mason says. "It's more preventative in nature."
A recently published study from the MBA concluded that while the evidence is not overwhelming, there does appear to be a correlation between pre-purchase education and better loan performance. According to some data, the MBA reported, pre-purchase counseling can reduce any form of default by as much as 34%.
Fifty-five agencies in the National Council of La Raza's (NCLR) counselor network receive some amount of HUD funding, says Janis Bowdler, the deputy director of NCLR's Wealth-Building Policy Project. If more funding is not obtained, the network could shrink to 20 agencies, she explains. "It's one thing to float yourself for an extra year, but that's not going to be sustainable ongoing," Bowdler says.
In turn, counseling agencies may increasingly look to lenders and servicers for direct compensation for the services they provide, including borrower outreach and the intake of loss mitigation documents. Some agencies already have relationships intact. For instance, the NCLR, which acts as an intermediary between HUD and counselors, has had a relationship with Ocwen since 2008.
"I think as the federal funding dries up for these kinds of programs, it's going to be critical that our partners in the servicing and lending industries pay for a service they think is valuable, because if they don't, it might go away," Bowdler says.
Chris Viale, president and CEO of Massachusetts-based Cambridge Credit Counseling Corp., says the shake-up may actually benefit the counseling and servicing sectors in the long haul. Counselors will be forced to rely less on federal finance options, which are inherently uncertain. Fee-for-service initiatives may facilitate better planning by counselors.
"It allows agencies to budget better and scale more effectively based on volume and capacity, rather than hoping and waiting for federal funds to come through the system," Viale says. Cambridge Credit has applied for – but does not receive funding through -HUD. If foreclosure counseling ends up leaning more heavily on industry-financed subsidies, the dynamic could have a weeding-out effect on agencies.
"If you enter into a contract with a servicer or a lender and you're doing a poor job working with consumers to remedy their particular foreclosure problem, then you're not going to hold that contract," Viale says. "It's going to go to another agency that's doing a better job."
