Tuesday, June 28, 2011

Predicting Strategic Residential Mortgage Defaulters

Empty mailbox fronts foreclosed home, Reuters 6/2011
A new Experian study that showed up last week on the Reuters wire shows that Strategic Defaulters – those who voluntarily stop making their mortgage payments - are financially astute, and often already have their next home and loan before they walk.

“They are high income, they are high wealth, they own multiple homes, and they have higher (credit) scores," Tracy Bremmer, director of product marketing and management at Experian, told Reuters.   Experian is trying to identify Strategic Defaulters before the fact, so that banks can strategically head them off at the pass.   

"Lenders are still interested in educating people about whether they really understand the repercussions," added Andrew Jennings of FICO. Jennings explained that 40 states allow lenders to go after foreclosed borrowers for the extra money that was promised in the mortgage but not collected during the foreclosure sale.  FICO, for their part, recently launched a new scoring algorithm to point lenders to borrowers who are likely to strategically default before the fact.  An earlier study by FICO found that strategic defaulters had relatively strong median FICO scores of 663 and low credit card balances.  Here is some real fodder for your predictive models:
  • They may have applied for other credit recently,
  • They are upside-down on their mortgages, owing more than the home is worth, and, note this friends,
  • Are heavily concentrated in geographic areas where the pace of home values falling below mortgage balances is accelerating.
FICO also indicates that they have ongoing research that suggests that 18 months after foreclosure, the majority are having other financial problems.

The Experian study finds that 3 percent of strategic defaulters (who in turn make up about 17 percent of all defaults) went out and obtained new mortgages just before they stopped making payments. "That strategy is certainly in place," said an Experian representative. "Strategic defaulters carefully plan ahead of time before defaulting in order to purchase another home prior to leaving their current home."  At that point, their credit scores and earnings histories might easily qualify them for the new loans.  Once they settled on the new home and stopped making payments on their old home, they would not have to worry so much about the resulting credit score hit. 

What does this tell us?  A lot.  We can use this information in our GIS to both identify risks in our portfolios, and possible new opportunities in our communities (the last FICO finding notwithstanding).

Friday, June 17, 2011

If You Can't Beat 'Em, Buy 'Em

CapOne bought ING yesterday, for $9 billion in cash and stock.  This moves CapOne up to #5 in deposits in the U.S. from #8.  The ING brand will persist for a year or more.

The deal makes a lot of sense from many perspectives, especially if CapOne adds assets (like the HSBC card portfolio, which includes many affinity cards).  There is access to a broad base of low cost funds.  There is a big gain in online know-how.  Most of all, as system conversions go, this one looks relatively painless as the two share quite a bit of technology.

Just one problem.  The kind of customer that ING has is typically a value-hungry, simplicity-minded, big bank rejector.  And among the big banks that ING customers reject, CapOne is high on the list.  In fact, in many ways, CapOne is the anti-ING - perceived by many to be a high fee, hard to do business with, even deceptive traditional bank.  One look at the ING customer response to the news, as suggested by online comments in response to news announcements, suggests that the difficulty here in conversion will be cultural rather than systemic.

This is going to create huge opportunities FOR YOU, super-regional, regional, and community banks and credit unions.  The latter have already made a lot of hay in the wake of the "death of free checking". 

It's June 2011, do you know which of your customer households is doing business with ING, or fits the ING customer profile (online-savvy savers and fee-averse transactors)?  Yes indeed, another reason to lean heavily on a customer-relationship, lifestyle-oriented GIS system.

Thursday, June 9, 2011

April Revolving Debt Decline May Obscure Upbeat Long Term Trend

On Tuesday, the Fed released data for April showing that revolving credit (largely credit card debt) declined once again, after increasing slightly in March.

There has been a lot of media attention on this decline, and a lot of misinformation, with many reporting that "consumers are pulling back on credit card spending again."  This is because the fact remains, revolving debt dropped for 27 consecutive months from September 2008 to November 2010, and it seems that nobody can wipe that bad taste away. 

However, it is also evident that revolving credit expanded in November 2010 and in March 2011, and the April contraction was just -1.4% - not good, but well below the levels of contraction we have been seeing.  As illustrated in this chart, the present long term trend looks a whole lot better than anything we've seen since the Great Recession began.

We believe that as political and economic conditions stabilize, we will see consumer confidence and spending begin to rebound.  It is going to take time, though.  Consumer spending, which accounts for about 70 percent of economic activity, rose a less-than-forecast 0.4 percent in April, according to Commerce Department statistics released May 27, as increases in fuel costs started to show up everywhere, especially in food prices as well as gas prices.

It is those fuel price increases -which affect everything that is transported - that remain a threat to stag-flate us.  But as we see gas prices relaxing now in June ahead of the peak summer travel months, and forecasts for planned consumer travel seem to have been little impacted based on TripAdvisor data (showing 61% of Americans say their travel plans will not be impacted at all by gas prices), we think people are going to travel and spend this summer - perhaps especially because times have been so tough and we all feel like we deserve a little vacation.

Wednesday, June 8, 2011

Merchants Rejoice as Senate Upholds New Debit Card Rules

Courtesy of National Public Radio, 2011
Banks will really need to find other ways of earning fee income now.  The Senate voted Wednesday to let the rule stand by which the Fed will slice away $12 billion in annual income represented by debit interchange, the fees that merchants pay banks each time a customer swipes a debit card.  Senators supporting the financial institutions' efforts to head off the Fed proposal fell six voters short of the 60 needed to prevail, 54-45.

Those charges now average 44 cents per transaction.  Let's get real.  That is well, well above the cost of a debit transaction carrying none of the risk of a credit based one.  BUT - the Fed ruling will hold those fees to a maximum of just 12 cents per swipe, and the law takes effect in about a month on July 21. While this might change, it probably won't now.

Smart banks will realize, and already have, that they need to enter retail financial businesses that earn fees. But most will simply look to place fees on what has been given away for years, and play right into the hands of online, non-traditional players, and non-banks.

What a good time to dig into your GIS, and determine which of your trade areas have the kind of customers and overall community composition that spells success for financial, college, tax and retirement planning.  

When one needs fee income, one emphasizes products and services for which consumers have always paid fees, and gladly.  And studies continue to show that consumers still trust their banker more than, say, their stockbroker.  Simply ratcheting up NSF and late and other fees and creating new triggers for them simply won't get 'er done.  Making new kinds of relationships and stepping up to compete in the new environment, will.