Kristin R. MoyerOne thing loan portfolio management can do is to identify borrowers in distress. This is very important for revolving lines of credit, as it enables lenders to take action on credit lines before problems go deeper. But what about non-revolving credit, like mortgage for example? Does identifying borrowers in distress really help? Yes, but “why” (identified through loan portfolio management as well) helps the lender take much more effective action. Once a lender can start to understand the why connected with the who, then they can know what to do in a much more effective way.
Credit models are typically based around “who” – who is likely to go delinquent. Once delinquent, treatment strategies are then selected (loss mitigation, short sale, third party sale, foreclosure). In the US, regulations such as the Home Affordable Modification Plan (HAMP) are pushing modifications. But a big problem is emerging. From what I can see, modifications are not really preventing default – they are delaying default. Fitch Ratings estimates 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. This focus on “who” has been (and will continue to be) very costly for mortgage servicers and investors.
This is where they “why” comes in. Default behaviors have been changing, and therefore borrower segmentation is important. For example, borrowers with negative equity in their home tend to look like good credit. However, their LTV value ends up making more sense to “strategically default” on their mortgage rather than remain current. In talking to Experian, they said this population of borrowers in 2004 -2009 went from 3% to 18% of defaulters. The behavior and motivations of different segments of borrowers is important to take into account in terms of identifying optimal treatment strategies.
So, “who” is important, but “why” helps show the way forward when it comes to optimizing treatment strategies.
Category: operations Tags: hamp, loan portfolio management
2 responses so far ↓
1 Patrick Ikhifa October 20, 2009 at 8:36 pm
Yes, I agree that the “why” is important even more so today than in the past and we should spend some time developing good predictive models in indentifying these “why” candidates. So my question is what elements in the Loan Portfolio Data lend themselves to that information?
I dont think the information that you need to determine the “Why” is in the Loan Portfolio Mgt space per se, unless you integrate other cosumer data with relevant relationships to give a more complete profile of the borrower.
2 Kristin Moyer October 21, 2009 at 10:11 am
Thanks for your comment, Patrick. I totally agree with you. Leveraging external data is a key part of loan portfolio management (and is actually in our “long” definition of loan portfolio management)….
External and macroeconomic data – credit scores, loan-to-value ratios and automated valuation models are useful in loss mitigation and distressed asset pricing, but do not take macroeconomic and other external factors into account:
o External data (for corporate loans) – corporate customer accounts receivable (AR)/accounts payable (AP) visibility/documentation, priority payables, covenant monitoring
o Macroeconomic data (for corporate and retail loans) – real estate attributes by geography, unemployment data, projected interest rates, projected home price index and others are critical in reducing credit loss and pricing distressed assets.