Proactive Risk Mit: A Holistic View of Debt
Ms. Brasington is executive vice president of strategic consulting for Lender Processing Services, Jacksonville, Fla.
It's hardly surprising so much servicer attention is focused on managing increased default and foreclosure volumes and this has been the case for quite some time now. Events of the past year certainly pushed issues of loss mitigation, loan modifications and foreclosure to the forefront and 2009 is set to bring more of the same. In fact, servicers can probably expect already high volumes to increase further in the coming year.
But there is good news. Even while managing this tremendous workload, servicing organizations have the opportunity to stem the rising tide before it can impact their foreclosure volumes. By engaging in proactive risk management and leveraging a holistic 360-degree view of borrowers, servicers can get ahead of the curve by identifying homeowners with a high probability of delinquency - before they are delinquent on their first payment.
This game-changing capability exists today for servicing organizations, and is not dependent on the type of servicing or banking systems they currently utilize. Servicers can make use of an effective, enterprise-view of customer risk that allows them to take early action with at-risk borrowers. By pulling in customer information from all channels across the enterprise - first and second mortgages, HELOC, credit card, automotive loans and deposit accounts - servicers gain invaluable overall insight into a customer's situation.
This in-depth customer view can forecast trouble - and allow servicers to take mitigating steps - far in advance of a mortgage default. And in an environment like the one we face today, proactive mitigation ahead of delinquent mortgage payments could revolutionize the ability of servicers to stave off many of the defaults, and potential losses, that would otherwise occur.
Any proactive risk management approach must transcend the particulars of the IT infrastructure. It must seamlessly integrate with a lender's existing servicing and banking systems, as well as enterprise credit risk models, analytics and data tools. In order to generate the most accurate customer risk assessment, servicers need access to as much information as possible.
When it comes to proactive risk management, the underlying theory is that a loan is a loan, regardless of the type of loan or the channel where it exists. Whether it's a first or second mortgage, HELOC, credit card, automotive or RV loan, the important thing is to measure risk according to the realities of a particular customer's situation.
By connecting borrower data across all lending lines, servicers can assess borrower risk in real time, using existing models or credit scoring. By immediately identifying all at-risk borrowers, servicers can pre-emptively deliver targeted risk management and loss mitigation recommendations to the borrower, based on the institution's parameters. The potential to reach customers is greatly increased by leveraging any communication channel the borrower comes into contact with - including call centers, IVRs and websites.
It is crucial to have a comprehensive view of the customer in order to accurately assess risk. Consider this all-too-common scenario:
A borrower under financial duress does everything in his or her power to stay current on a first mortgage. To make ends meet, the borrower may first turn to credit cards, running up balances until the maximum limits are hit, then falling behind on even the minimum payments. Next, the borrower stays current on their car payment to be able to get to and from work but dips into a HELOC to make first mortgage payments. This cycle typically leads to a debt scenario that the borrower cannot recover from and inevitably results in delinquency and default on the first mortgage.
Without the ability to evaluate the borrower from an all-encompassing relationship standpoint, the first clue the servicer has that a problem is brewing often comes at the point of payment delinquency. On the other hand, a proactive approach to risk management that gathers customer information from across the banking enterprise would provide early-stage awareness of this cycle and allow the servicer to reach out to the borrower with alternatives before it's too late.
This is the central goal of proactive risk management - to proactively reach out and provide workout solutions before borrowers dig a hole they simply can't climb out of.
While most servicers have a good idea of what's going on with their borrowers from a first mortgage perspective, many lack the same level of insight into second mortgages - let alone credit card or other consumer debt associated with the customer. When it comes to mortgage loan modifications, servicers depend heavily on the debt-to-income ratio - but they don't always have ready access to the overall debt picture as seen across all channels.
Proactive risk management aggregates all available information from the servicing platform as well as the HELOC, automotive and credit card servicing systems. In addition, it pulls in credit bureau account data for "off-us" products owned by the customer. By aggregating this data, servicers gain a holistic, total relationship view of the customer. This helps them see trouble much earlier on by identifying patterns like HELOC withdrawals that are closely followed by first mortgage payments in similar amounts.
Without a comprehensive proactive risk management strategy, most servicers are limited to the customer information they can access through their servicing platform, along with some initiatives they may have in place to monitor FICO scores and perhaps credit reports. Still, if a borrower is "robbing Peter to pay Paul," the credit agencies will not have the necessary insight to ascertain that these problems are building.
The key to the solution is to be able to proactively understand customers' situations in order to optimize any workout or modification option and reduce portfolio risk. Understanding customer risk from a total relationship standpoint gives a much better portfolio view in terms of total overall debt with the institution. This insight is imperative to a proactive risk management approach and the development of a sustainable mortgage loan modification.