Evidence on the effect of credit counseling on mortgage loan default by low-income households

Research on the effectiveness of credit counseling is surprisingly scarce given its widespread use and given that it has been around for at least three decades. This paper studies the effects of counseling on default by adopting an option-based approach to mortgage termination. Data come from a counseling program developed as result of the collaborative efforts of a large Midwest bank, Community Churches, and a local community development company implemented during the 1992-1996 period. We find some evidence that counseled borrowers defaulted less often than non-counseled borrowers and that counseling affects optimal exercise of the default option.