A bill in the U.S. House would lower the mortgage rate paid by first-time homebuyers using a Federal Housing Administration (FHA) mortgage if they agree to go through counseling first. It must still be passed by both houses of Congress and signed by the president to become law, however.

H.R. 2162 would require FHA to provide a form of risk-based pricing and offer a discount of 25 basis points on the up-front premium charged to first-time homebuyers receiving FHAinsured mortgages if they’ve completed an agency-approved mortgage-counseling program. (A basis point is one-hundredth of a percentage point.)

To qualify, buyers would need to complete counseling before applying for the mortgage.

As part of the process, the Congressional Budget Office (CBO) conducted an audit to determine how much the change would cost taxpayers, and CBO released its estimate late last week. It determined that H.R. 2162 would “have no significant effect on discretionary offsetting collections from the FHA mortgage insurance program in any year over the 2020- 2024 period.”

Basis of estimate

Does counseling help prevent foreclosures? CBO said a “limited body of evidence” suggests it does because buyers better understand their obligations which reduces their likelihood of default.

“Studies are rare, and the literature generally does not identify a strong causal link between counseling and lessened rates of default,” the CBO report says. “However, some studies show that providing pre-purchase counseling to first-time homebuyers and low- and middle-income families promotes informed decision-making by increasing buyers’ understanding of the risks of a mortgage.”

Under current law, the Department of Housing and Urban Development (HUD) has designated over 1,800 approved-housing counseling agencies that provide pre-purchase counseling. Counseling is offered online, over the phone and in person. Although charges vary, those services tend to be offered at little to no cost to the prospective borrower.

The bill does not include program advertising, however, and CBO estimated that only about 25% of eligible borrowers would take part in it. Many would probably not know it exists. For those who do, however, it would save them an estimated $500 per mortgage.

CBO also estimates that some potential buyers, after counseling, would decide to forego a home purchase. On that basis, CBO expects any reduction in the probability of default to roughly equal any offset by the 25 basis point reduction in FHA’s upfront fee.

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