Magazine article Mortgage Banking

Driving Profits through Risk-Based Collections

Magazine article Mortgage Banking

Driving Profits through Risk-Based Collections

Article excerpt

For this month's column, I would like to highlight some excerpts from Unleashing the Power: Driving Profits Through Risk-Based Mortgage Collections, a report recently published by Deloitte & Touche USA LLP done in conjunction with the Mortgage Bankers Association (MBA). I contributed to this report, and the co-author of this month's column, J.H. Caldwell, was its primary author. The report includes research done by a team of my colleagues at Deloitte Financial Advisory Services LLP.

As we know, the mortgage banking industry has entered a challenging environment. We believe that the industry trends described here may drive more lenders to re-examine collections and look at new ways to enhance profits.

Concerns about credit quality: Consumer debt continues to increase faster than incomes. ABA Banking Journal reported that mortgage debt in the United States reached an estimated $8.8 trillion in 2005, up 42 percent since 2001. Home-equity loans posted a record $715 billion in 2004, and outstanding credit-card balances rose to $800 billion in 2005, while non-credit-card debt totaled $1.3 trillion.

Rising bankruptcies: Although the increase in filings in late 2005 in anticipation of the change in the bankruptcy law was a temporary spike, The Wall Street Journal reported that the number of personal bankruptcies has continued to double every decade since the 1960s.

Expansion of subprime lending: The origination volume of subprime mortgages has skyrocketed from just $35 billion in 1994 to roughly $530 billion in 2004, accounting for more than 20 percent of new mortgages, according to ABA Banking Journal. Many institutions have been reducing minimum credit scores based on lower FICO[R] scores, requiring lower or no down payment and reducing or eliminating required documentation of income and assets.

Risks posed by alternative financing vehicles: MBA data show that in the first half of 2005, adjustable-rate mortgages (ARMs)--including interest-only ARMs--comprised approximately 58 percent of dollars originated and 48 percent of originations by count. Of concern is that hybrid ARMs will most likely trigger a reset in a rising-interest-rate environment.

Macroeconomic concerns: There is speculation that the rapid rise in housing prices may not be sustainable. The low U.S. savings rate, coupled with large federal budget and trade deficits, may eventually lead foreign investors in U.S. Treasuries to demand higher interest rates. This could present consumers holding adjustable-rate mortgages with higher monthly payments that they may be unable to afford.

With these trends in mind, Deloitte & Touche USA LLP designed a study, together with MBA, to assist in analyzing collections practices used by mortgage banks to reduce costs and increase productivity. We found that major lenders, acutely aware of the conditions facing the industry, have been taking steps to increase the efficiency of collections.

To develop our point of view, a study of leading practices in mortgage collections was conducted by gathering information through an online survey, in-depth interviews with senior executives and our practitioners' experiences with clients. The study focused on mortgage institutions with more than $600 billion in their combined mortgage portfolios, including six of the 10 largest servicing portfolios.

The resulting report, Unleashing the Power: Driving Profits Through Risk-Based Mortgage Collections, concludes that a new operating model is emerging for mortgage collections. The largest mortgage lenders are now leveraging advanced predictive analytic tools and techniques to make more accurate assessments of the risk associated with each account and to identify the most effective collections treatment strategy.

Leading institutions are adopting these techniques in combination with other initiatives to substantially increase efficiency and productivity. …

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