The general public has long held a belief that the collection industry is recession-proof. In 2009, if not before, that belief may have been proven wrong once and for all as most industry leading companies reported declining profits and liquidations and rising impairment charges.
Industry executives in 2010 are focusing on what’s next. Many fear it’s more of the same. There seems to be no clear consensus about where the industry is heading. It all hinges on the greater economy. Collections, as always, will follow the economy’s lead.
For now, debt collectors are focusing on being prepared. Should the economy rebound and consumers find themselves flush with cash, or more comfortable with their financial standing, savvy agencies will be ready.
Some agencies are adding risk-management and scoring technology; others are training employees how to better approach debtors who have grown increasingly skittish about dealing with collectors.
Forecasting
In the near term, account placements should continue at high levels as unemployment woes linger. Mortgage collections in particular have been hard hit by unemployment, Robert Smiley, executive vice president of loan administration at U.S. Bank Home Mortgage, tells Collections & Credit Risk. Delinquency rates are up in the servicer’s $182 billion portfolio of 1.3 million loans. Smiley, however, expects improvement after the second quarter when he believes unemployment will ease.
In the long term, specifically the next 12 months, some industry insiders expect to see industry consolidation as well-heeled competitors that have weathered the recession sweep up less-agile players. Likely targets are smaller, overstaffed companies that did not stay current with technologies and were caught off-guard by the depth of the recession.
“Once the volume of [placements] goes down, more consolidation will take place,” says Jim Kelleher, president and chief operations officer at United Recovery Systems, Atlanta. United Recovery continues to grow organically, not by acquisitions, but, “We are always looking for opportunities,” he says.
Hopes And Fears
The collection industry clings to hope that debt prices will climb and collectability will improve amid tighter underwriting standards adopted by creditors in the last 18 months.
“We have a cautious outlook for 2010,” Ken Rapp, president and CEO at St. Paul, Minn.- based I.C. System, tells Collections & Credit Risk. But for the industry as a whole, Rapp expects this year to be difficult for collections, mostly because he doesn’t see any immediate end to the nation’s unemployment woes. “It will probably get worse before it gets better,” he says.
Unemployment in recent months has hovered around 10%, the highest level since April 1983. Add the underemployed – those working less than they want – and the rate is approximately 17%. The numbers will continue to impact liquidation rates that, depending on the product and portfolio, are down 15% to 40% from 18 months ago, industry sources say.
Personnel Boost
To cope with the economy, creditors and collection agencies have adopted a range of strategies. U.S. Bank Home Mortgage, for example, has increased its loss mitigation staff by 250% to handle the workload associated with mortgage modification programs in place to help keep people in their homes, says Smiley.
Some collection agencies too are selectively adding employees to handle a rise in placements seen across all types of debt. FMS Investment Corp., Schaumburg, Ill., recently opened a call center in Rockford, Ill., where it has 50 employees.
Companywide, FMS added 160 employees in the past 12 months. The Department of Education awarded FMS a contract, which accounts for some of the expansion, but placement volume from other sources also is expected to increase in 2010, says Maureen Peterson, executive vice president and chief operating officer.
The company handles late-stage debt, which is just starting to impact work volume at the agency. “We will see increases in volume in the next two quarters,” she adds.
But staffing increases may not be widespread and, in general, creditors are not necessarily adding employees either.
More companies are rightsizing and making their operations more efficient, Vytas Kisielius, CEO at Wilmington, Del.- based Collection Marketing Center, tells Collections & Credit Risk. The company’s “FlexCollect” software platform synchronizes debtor communications across all channels. For example, dialer campaigns do not compete with agents making calls. “We’ve had enormous growth,” says Kisielius, who expects his company to quadruple in size this year.
Collections Marketing Center recently introduced a new loss mitigation application that sets up loan modifications at the pre-delinquency stage. Kisielius notes that a growing number of creditors are focusing on pre-delinquencies in an effort to treat first-time or potential debtors as viable, or profitable, continuing customers. “There’s a real change in the tone and tenor of [collection] agents,” he says.
Nationwide Credit Inc., a Kennesaw, Ga.-based collection agency, works with a consumer psychologist to develop phone scripts that guide collectors.
“With the economy so poor, it’s a different environment,” says John McRae, CEO at Nationwide Credit. “We try to be more collaborative in our work with debtors to find sources of income.”
Another successful strategy involves using legal remedies. “There are higher upfront costs, but the benefit is a higher liquidation rate,” says Sameer Gokhale, senior vice president, specialty finance and equity research at Keefe, Bruyette & Woods (KBW) in New York.
After a two-month run of improvement, November charge-offs on credit cards rose about half a percentage point to 10.56%, according to Moody's Investors Service in its latest Credit Card Indices report. The delinquency rate for November also rose, to 6.2%. Rising delinquencies will keep charge-offs at a high level.
Placements will rise until the end of the first quarter of 2010, according to McRae. After that, placements should rise at a slower pace and then drop. “Tight credit markets will impact placements,” he says.
Lenders began tightening underwriting standard about 18 months ago, which will result in fewer delinquencies. “The days of subprime lending are gone,” he says. At the same time, McRae predicts recoveries will be helped by recent, tougher lending standards.
Today’s debtors, with higher credit ratings than the borrowers of several years ago, are a better risk and more likely to repay. But most observers admit the collection cycle has yet to truly rebound. A key sign is that the publicly traded debt-buying companies still report a high level of impairments.
Accounting rules require that companies report impairment charges when collections are expected to exceed the debt purchase price. Debt buyer Asta Funding, Englewood Cliffs, N.J., announced last week it recorded impairment charges of $137.3 million for its fourth quarter ended Sept. 30, including $53 million from the February 2007 purchase of a $6.9 billion delinquent credit card portfolio from Great Seneca Financial Corp. Asta Funding paid $300 million for that portfolio, according to Collections & Credit Risk.
Debt buyer Portfolio Recovery Associates Inc., Norfolk, Va., took an $8 million impairment charge in the third quarter related to a debt pool purchased between 2005 and 2007.
“If we see these impairment charges reverse themselves, this is a positive sign of things to come for the collections industry,” Gokhale, with KBW, tells Collections & Credit Risk. But, he adds, “We have not seen that yet.”
Prices Up, Volume Down
Debt pricing may have bottomed out and could be bouncing back. Prices are approximately 10% to 15% higher than they were during the second quarter of 2009, says Sean McVity, managing partner at Harrison, N.Y.-based Garnet Capital Advisors.
Debt sales volume has decreased approximately 30% from its peak of $125 billion in 2007. Instead of selling accounts, creditors have been placing more volume with agencies because debt prices and liquidations are depressed. Others agree debt prices are creeping higher.
“There’s a window of opportunity here for debt buyers,” says KBW’s Gokhale. “But the opportunity will not last more than two to three more quarters.” Asset-based securities and other fixed-income instruments have gone up in price, so debt prices also will continue to rise, says Gokhale. “Liquidity is returning to the market.”
Though debt prices have made a slight rebound, McVity does not expect price hikes in the next six months. Two factors could keep buyers and sellers on the sidelines: uncertainty about the economy and new regulations.
In particular, new laws could make doing business more expensive for debt buyers. In North Carolina, for instance, a law enacted Oct. 1 classifies debt buyers as collection agencies regardless of whether the debt buyer actually collects the debt. A law has been proposed in Massachusetts to reduce the statute of limitations for consumer debt from six to four years, prohibiting collection activity after the statute of limitations expires.
“Any important law like that tends to color the market,” says McVity. “It will be hard for volume and pricing to pick up until there is clarity on these fronts.”
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