Academic journal article ABA Banking Journal

Profitable Subprime Loan Servicing. (Special Advertising Supplement)

Academic journal article ABA Banking Journal

Profitable Subprime Loan Servicing. (Special Advertising Supplement)

Article excerpt

In the mortgage industry, there are significantly higher revenue and margin opportunities in nonprime (or subprime) loan servicing when compared to prime servicing. However, higher margins and increased revenue can only be realized through focused collections and default management practices and operational management controls.

In the prime world, because of the active secondary market and GSE (government sponsored enterprise) involvement, servicers have pre-established guidelines and procedures to follow through all aspects of servicing. Prime loans are a commodity and the associated servicing procedures are standard across the market. Although GSEs have attempted to use credit scoring to enter the subprime market, their influence in the sector has so far, been only peripheral.

Therefore the evolution of subprime servicing has occurred, for the most part, without the involvement of GSEs. Subprime loans are not a commodity like the plain vanilla prime loans, there is considerable variety and more complexities. So, without a standard product, or universal servicing rules, each servicer of subprime mortgage loans has to develop and deploy its own processes and practices and establish rules based on its unique loan portfolio. Servicers of subprime loans incorporate the use of credit scores and risk grades, loan-to-value, borrower payment behavior, lien position, NSF (non sufficient fund) history, and promise-to-pay performance to manage the loans of borrowers who have had difficulty securing credit or managing debt. It is a natural conclusion that in order to protect the returns within a subprime portfolio, subprime servicers must have a razor sharp-focus on collections and default management.

Here are some suggestions and practices subprime servicers should consider deploying based on portfolio content and available technology:

Subprime Portfolios call for Proactive Strategies

Standard and Poor's subprime servicing guidelines say "collections for subprime portfolios must begin sooner than their prime counterparts, because subprime borrowers typically do not properly budget their finances, and they often pay the first debt collector to reach them." So, subprime servicers must adopt a proactive strategy for collections because they are dealing with borrowers that are credit challenged. Proactive collections management must begin when the loans are boarded onto the servicing platform.

Welcome Calls Initiate Payment Obligations Counseling

The subprime servicer makes contact at the beginning of the servicing relationship with a Welcome Call. The loan servicing platform's collection queuing facilities can be automated to queue up new loans, and present collectors with pre-scripted narratives to welcome the new customer. During the Welcome Call, the collections counselor explains the need for timely payment and the impact on credit history in the event of non payment. The counselor has the opportunity to impress upon the borrower the importance of the obligation, financial budgeting, and establishing the mortgage as the top priority. With the proactive approach comes first time calling and more hand-holding throughout the life of the loan to protect the servicing asset and prevent default loss.

Using Tools to Fortify Collection Efforts -- Realtime Lockbox Processing arid Dialer Feeds, Flexible Queues

Subprime collection effectiveness can be enhanced by using behavioral and performance criteria. Collection campaigns can be based on standard factors such as degree of delinquency, or centered on other criteria such as first payment default, broken promises, NSFs, lien situation, number of modifications, or customer language preference (Spanish or English). The servicer can establish the criteria to match the objectives of the campaign. By focusing campaigns, the servicer has the best probability of yielding favorable results. …

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