Kristin Moyer

Loan portfolio management in the US residential mortgage industry has hit a speed bump.  The Home Affordable Modification Plan (HAMP) uses a rule-based formula for driving the terms of a modified loan to 38% debt-to-income (DTI) ratio, with the Treasury matching further reductions in payment to 31% DTI for the borrower.  This leaves no room for intelligent loan level decisioning that takes into account borrower behavior as a proxy for capacity to perform in a loan modification.  So why should the US mortgage industry use loan portfolio management?

For one thing, not all homeowners qualify (Freddie Mac or Frannie Mae guarantee $5.5 trillion of the $10.9 trillion of residential mortgages in the US).  This program has struggled as well – only 360,165 (or 12%) of 2.9 million eligible distressed homeowners have started trial modifications under the Home Affordable Modification Program (HAMP) (as of August 2009).  Some of the largest US banks, such as Bank of America, have only done HAMP modifications for 7% of eligible loans.  In addition, earlier this year Fitch Ratings estimated that 55% to 65% of overall loan modifications, and 75% of sub-prime loans, will become at least 60 days delinquent in the next 12 months.

Loan portfolio management has been shown to improve average unpaid-principal-balance increase in net present value (NPV) from modifications using loan portfolio management (relative to nonoptimized loan modifications using general risk scores) by 25%.  With such a big impact like this (sometimes up to 35% of NPV), I think banks and servicers in the US mortgage industry will turn back to loan portfolio management once banks either decouple from the Treasury by paying off TARP funds, determine that HAMP modifications are not sustainable (low bank adoption rates would suggest resistance already), or both.

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Category: Uncategorized operations     Tags: default management, loan portfolio management, us mortgage industry

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