Time to raise the systems bar
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This month marks a grim anniversary. It's two years since the credit crunch began, sparking one of the biggest upheavals the mortgage market has ever seen.
Since then we have seen unprecedented change in the sector, not only in how businesses manage their processes but also in how they treat customers.
In the wider economy we have seen unemployment continue to rise. It hit 2.38 million in May and the Confederation of British Industry expects this to rise to 3.03 million by Q2 2010.
The market has already had to deal with a surge in arrears and repossessions due to job losses but the CBI's forecast shows the worst may still be ahead.
In the recent past lenders and servicers have not had to focus too much on their collection strategies. In a rising housing market any losses made on costs associated with arrears and repossessions are covered by increasing house prices.
But those days are long gone and while some house price indices point to a tentative recovery we should not be fooled into thinking we've hit the bottom of a conveniently V-shaped slump. In my opinion the recovery will be slow and pretty painful.
In May the Halifax index showed the average house price rose by 2.6% yet in June prices were back down again. It's vital that lenders and servicers don't simply hope for the best and ignore warning signs - they can't afford to assume the market will cover the costs of managing arrears and repossessions.
With this in mind, firms are having to rethink how they manage their mortgage books and particularly how they control arrears in an efficient way.
In most cases, getting up-to-speed will require either a partial or total upgrade of systems and software. Legacy systems are still all too common. We recently conducted research that shows 53% of lenders are using systems that are not adequate for the current market - a statistic alerting us to the need for immediate action.
Firms' biggest worry is the expense. Not only is there concern about having to stump up huge initial payments for upgrades but lenders and servicers are also understandably worried about the opportunity cost as well as the disruption that could come with hardware replacement and data transfer.
But current circumstances demand change. The Financial Services Authority and the government are all too aware that arrears and repossessions are on the rise. They are also alive to the fact that some lenders and servicers are not treating their customers fairly.
This is often not deliberate, but rather an unavoidable consequence of lack of borrower understanding or the inability of lenders to access customer data in a way that allows decisions to be made efficiently.
Even so, the authorities have taken a firm stance with the introduction of the Mortgage Pre-Action Protocol and the Treating Customers Fairly initiative.
Lenders and servicers now have to show they are giving their customers every opportunity to manage their debts before moving to repossession. This is proving demanding for a number of organisations because legacy systems are not up to the task of delivering this sort of service.
Effective response to the Pre-Action Protocol requires bespoke strategies for all cases. Lenders not only have to streamline their systems to deal with different types of customers, they must also document every stage of the arrears collection process before filing for repossession - a problem for many legacy systems.
Similarly, TCF requires more comprehensive data collection than ever before, and accurate processing of this information is essential for responsible lending decisions.
Most lenders have the data necessary to deliver on these initiatives but are unable to take advantage of it because their systems lack the sophistication to extract and process it.
Lenders and servicers also have a commercial interest in being able to process this information effectively. Not only will it lead to consistent delivery of regulatory objectives but it will also afford them a more in-depth understanding of their balance sheets. This in turn will help them manage their credit quality.
Of course, for some lenders and servicers the worry and financial implications of a complete overhaul will be too much. But there are incremental steps which can be taken with existing systems to allow for sufficient data extraction and process.
For example, bolt-ons can be created for existing systems to manipulate the required data intelligently. These are relatively inexpensive and can also be run on a rental basis, avoiding heavy initial outlay. But systems are a bit like vintage cars. You can replace the bodywork on your beloved classic, give it a coat of paint and touch up the chrome but the chassis and engine remain essentially the same. Eventually, a total overhaul will be necessary, which usually means waving a fond farewell to a once trusty machine.
Our software and systems are available on a rental basis, with payments tied to the size of lenders' or servicers' books. So essentially we share in the cost while our clients grow and are rewarded as they succeed. And we can work with existing hardware or laptops so upheaval is a thing of the past.
There are few excuses left for those lenders and servicers still reluctant to act. In fact, time has run out.
They must ensure they have the systems in place to provide customers with the level of service required and to do this they must be in a position to use their data intelligently.
I hope that when we look back at this downturn we see it as a time when the sector got its systems in shape for the future.
Source:
Lending Strategy
