As the home equity lending crisis deepens, institutions of all sizes are grappling with three customer issues: finding pockets of growth in a treacherous market, curbing losses by anticipating borrower distress before delinquency, and competing for collections in a world of multiple-creditor defaults.
Many lenders are inadvertently losing ground by sticking with the one-size-fits-all approaches that helped get them into trouble in the first place. By failing to distinguish among different categories of borrowers, lenders continue to misdirect their efforts with large numbers of customers and prospects who are unreceptive to blanket offers — or were never good candidates to begin with.
Examples include soliciting new customers without analyzing their potential risk-adjusted relationship profitability, needlessly tightening or erroneously extending credit for current customers, waiting too long to intervene with floundering borrowers, and overlooking unique borrower circumstances and relationship factors in collections.
To combat this self-defeating trend, progressive institutions are reorienting their home equity strategies to capitalize on customer differences. The goal is to define the customer groups best suited for various performance improvement initiatives.
Precision Prospecting. A top 10 bank wanted to prospect aggressively for new home equity borrowers, ideally to help offset rising losses elsewhere. The all-important question was how to proceed with a high degree of sensitivity to profit contribution and risk exposure.
As executives evaluated sales priorities, they saw that more robust measurements of lifetime relationship profitability were needed, both at the customer and segment levels. Along with historical performance information, this bank looked at probabilistic estimates of default risk, anticipated credit use, and the borrowing time horizon.
After the new metrics were used to array a large pool of customers by prospective lifetime relationship profitability, it became apparent that as many as half were not worth pursuing for home equity cross-sales. Among the other half, there was a 10-to-1 skew between prospects with the most risk-adjusted profit potential and those with the least.
Such knowledge permits a graduated approach that includes the development of targeted acquisition and retention programs for prime customers, guidance on performance patterns among lukewarm accounts, and guidance for situations that should be avoided.
Risk Intervention. Increasingly, the time when distressed debtors hurt themselves and lenders the most is during the downward spiral that often follows the onset of repayment difficulties. Though there are warning signs of crisis-mode debt accumulation, lenders often do not heed them, and distressed borrowers dig themselves deeper into debt.
To strengthen its defenses, one bank decided to go beyond traditional risk management steps, such as frequent refreshment of credit scores and careful monitoring of monthly payments. Additional reconnaissance included monitoring credit line use, borrower life events, financing activities with other creditors, and total account behavior within the financial institution, including both assets and liabilities.
This exercise helped the lender identify and manage high-risk credit lines and loans and work with overloaded borrowers before their situations worsen. The bank also found that credit trip wires had been set too tightly for certain categories of profitable borrowers. Such knowledge reinforces the value of understanding risk-adjusted relationship profitability, as opposed to basing decisions on narrower views of risk or profit alone.
Collections as Marketing. Many of today's distressed borrowers feel relatively uninhibited about setting their own repayment priorities. Retaining reward points, for example, can inspire people to stay current on some accounts while neglecting others.
At a more serious level, people are often tempted to give up when they see their theoretical "home equity" being wiped out as home prices fall. Many debtors start to question whether they should even attempt to repay property-secured advances used to consolidate card debt or finance education, trips, and recreational vehicles.
Welcome to the era of nuanced repayment negotiations. Fortunately, people arrive at delinquency in a variety of circumstances, providing lots of room for different kinds of negotiating tactics and workouts. To take advantage, the lender needs a methodical understanding of varying customer profiles and the kinds of tailored outreaches that work best in different circumstances.
Troubled borrowers who have substantial assets, few credit lines, and deep ties to the institution present a very different profile than debtors in the opposite condition. Accordingly, progressive home equity lenders are beginning to analyze the delinquent customer base to identify patterns and profiles in various clusters of accounts.
From a management perspective, there are four major priorities in unlocking these segment-based opportunities, each of which stems from risk-adjusted profitability analysis: unifying activities around a comprehensive measurement of risk-adjusted profitability; improving internal analytical capabilities; integrating new concepts into daily operations; and incorporating the right information tools and technology.
Increasingly, the winners in home equity lending will be those who can identify selective opportunities.
