The battle to control defaults
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In the first of a two-part report from the US mortgage front line Craig Focardi reports that defaults are almost out of control, while politicians and companies are vying to take the high ground in addressing the situation
US mortgage defaults are almost out of control. The US Mortgage Bankers Association said in November that the mortgage delinquency ratio at 9.64% and foreclosure ratio at 4.47% had both reached their highest levels ever since it began tracking this data in 1972.
Worse yet, mortgage industry and US government attempts to help delinquent borrowers have failed. The Making Home Affordable loan modification component of president Obama’s Home Affordable Mortgage programme has yet to make a dent in the rising casualty rates of defaulting US home owners.
Moreover, politicians remain in conflict with business interests, with both sides purporting to defend mortgage customers. This has become a war of words. Each protagonist’s weapons include reports showing the number of loan workouts and trial loan modifications started. And both sides’ reports are accompanied with their versions of the truth as to how successful the MHA programme has been so far.
But lost in the media headlines are the facts about what mortgages lenders are and are not doing to cope during the crisis. So to shed some light on this, in this piece I will highlight selected results from the FICO/TowerGroup Mortgage Credit Risk Management 2009 Survey.
The survey was designed to reveal the strategies, views, accomplishments and plans of leading US mortgage credit risk managers. The results provide the mortgage industry and its stakeholders with an objective way of evaluating improvements in credit risk management practices, and many are likely to be infor- mative for mortgage credit risk managers in the UK.
For the survey, TowerGroup spoke to 25 senior mortgage credit risk managers working for servicers - otherwise known as loan administrators - that collectively accounted for 58% of mortgage debt outstanding as of December 31 2008.
The survey assesses the state of mortgage credit risk management in September 2009 and identifies some im- portant best practice procedures in leading institutions that managers should evaluate.
TowerGroup asked 28 questions in six categories - issues facing mortgage credit risk evaluation; early identification of borrowers at risk; optimising portfolio value while reducing redefaults; integrating transactional data to improve predict- ability; tracking; and validation of collections best practice.
The remainder of this piece presents findings from three of these sections - issues facing mortgage credit risk evaluation, early identification of borrowers at risk and collections best practice.
Most importantly, the survey reveals that executive managers have intensified their focus on credit risk management and restructured the management of distressed property assets.
Almost as importantly, most institutions have begun to increase technology spend on analytic and reporting tools. But only 24% significantly increased their IT spend in 2009.
Interestingly, 45% of respondents classed among the top 25 servicers have made significant IT budget increases but only 7% of others have done so.
Other responses reveal that recently originated loans are performing better than loans originated prior to 2008.
Best practices driving these improved credit risk management results include stronger income verification efforts (76%), a shift away from higher risk loan products (80%), higher loan score cut-offs to qualify for mortgages (76%) and more stringent loan documentation requirements (64%).
Some three-quarters of servicers are participating in the MHA loan modification programme. And among respondents, more than three-quarters of these have analysed the potential effect on portfolio valuation of government guidelines and automated the distribution of programme applications and qualification packets.
But many firms have not fully automated the programme’s processing requirements after borrowers receive their application packets. For example, more than two-thirds of servicers that responded have made only manual process and system changes to comply with the programme.
An emerging best practice is to automate MHA application, approval and tracking processes to boost participation and success.
Early identification of borrowers at risk has become another best practice in managing the higher default levels driven by rising unemployment, declining house prices and the large number of adjustable rate mortgage payments being reset at higher levels.
Spotting borrowers at risk early allows servicers to staff collections departments appropriately, determine the best type of customer outreach and initiate repayment plans before the situation worsens to the point at which foreclosure is unavoidable.
Craig Focardi is senior research director with TowerGroup. He can be contacted at cfocardi@towergroup.com
