As the housing and mortgage crisis grows across the U.S., some builders are providing financial counseling to customers with bad credit. Time will tell how well the program works, but at least for now, it provides credit relief for some buyers.

As the real estate and credit markets sink in a sea of debt in the wake of the subprime lending debacle, builders are suffering from sagging prices and lost sales. A recent survey of members of the National Association of Home Builders indicated that confidence in their industry's outlook is the lowest it's been in the 23 years since the monthly survey was first instituted. Building industry veterans have valid reasons for being bleak about the future, as home prices continue to crumble and the pace of lending slows under a massive burden of bad debt.

Builders and bad credit mortgages

Some economists predict that the losses to lenders as a result of the subprime mortgage crisis will top $2 trillion. This means that banks and mortgage companies will expand-and further tighten-their policy of not lending to anyone with a sketchy credit history. Some companies, including D. R. Horton (the nation's largest builder), and Hovnanian (the sixth-largest), are starting to provide their own credit counseling programs. The builders say that it's a last ditch effort to help customers boost their credit scores and qualify for a bad credit mortgage loan. The programs help consumers manage and reduce their debt, challenge mistakes on their credit reports, and budget their money in a way that allows them to save for a down payment.

Profitable altruism

Hovnanian contracts with another company, Debt Resource USA, to conduct the counseling classes. So far, nearly 200 people have enrolled in the program. But while the trend of builders branching off into the credit counseling business may gain traction, critics argue that it's simply another ploy to lure buyers into homes that they can't afford. Hovanian acknowledges that it has a profit motive, and admits that it would like for buyers to borrow their bad credit mortgage money from its own lending subsidiary. Meanwhile, results speak for themselves-if people are able to bolster their credit and legitimately qualify for a loan, it's difficult to criticize the ultimate outcome. That's especially true these days, when credit counseling companies are so swamped, they're turning away people who urgently need help to keep from losing their homes to foreclosure.

Although this educational outreach has helped to sell homes to those who graduate, the nation's homebuilders are still suffering staggering losses. The price of publicly-traded building company stocks have plunged in recent months, and most have slashed prices on their homes in an effort to unload a backlog of inventory. At one point, Hovnanian resorted to discounts of $100,000 or more on some of its products, a move that underscores the fact that home prices are deflating at a rapid pace.

Published on December 15, 2007