This year, credit unions have captured additional market share and economic conditions have shown some positive signs of leveling off. TransUnion's annual credit forecasts released earlier this month show that national mortgage loan delinquencies (the ratio of borrowers 60 or more days past due) will drop nearly 3 percent by the end of 2010 to 6.39 percent from an expected 6.56 percent at the conclusion of 2009. This projected decrease in mortgage delinquencies would end a trend that included unprecedented year-over-year increases of 43 to 54 percent between 2006 and 2009. For credit cards, 2010 delinquency rate forecasts (the ratio of borrowers 90 days or more delinquent on one or more of their credit cards) indicate the nation will experience a third straight year-over-year decrease from 1.07 percent at the end of 2009 to an estimated 1.04 percent by the end of 2010.
While delinquencies are expected to decrease slowly at the national level, it is important to also understand the impact of market trends at the regional level. For example, some states will see double-digit decreases in delinquency while others will have increases. To address the ever-changing market, there are inherent steps that must continue to be taken to successfully manage accounts and prevent losses.
- Credit unions should continue to review trends to verify any changes to treatment strategies. Are the problems in your portfolio due to your actions or the market? You may be missing opportunities to capture additional market share if you tighten up on lending because your delinquencies may be higher, when in reality they are in line with or even lower than the industry or seasonality trends.
- Credit unions should also conduct frequent reviews of their accounts to monitor for risk while identifying opportunities to grow existing member relationships. It's not enough to score your accounts once or twice a year. Approximately one quarter of consumer scores change more than plus or minus 20 points within a three-month period. And, as consumer credit profiles change more rapidly, it's important to obtain current scores on members, as they are more predictive and can better capture those changes. With updated scores, you can take more timely actions to increase lines or reduce risks. Fresh credit scores on account portfolios can be made available as soon as 24-48 hours.
- In addition to a fresh score, better segmentation of member accounts with additional variables is also important. You don't want to aggravate or lose your good members by raising fees, reducing lines or closing accounts. By profiling your members through additional credit characteristics, such as loan-to-values, balances, and utilization amounts, you can further separate your most risky accounts and reduce the impact on your best members. Additionally, a dual score approach, such as adding a bankruptcy score, can provide further segmentation and protection.
- The impact of adjustable-rate mortgages is not behind us. Credit unions need to evaluate their accounts to identify members that may have adjustable-rate mortgages with other lenders. Nearly 70% of ARMs have yet to reset, and an estimated 1.5 million ARMs will begin resetting in 2010. Consumers with ARMs are almost four times more likely to default on an account than consumers without an ARM. And, once the ARM resets, the likelihood of defaulting on any account increases. Consumers with ARMs also carry higher balances across all product lines, which means higher potential losses. For acquisitions, identifying ARMs on the front-end should be factored into a member's capacity to pay. When the ARM resets, will the member be able to afford that car loan?
The key to a successful 2010 is to understand how external and internal trends are affecting your credit union—and your members—and adapt accordingly. Combine market intelligence with more frequent portfolio reviews. Get a more complete view of your accounts by accessing consumer credit and behavior changes. And use that insight to develop more effective portfolio management strategies to optimize member relationships and reduce risks.
David Dodson is vice president of credit unions at Chicago-based TransUnion. He can be reached at email@example.com.
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