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Manage Your Portfolio Proactively with Credit Scores

Mr. Maddox is vice president of national sales at TransUnion Settlement Solutions, a wholly-owned subsidiary of Chicago-based TransUnion, which provides real estate information, settlement services and process management solutions to the residential lending industry.

Before the introduction of easily available credit scoring tools, mortgage servicers spent a large amount of their time calling every account that was more than 15 days past due. It didn't matter that many of these borrowers typically paid before drifting into serious delinquency. Today, servicers use credit scoring tools to identify the accounts most likely to become 30 days or more past due. They then focus their efforts on this high-risk group, rather than wasting time pursuing mortgagors who historically pay late, but not too late. But credit-scoring tools can help servicers manage potential delinquencies, reduce customer runoff and influence prices for servicing portfolios, too.

The Next Step in Delinquency Management

Credit models actually determine the probability that a customer will go delinquent over a predetermined period. Smart servicers can use these models to establish a strategy for servicing a portfolio of loans that allocates resources more efficiently.

Servicers recognize that early contact with a borrower increases the likelihood of successfully collecting overdue payments, even preventing foreclosure. By applying credit scoring to an entire portfolio, you can organize the accounts according to each borrower's likelihood of default. Then, you can flag high-risk accounts, contacting them early in the delinquency to offer mutually beneficial solutions before initiating more formal curative actions. By using available resources to contact high-risk customers first and low-risk customers last, you can offer solutions to the customers who need them, and avoid offending your other customers.

To create this strategy, you must run the entire portfolio through a credit model to determine risk. You then can group your portfolio into different striations or bands for process management. Once you have set up these striations, you can refresh credit scores periodically to identify migration between bands of credit risk.

Because different credit models predict different things, a retroactive analysis using many different scoring models can help you determine which model works best for the types of loans in each portfolio. To do this, you compare the past scores of loans determined by each model to the loan's future performance. The model that produces scores that are most consistent with the borrower's actual behavior is the model that serves you best. Custom models can also be developed using specific types of portfolios to be more accurate at predicting behavior.

Credit scores are not the only way to anticipate borrower delinquency. You can use "triggers" to monitor the individual characteristics underlying the credit scores. This ongoing monitoring allows you to take action if one of the credit characteristics on the credit report changes. For instance, you may want to take action if a customer becomes delinquent on other loans or if another mortgage inquiry is added to the credit file.

Reducing Runoff

Retrospective analysis and the use of triggers can also help you reduce runoff - in other words, prevent a good customer from leaving. For example, a "credit inquiry trigger" could indicate that a borrower is shopping for a new loan, intending to refinance the current loan that you're servicing. You may be able to contact that borrower (depending on the loan you are servicing, some investors prohibit direct refinancing contact with mortgagors) and turn this potential defection into an opportunity for refinancing.

Pricing Servicing Sales

Credit scoring also can help you make the best deal on a service portfolio you're buying or selling. As a buyer, you can use an up-to-date scoring model to measure the risks for potential foreclosures and bankruptcies, allowing you to offer an appropriate bid based on the current default risk. Conversely, as a seller, the data from a current scoring model that demonstrates a lower potential for delinquencies and foreclosures can promote a higher bid for your portfolio.

Credit scoring models provide a number of benefits in managing a servicing portfolio: a higher servicing income stream, reduced costs for delinquency administration, lower runoff, decreased foreclosure costs and better servicing prices. Less obvious but no less important are the other potential benefits derived from credit scoring models: hedging the servicing portfolio against losses from foreclosures and bankruptcies, developing a reliable valuation for your portfolio or increasing customer retention. Credit scoring models provide tools for managing your servicing portfolio. Using them proactively is up to you.

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