Ever since the foreclosure crisis hit full swing, once piece of advice has repeatedly been dished out to servicers: Think proactively, not reactively.
Valid as this advice might be, the task of overhauling operations to become more prescient is not as simple as flipping a switch. A system makeover can be an unwieldy thing to manage in even the most trouble-free times – never mind in an environment in which understaffing is the norm.
The desire to be proactive, though undoubtedly well-intentioned, has resulted in hastily crafted and poorly focused solutions, which have only exacerbated the challenges involved with managing default.
During Deloitte's ‘Achieving Excellence in Default Management’ Web cast last month, David Sisko, the firm's director of default management, gave examples of strategies employed in collections departments that are meant to curb defaults but, in fact, miss the mark.
‘Prior to the current economic crisis, mortgage servicers primarily focused on cost reduction over collections competencies and effectiveness,’ Sisko said. ‘Frankly, this is completely understandable because of the traditionally low delinquency and loss rates. However, times have definitely changed.’
Mortgage servicers' collections techniques, such as dialers and virtual agent campaigns, are relatively unsophisticated in comparison to those used for unsecured portfolios, like credit card portfolios. Nonetheless, such campaigns been ramped up in line with increased delinquencies. Some institutions have increased penetration rates by as much as 500%, Sisko has observed, meaning that a borrower's number that was formerly called once a day is now being called five times a day.
If dialer campaigns fail to consider the best times for borrowers to receive calls, however, the end result is simply multiple unanswered attempts.
Servicers are better off concentrating on contact performance, which can be determined by monitoring right party connect (RPC) metrics and improved by including risk-based modeling. Historical behavior patterns can be used to segment borrowers into risk buckets, allowing servicers to direct phone campaigns as appropriate.
Such risk segmentation can help identify which borrowers are ‘self fix’ borrowers (those who likely require little prodding) and which borrowers will probably continue through collections. Drawing this distinction among borrowers is crucial, Sisko said. The segmentation does not have to be particularly advanced; creating low-, medium- and high-risk buckets can make a meaningful difference for shops that are not already doing so.
A frequent knock against servicing operations has been that they lack capacity, but that criticism does not necessarily hold true in regard to collections. But while it may ease capacity constraints, adding bodies to call centers is no guarantee of better performance, Sisko noted.
‘Some organizations have dramatically impacted collections cost without corresponding improvement in delinquency and losses by simply hiring 20 percent to 50 percent more collectors in lieu of properly aligning risk segmentation and treatment strategies,’ he said.
Collectors must be trained to identify the root cause of a default and be prepared to provide payment solutions on the spot. Moreover, collectors should treat every conversation with a borrower as though it is the last, and obtain borrower information accordingly.
In much the same way that collections departments have doubled human resources or quintupled outbound call volumes, they have also emphasized increasing the quantity – rather than the quality – of performance reports.
‘A word of caution: Granular does not equate to an excessive number of reports,’ Sisko warned, adding that he has seen organizations keep over 1,000 daily operational reports. ‘Typically, we like to see that down to a dashboard of five to 10 data elements that can be drilled into, should an issue or red flag arise.’
Reports should focus on promise-to-pay metrics (e.g., the percentage of promises made and the percentage of promises kept), which vary by mortgage product, call center, delinquency tier, risk tier, time of day and day of the week. Such metrics are considered ‘quality indicators’ and are essential for training programs and staffing models.
Based on promise-to-pay numbers alone, early-stage collections is a function that appears better suited for in-house resources than outsource providers, Sisko added.
‘What I've typically seen in the last 12 to 18 months, is the outsourcers – the quality of the output of collections – is significantly less than the quality of in-house collections,’ he said.
There is no denying that several governmental initiatives (e.g., HOPE NOW, Making Home Affordable) have combined with mainstream media reports to make servicers more visible than ever. Consequently, call centers have fielded record numbers of phone calls from borrowers who have more than a superficial understanding of the programs available to them.
By the same token, debtors who are consciously avoiding collectors' calls have become more sophisticated about creditors' techniques, Sisko said. The result: lowered RPC totals.