Credit Counselor: Lenders Starting to Take Precautions in Light of Rising Delinquencies.(Brief Article)

With the national economy starting to decline after years of growth, the mortgage industry is taking early precautions to minimize the potential impact of a rise in delinquencies, defaults and foreclosures. In addition, servicers are increasingly implementing hedging strategies to protect against drops in the values of their portfolios.

Lenders who made an excessive number of high-risk loans during the last few years are the ones in the most danger during this economic downturn.

Ralph Carrigan, executive vice president of SunTrust Mortgage Inc., Richmond, Va., said, "The increase in making loans at a higher loan-to-value has resulted in more consumers with less equity in their homes who are at a higher risk of default. To minimize that risk, many of us have been all about getting mortgage insurance."

In the current environment, many companies selling loan pools into the secondary market are also making agreements with buyers to retain a portion of the risk as well as the profit, said Mr. Carrigan.

Others are making deals with mortgage insurance companies to share the risk, while yet others are focusing on their hedging strategies, he said.

Kent Westerbeck, interest rate risk manager and senior vice president of ABN AMRO, Chicago, said, "The hedges that we have in place have been reasonably successful in increasing in value to offset the decrease in value of the servicing assets."

ABN uses software licensed from the Mortgage Industry Advisory Co., New York, to "determine the value of the servicing (portfolio), its risk profile and which hedges to use to manage the risk. We also use it to do the calculations necessary to have our derivatives qualify as hedges under FAS 133 and to record all the necessary accounting details."