Looking at the growth of 1st mortgage delinquency—100 basis points in less than three years—asking "How do you prevent delinquency growth?" is a lot like ducking into battlefield trenches while pondering "How can we make sure things don't get violent here?"
The reality is when you are looking at a rapid delinquency growth scenario, it is never too late to start being proactive. I stress "proactive" because there a number of steps that credit unions can take to slow the growth while helping members. To do this, credit unions must address insipient problems in their mortgage portfolio before they become delinquent loans. Here are four methods being successfully employed by credit unions right now:
1. Cross check member loan accounts
What other loans do your members have? Take your members that have a mortgage with your credit union, and see if they are current on their other accounts with your credit union or with other lenders; a good place to start would be their credit card account, since they have the highest delinquency rate of any loans and may provide a lending indicator.
2. Monitor loan-to-value
This one is actually a two-parter. First, monitor what's currently happening to home prices where your members own property. Second, run shock scenarios. What happens if housing prices drop 5% in a month? What about 20%? How many of your members are or would be over 100% LTV? These are members to whom you should pay very close attention; even if they are current on all their loan accounts and are not experiencing economic hardship, there is still a risk they may want to walk away from the property. It may be necessary to renegotiate to keep these members current.
3. Regularly update members' credit scores
Your credit union would likely benefit from performing regularly runs on the credit scores of your members, especially those holding a first mortgage in the currently environment. It's a good idea to run this report quarterly and track credit changes. Has a member taken a 20-point hit to their credit score since last quarter? They may be trying to tap into additional credit sources quickly. Again, another red flag that delinquency may be coming your way.
4. Pick up the phone
After you see a red flag that a member may be on the path to being non-current on their mortgage, call them. Ask why they may be behind on their other loan accounts: have their hours at work been cut back, have they been laid-off, or are they incurring unexpected expenses? Reach out to as many members as you can. For example, Affinity FCU is currently making up to 10,000 calls per month to members identified as being at risk and is in the process of adding a second shift to work with members on nights and weekends.
Broach the subject tactfully, and lead with a message that you are there to help keep them in their homes. Consider that they may not be fully aware of their financial situation, or they may be too embarrassed or afraid to admit that they are struggling financially. Many credit unions have renamed their Collections Departments to names like "Credit Assistance" or "Member Care" that reminds the member that the credit union is there to work with them toward a solution. After all, doesn’t "Hi, this is Bob from XYZ's Member Care Department" sound much better than "Hi, this is Bob from XYZ's Collections Department"?
For the sake of the member, you want to make sure that the member can handle their monthly payments so that they are not constantly living in fear of foreclosure. For the sake of the credit union, you want to make sure that the members are making their monthly payments to keep liquidity flowing into the credit union. It’s still a possibility that things may get ugly, but by handling delinquency growth proactively, credit unions can help keep the peace a little bit longer.