By Iris Richmond. A third of Crossmann Mortgage's loans go to first-time buyers, but it should be higher, in the company's view. Marianne Lee, president, sees the potential to capture a greater slice of the segment. A subsidiary of Crossmann Communities, the mortgage group has stepped up its counseling of would-be buyers with the launch this summer of "Home Rewards," a program designed to assist people who don't automatically qualify.

"We have a tremendous number of folks who aren't qualifying today or can't close within the next six months," says Lee. "We saw the need to formalize what we've been doing informally since the beginning because it can take more than 12 months to secure financing. Keeping a buyer interested for that long is difficult for any builder. Our costs will certainly go up, but so will closings."

Counseling first-time buyers--not just about credit but about homeownership--isn't a new idea, but it's one that is gaining respect in light of evidence that it can be effective. A growing number of builders are trying the counseling route, not only as a way to sell more homes, but to avoid foreclosures, thus keeping customers as homeowners and potential move-up candidates.

Research conducted by Freddie Mac last year shows that borrowers who receive pre-purchase counseling have, on average, a 19 percent lower 90-day delinquency rate than those without it.

"Counseling is a loss mitigation tool in the form of credit enhancement," says Steve O'Connor, vice president of industry affairs at the Mortgage Bankers Association of America in Washington. "An informed buyer is less likely to have difficulties down the road. [Buyers] become better equipped for homeownership by understanding their financial responsibilities, and all the things [they] never worried about as a renter."

Builders are coming to similar conclusions. At Home Funding Corp., a mortgage broker that works with Whitemark Homes in Maitland, Fla., 60 percent of its first-time buyers receive counseling. "If a buyer is ignorant of the process, he's at the mercy of predatory lenders who can take advantage," says Ryan Bartkus, a Home Funding loan officer. "It can be a rude awakening, especially when a buyer doesn't qualify, but that's all part of the learning."

Bartkus credits the trust established between the loan officers and the buyers for Home Funding's high referral rate, which is more than 90 percent.

Lesson plans

New counseling efforts run the gamut, from credit repair to cleaning gutters and changing air filters. Shea Homes' San Diego division takes its first-time buyers through a classroom session on home maintenance. At Crossmann, counselors advise on maintenance as thoroughly as they do on financing.

"So many of the folks are still rather blaseacute; about the fact that things haven't been paid on time," says Lee. "We have to help them realize that a $29 late fee blemishes their credit and could have been put towards their savings, but they also don't realize that value comes from knowing they shouldn't leave a hose out in the wintertime."

More builders are offering mortgage counseling as a way to extend homeownership opportunities to those with blemished credit. Crossmann requires buyers who need to improve their credit to attend classes, but first-time buyers without a spotty credit history may attend as well, and do. The company distributes workbooks and holds classes, but according to Lee, the dynamics of discussion are what people come for, and where most participate. "We might be discussing budgeting versus frivolous spending and someone will tell us which store near their new community has the best price on a certain home product," says Lee.

Crossmann's counseling is done both individually and in a classroom setting, which, according to Freddie Mac, are the two most effective methods. Counseling by phone and by using study materials at home are much less so.

"We really commit to these customers, because we know that it will insulate them from circumstances that might cause early payment default," Lee adds.

Beazer Homes, Crossmann's new parent company, has begun revamping its counseling as well. "For us, it's always been if we couldn't convert that buyer segment within our world of time, we'd refer them to a credit agency. I only staff for what I can manage within the construction period and produce loans for what my pipeline calls for," says Ron Kuhn, division president of Beazer Mortgage Co. in Dallas.

That approach is about to change. Beazer plans to incorporate Crossmann's more in-depth approach at its Houston, Charlotte, N.C., and Dallas divisions, where first-time buyers drive the market.

"We have more control this way," says Kuhn. "We don't have to leave it up to good faith that a buyer will like the Beazer product enough to make him come back after he cleans up his credit."

Buyer differences Not all builders concur that buyers need extensive, in-person help. The extent to which they do could vary, perhaps by location. Centex's mortgage company, CTX Mortgage in Addison, Tex., sees first-time buyers with a different profile.

"Buyers are going to the Internet to learn about the mortgage process before coming to us," says Jim McMahan, vice president of CTX's Dallas division. "That makes our loan officers more of a trusted advisor than a loan counselor. We have to be educated on choices, balloons, ARMs, fixed rates, etc., because even in a blue collar market a buyer still has so much to wade through."

Karyl Gately, president of Shea Homes' mortgage company, agrees. "There are more resources available today to someone who's looking," she says. "We're seeing a more sophisticated buyer."

Both CTX and Shea rely more on the Internet and the information they make available there to explain terms to first-time buyers, which saves considerable time in the process.

Unlike Shea, which chooses not to create the infrastructure necessary to work with non-qualifiers, CTX doesn't turn away applicants with low credit scores. "It costs money to get new leads," says McMahan, whose company has a "Homeownership Club" to provide services for people who may need up to three years of guidance. As a last resort, McMahan has his own "Never Give Up" program, where he will personally work with a potential buyer.

"Sometimes the answer isn't a loan with a higher rate, but patience and education," says McMahan. "A higher rate is still cheaper than paying rent, but we don't want to burden a buyer with a big monthly payment he won't be able to pay."

BIG BUILDER Magazine, April 2002