Subprime on Your Mind?
So what were people talking about at this year's annual MBA National Mortgage Servicing Conference? Portfolio churning was a big concern, as you'd expect it to be in the third year of a refinancing boom. Collection practices, technology and litigation concerns also ranked high on the list of topics being addressed.
But we couldn't help noticing the healthy attendance at sessions addressing concerns related to managing loan administration on subprime mortgages. Clearly, the growing origination of loans to people with credit problems in their past has attracted the attention of loan servicing professionals. In the exhibit hall as well, we saw a lot of vendors who were marketing services, expertise and technology designed to help lenders manage "high touch" loans to borrowers whose payment patterns may be unconventional, to say the least.
So what are the ramifications of a growing subprime market? Subprime lending first picked up steam after the recession of 1991 and 1992, which resulted in widespread layoffs and created credit problems for many people who may have been strong credit risks in the past. As lenders reached out to people with tarnished credit, the industry grew. Subprime lending wasn't just an altruistic way of helping people get back on their feet, however. Lenders found profit margins to be much wider on B&C credit quality loans than on cookie-cutter
"A" credit loans. Servicing fees are higher as well, to reflect the anticipation that lenders will spend more time and effort collecting payment on these loans.
But that doesn't mean that subprime lending is easy. Special servicing expertise is needed to cope with borrowers who are used to getting frequent calls from creditors. In many cases, they've developed expertise in avoiding payment and thwarting the efforts of credit representatives. In other cases, subprime borrowers are the ones who, despite good intentions, fall behind on bills easily and find it harder than most people to catch up. A special servicing expertise is needed to address the challenges of managing large subprime portfolios.
We are happy to see technology vendors responding to the need for automation and workflow management designed specifically for subprime loans. But lenders should remember that they call these loans "high touch" for a reason.
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