Can Better Financial Education Help Prevent Foreclosures?


Foreclosure starts are up nationally and some industry leaders say that better financial literacy could help prevent homeowners from becoming distressed.

Lenders started the foreclosure process on 22,575 properties last month. That’s up 11% from a year ago, according to the February 2024 U.S. Foreclosure Market Report by ATTOM.

There were a total of 32,938 properties with foreclosure filings – default notices, scheduled auctions, or bank repossessions – according to the report, and lenders repossessed 3,397 properties through completed foreclosures last month.

Donna Schmidt, managing director and owner of DLS Servicing in Grand Rapids, Michigan, said in a recent interview with The Mortgage Note that the people most likely to be foreclosed on this year are people who have received loss mitigation assistance.

Schmidt said these borrowers are often going back for help multiple times and at some point, they will have eaten up the equity in their homes. When they can’t keep up with their lifestyles, they will be forced into short sales or face foreclosure.

Schmidt said that unlike during the Great Recession or the Covid pandemic, these borrowers are not defaulting due to a loss in income.

“We’re starting to see an increase of the normal, typical reason for default, which is excessive obligations. They’re spending more money than they are making,” Schmidt said.

Schmidt said these borrowers should have financial counseling but they don’t because they’re not required to in order to receive loss mitigation services. She said repeatedly giving borrowers assistance with no guardrails will have repercussions.

“Eventually, this is going to catch up with the industry, and eventually, it’s going to cause a problem,” Schmidt said.

Schmidt said financial literacy programs can help. She points out that many state housing authorities require homebuyers to complete counseling before receiving down payment assistance.

“Loans with down payment assistance are performing better in the FHA portfolio than loans without down payment assistance,” Schmidt said.

Miki Adams, president at CBC Mortgage Agency in South Jordan, Utah, said the data consistently shows borrowers who receive down payment assistance from a government entity are less likely to lose their homes to foreclosure.

“This is a testament to the value of counseling and financial literacy for first-time homebuyers, which we provide at CBC Mortgage Agency. Our counseling program not only prepares borrowers for homeownership but also guides them through the first 18 months of owning a home,” Adams said in a statement.

Adams said FHA borrowers who receive homebuyer education and are willing to work with their servicer when they experience financial difficulty are likely to avoid issues.

If homeowners do get behind, it’s important that they keep the lines of communication with their mortgage servicer open, she said.

“Even if they are unable to make their loan current, being proactive will yield far better results than avoiding calls and letters,” Adams said.

There is a push for schools to teach financial literacy.

In an op-ed, New York State Education Commissioner Betty Rosa and New York State Comptroller Thomas DiNapoli said a required course in high school is being given serious consideration. They say it is time to catch up to states with financial literacy courses.

Positive outcomes for financial literacy courses have been seen in Utah, Georgia, Idaho, and Texas.

“Just as teens are required to take a driver’s education course before getting behind the wheel of a vehicle, we have a responsibility to empower students with the skills to effectively manage their finances before applying for a credit card, student loan, or mortgage,” Rosa and DiNapoli wrote.

“It is in the state’s economic and social interests to offer personal finance in our schools now.”

According to a paper on financial literacy and mortgage stress shared by the American Economic Association, borrowers with high levels of financial literacy are 60.3% less likely to suffer from mortgage stress than borrowers with low levels of financial literacy. The authors’ findings suggest the potential for significant benefits from increased financial education for all mortgage borrowers.

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