Academic journal article ABA Banking Journal

Don't Repossess That Mobile Home

Academic journal article ABA Banking Journal

Don't Repossess That Mobile Home

Article excerpt

Don't repossess that mobile home

There's a long-accepted maxim in the financial industry that "first loss is best loss." That is, business interests are best served when a loss is taken quickly, thereby instantly getting rid of a credit risk gone sour. This "wisdom" looks at loss prevention as an ineffective solution.

Of the 400,000 mobile homes our company insured between 1969 and 1985, 75,000 have been repossessed. A review of our repossession philosophy caused us to throw out the "first loss is best loss" theory in favor of loss prevention analysis.

We've determined that it isn't personal problems that cause wide-scale repossession, but national economics. In a recessionary economy, all property values drop. Fewer jobs means fewer buyers and people who are faced with a cash shortage can't liquidate their homes.

Boil it down to a simple question: would you rather pay $1,500 for loss prevention or more than $10,000 to repossess a mobile home? Using loss prevention analysis, our company has paid $1,500 for each repossession that is prevented or "saved," and during the last two years over 70% of our "saves" have paid their loans.

Repossessed mobile homes that are resold cost us an estimated $10,000 or more and have a higher frequency of default than our "saves." With repossession, one should also consider the loss of value on the mobile home, the costs of towing, repairs, the retailer's resale commission, and insurance costs. (See table.)

Loss prevention is a good business decision for mobile home lenders, but it only works when there's full commitment to the program. …

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