Predictive Analytics Gaining Credence with Servicers.(surveys)

Phoenix -- Similar to credit card and auto lending operations, mortgage lenders are now incorporating predictive analytics to better manage risk, said James Caldwell, a partner with Deloitte & Touche, at the MBA's National Mortgage Servicing Conference & Expo here.

"There are several stages of increasing sophistication in collections, ranging from traditional to enhanced and then to risk-based," Mr. Caldwell told conference attendees during a session entitled "Leveraging Predictive Analytics to Drive Profit in Mortgage Collections."

Deloitte conducted an online survey with the assistance of the Mortgage Bankers Association in which it conducted in-depth interviews with senior executives and examined collections operations of more than 20 mortgage companies, including six of the 10 largest services with more than $600 billion held in combined portfolios.

With rising rates, concerns over housing prices and strained economic outlook, the survey found that lenders are implementing a variety of techniques to lower costs and boost revenue. "Mortgage lending has always looked for trends in customer data. However, sophisticated analytic tools can recognize critical patterns beyond trends. The market for decision analytics software in the U.S. was $2.3 billion in 2004 and is expected to grow by 30% in the next two years."

Trends driving mortgage collections practices include concerns about credit quality and the rising rate in bankruptcies. Mortgage debt has increased 42% since 2001 to $8.8 trillion and home equity at $715 billion in 2004, according to the survey. MBA data show that interest-only and adjustable-rate mortgages made up 65% of new mortgages in 2004, up from 18% in 2003. "Industry trends will drive more lenders to adopt predictive techniques and to re-examine their collections organization. Lenders are seeing new needs and new opportunity for those in the subprime market, which accounted for 20% of all new mortgages between 2004-2005," said Mr. Caldwell. "And the impact of bankruptcy law changes in 2005 has not realized. Personal bankruptcies have doubled every decade since 1960."

Major lenders have been taking steps to improve collections by streamlining the workflow, measuring performance more accurately and building the technology infrastructure, he said. One study participant used predictive analytics to target loans for foreclosure using LTV and the number of months the account was delinquent. "By foreclosing on accounts four months delinquent and with an LTV greater than 50%, they refer 18% more homes for foreclosure and decreased charge-offs by 10%," Mr. Coldwell ...