Market Volatility Top Concern for Lenders

Even before the current credit crunch, lenders cited market volatility as their top business driver for 2007, according to a report just released by TowerGroup, Inc., Needham, Mass.

"Market volatility is forcing consumer lenders to revise their business objectives and strategies if they want to be successful in the coming years," writes TowerGroup Senior Analyst Bobbie Britting in Future of Consumer Credit.

The mortgage market is in a state of even more extreme flux now than when the survey on lenders’ views was conducted in the spring. Even then, according to the report, “rising mortgage payments, borrower defaults and loan buybacks from secondary mortgage market investors have led to numerous subprime lenders shutting their doors and has provoked Congressional hearings on the topic of high default rates in that market.”

TowerGroup and Canadian-based technology firm CGI jointly developed the questionnaire of senior operations and technology personnel at 31 major financial services institutions in the U.S., Canada, the United Kingdom, and Ireland. The online questionnaire was sent in March. Fourteen firms—nine in the U.S. and five in the other countries—for a 45 percent response rate.

Seventy-one percent of lenders ranked market volatility as one of the top three business drivers at their institutions. The aggressive regulatory environment and increased competition were the next most-cited drivers, followed by increased risk of fraud.

The report points out that rising interest rates and the leveling off of home prices have made it more challenging for consumer lenders to extend credit to borrowers, who face higher loan-to-value ratios on their properties and higher interest rate payments on loans. That is particularly true of borrowers who secured the 2-28 loans that were popular during the real estate boom of 2003 to 2005. These adjustable rate mortgages had low initial teaser rates for the first two years, then reset to a fixed rate (based on market rates at the time) for the final 28 years. A majority of the loans taken out during the boom is starting to hit those resets.

As a result of the market volatility, regulatory concerns, competition and fraud risk that were already evident in the early spring, lenders’ technology initiatives will focus on core lending systems as well as automated workflow and business process management, Britting found.

The automated workflow enables lenders to better track a loan throughout its lifecycle – from initial application to payoff of collection, Britting told insideARM.com. Without automated workflow, each of these processes tends to be in its own silo.

“By breaking down the different stages of a credit product, lenders are better able to try to turn a collection into a servicing call,” Britting said. By tracking credit throughout the process, lenders can see more quickly where a loan gets in trouble and can opt to offer a borrower a different product rather than just put the borrower into collections.

For example, a borrower who has an unsecured loan who falls behind on his payment can be offered a home equity loan (if he or she indeed has equity to draw upon) or the terms of the initial credit can be rewritten so that the borrower remains a customer rather than becoming an account that goes to collections.

Lenders are making these moves to try to build lifetime customers rather than to focus so much of their efforts on collections, Britting said. This is also evident in some of the other technology initiatives lenders cited – implementation of advanced analytic solutions, data management and fraud detection technologies – that are focused on alerting lenders more quickly about problem credits.