In the past few days I’ve read several articles discussing how lenders are taking various actions to reduce their exposure to toxic mortgages – some, like Bank of America, are engaging new principal repayment programs.* Others, (including Bank of America) are using existing incentive programs to fast-track the approvals of short-sales to stunt their losses and acquire stronger lenders on existing real-estate assets.
Given the range of options available to lenders, there are significant decisions to make regarding the creditworthiness of existing consumers and which treatment strategies are best for each borrower, these decisions important for assessing credit risk, loan origination strategies and loan pricing and profitability. Experian analysis has uncovered the attributes of borrowers with various borrowing behaviors: strategic defaulters, cash-flow managers, and distressed borrowers, each of whom require a unique treatment strategy.
The value of credit attributes and predictive risk scores, like Experian Premier Attributes and VantageScore, has never been higher to lenders. Firms like Bank of America are relying on credit delinquency attributes to segment eligible borrowers for its programs, and should also consider that more extensive use of attributes can further sub-segment its clients based on the total consumer credit profile. Consumers who are late on mortgage payments, yet current on other loans, may be likely to re-default; whereas some consumers may merely need financial planning advice and enhanced money management skills.
As lenders develop new methods to manage portfolio risk and deal with toxic assets on their portfolios, they should also continue to seek new and innovative analytics, including optimization, to make the best decisions for their customers, and their business.
* LA Times, March 25, 2010, ‘Bank of America to reduce mortgage principal for some borrowers’