Lender Market Volatility Expected Through 2008, Report Says

MBA (2/21/2008 ) Sorohan, Mike
With the full effects of subprime mortgage adjustments yet to run its course, lenders can expect continued volatility—and opportunity—through 2008, according to a new report from TowerGroup, Needham, Mass.
The report, 2008 Top 10 Business Drivers, Strategic Responses and IT Initiatives in Consumer Lending, said while lenders must remain on “heightened alert” as the subprime fallout continues and financial performance expectations revise downward, the coming year also offers opportunities for those lenders that can adapt and plan ahead.

“The volatility of consumer lending markets has forced consumer banking divisions of financial services institutions into a defensive mode,” said Bobbie Britting, senior analyst in TowerGroup's consumer lending practice. “As a result, both revenue and profitability are forecasted to decline across most lines of the consumer lending business. During this time of crisis, it is imperative for the consumer lending industry to refocus and begin taking steps toward a broad reformation of credit.”

The Mortgage Bankers Association expects mortgage originations to decline over the next two years, to around $2 trillion this year. MBA predicts housing production of new homes and sales of existing homes will likely decline by 13 percent this year and home prices will likely drop by 8-12 percent.

MBA Chief Economist Doug Duncan said economic turmoil, driven primarily in California and Florida as well as Michigan and Ohio, have led to increased foreclosures in those states. Additionally, tightened credit standards have virtually “shut down” the subprime mortgage market. “Banks are still making subprime loans, but those are few and far between,” he said.

The TowerGroup report said lenders must focus organizational, operational, financial and technology operations on addressing the gaps that contributed to the current crisis, as well as to prevent new ones.

“Paying attention to key business drivers and reforming outdated strategies will be critical to providing the types of products consumers want and can understand—as well as to setting appropriate customer expectations about all aspects of a lending transaction,” Britting said.

Key elements of the report include:

• Many top line metrics—including lending volume, revenue, profits, home sales, home prices, automobile sales and college costs—will worsen in 2008.

• Lenders will “face increasing regulatory burdens and must have the right IT systems in order to adjust rapidly. Technology, particularly in core lending systems, will play a major role in enabling consumer lenders to remain viable.”

• Lenders must undertake “broad reformation of credit, which encompasses product, service and channel innovation; improved risk assessment and loss mitigation; and increased focus on the customer.”

• On a fundamental level, lenders must integrate systems to better understand the customer and obtain a holistic view of the customer or household’s relationship with the financial institution; make better use of data to develop the next successful product offering; and automate to engage in these activities consistently, compliantly and cost-effectively.

• Innovation, integration, transformation, automation and optimization are “no longer buzz words, but represent key initiatives supporting credit reformation.”

• The situation remains fluid, with the potential for greater volatility should a new crisis occur, such as in other types of highly-leveraged credit instruments. “This scenario would exacerbate consumer credit market volatility globally and again reshuffle lenders’ strategic responses,” the report said.

“A credit reformation is needed across all areas of consumer lending, including mortgage lending, loan securitization, and loan servicing,” said David Hamermesh, senior analyst at TowerGroup and the report’s co-author. “In order to have real impact…these reforms must encompass product, service and channel innovation, with a greater focus on risk and loss mitigation and an increased emphasis on the customer. Those lenders that focus attention in these areas have the opportunity to emerge stronger and more competitive.”