Better risk prediction in mortgage servicing

Perhaps no other entity within financial services has been more challenged by the economic downturn than mortgage servicing. It’s not just that mortgage default severity is significantly higher than other consumer loan defaults. The changing nature of assessing consumer credit risk and declining property values has put huge pressure on mortgage servicers, and changed the underlying data requirements, analytics, and servicing staffing mix. They have also changed the relationships between risk, default, and profitability.

These circumstances have moved the management of mortgage credit risk from backstage to center stage. Early identification of borrowers at risk is not only essential now, but will remain so after the current crisis has passed.

FICO clients are realizing the benefits of investing in servicing to help identify risk and prevent defaults. One such client recently tested the FICO® 8 Mortgage Score for early-stage collections efforts within three segments of the servicer’s portfolio. Full results are available in a new FICO study (register to download), but here are the benefits highlights for each segment:

1. Conventional Conforming Loans—loss avoidance of over $2 million
2. Option ARM Loans—loss avoidance of $31 million
3. Non-Agency Loans—loss avoidance of $6.7 million

FICO clients are finding that investing in new analytic tools to enhance credit risk management strategies can pay off. Far from a temporary fix, these institutions are rebuilding servicing with a new, long-term market perspective.