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Timely study reveals value of debt management help

By Broderick Perkins

It's not unlikely, in the current environment of rising mortgage interest rates, that you could find it difficult to make ends meet--especially if you have an adjustable rate mortgage.

If you think you are going to slip on your mortgage payment or other bills, before you actually do, get some debt management counseling. The sooner, the better--even if you only have time to get counseling by phone.

A new study examining delivery techniques--by telephone or in person--for financial management education found when debt management counseling is offered as part of the service, those who participated lowered their risk of bankruptcy and improved their creditworthiness.

A debt management program typically allows a consumer to consolidate debts and make one monthly payment to cover all debts. The consumer must agree to a strict money management regimen, without creating new debts, until the consolidated debts are paid off.

The study sends a timely message.

The housing boom has left home prices in the ozone in many locales. Santa Clara County's median single-family home price in May was a record $800,000.

High housing costs force homebuyers to seek greater financial leverage and that typically means riskier ARMs, especially those with additional low initial-cost benefits, including interest-only payments, option-payment and piggy-back loan terms.

The loans start out cheaper and allow buyers to afford a home; later, when interest rates rise, as they have been for the past year, the household budget gets squeezed.

Washington, D.C.-based NeighborWorks America, a network of 4,400 community agency partners, including Neighborhood Housing Services of Silicon Valley in San Jose (www.nhssv.org) and South County Housing in Gilroy (www.scounty.com), is so concerned about those conditions it recently held a refresher boot camp for 240 financial management counselors.

Not unlike preparing for a natural disaster, the group met in Kansas City, Mo., during the last five days of June to hone home ownership survival lessons for what could be a disaster spawned by the flood of riskier mortgages.

"For many of the new homeowners who were just able to afford their homes with low-rate adjustable mortgages, when the rates on these mortgages begin to reset, they're going to be in for significant payment shocks," said Ken Wade, NeighborWorks' CEO.

"We know that as many as one-quarter of all borrowers chose interest-only mortgages, and are choosing not to pay the optional principal. Coupled with flat and even declining home values in some communities, borrowers who got into their homes with small down payments may not have enough equity to enable refinancing," explained Wade.

That's where counseling can come in handy.

Co-sponsored by the Consumer Federation of America and American Express Company, "Evaluating the Effectiveness of Credit Counseling/Phase One: The Impact of Delivery Channels for Credit Counseling Services," is the research work of Georgetown University's Credit Research Center director Michael E. Staten and John M. Barron, an economics professor at Purdue University.

The two sifted through 59,972 clients' files (with the personal identifying information removed) from 10 credit counseling agencies who variously provided face-to-face, telephone counseling and a combination of both for the clients. The clients had their initial session during March-April, 2003, and three subsequent years of credit report data and credit scores from TransUnion were included in the data.

Telephone service was provided to 67.7 percent of the clients; in-person help went to 22.6 percent of them and 9.7 percent got help via the Internet.

The survey found:

* Consumers who were recommended for a debt management program and agreed to its terms had a significantly lower incidence of bankruptcy over the two years following counseling, and they had higher bankruptcy and delinquency risk scores (which means they were at less risk for bankruptcy or missing payments).

* The opposite was true of those who were recommended for a DMP, but chose not to.

* Clients who were not recommended for a DMP but did so anyway experienced improved delinquency risk scores two years later, relative to those who didn't use a DMP, but they revealed no change in bankruptcy risk scores.

The study said there was no significant difference in the changes based on how the service was rendered, in person or by telephone.

The researchers were quick to point out the study is an initial one which focused on consumers who received help from agencies that emphasize financial education as well as a debt management program.

Other studies reveal debt management programs don't always work as well without added financial education that teaches money management, credit use, budgeting and related subjects.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.