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Mortgage shortfall
debt recovery
making the most of the window of opportunity and
ensuring favourable outcomes for borrowe...
3
Contents
Section 1:
Section 2:
Section 3:
Section 4:
Section 5:
Section 6:
About this paper
A brief introduction to HML
...
4
This good practice guide details HML’s
experience of collecting mortgage shortfall
debt, capitalising upon our four uniq...
5
HML is a third-party mortgage
administration company that operates in the
financial services sector. It has 25 years of
...
6
Executive summary: The successful
recovery of mortgage shortfall debt
requires specialist skills. It takes time
and comm...
7
1: 	Reputational risk
One of the main reasons why many lenders decide not to
pursue mortgage shortfall debt recovery is ...
8
4.1: USP 1: Market-leading
analytics
Executive summary: A successful
mortgage shortfall debt recovery strategy
begins wi...
9
Credit reference agency data
We begin the analytics process by drawing upon credit
reference agency data, which includes...
10
Section 4.2:
4.2: USP 2: Collections
strategies
Executive summary: Drawing upon
our market-leading advanced analytics,
...
11
Section 4.2:
Continued
If a borrower is identified as a non-homeowner, but with a
high propensity to pay, this means th...
12
Section 4.2:
Continued
Borrowers who are identified as buy-to-let landlords
and other ‘special cases’, such as owning m...
13
If a borrower is identified as a non-homeowner, but with
a medium or low propensity to pay, this means they have
no rec...
14
Section 4.3:
4.3: USP 3: SMS
Executive summary: The third USP is
handling reputational risk. Our subsidiary
SMS collect...
15
Section 4.3:
Continued
Outsourcing legal title to SMS means it will hold the
regulatory permissions, including the requ...
16
Section 4.4:
4.4: USP 4: Specialist shortfall
debt recovery team
Executive summary: HML’s mortgage
shortfall debt team ...
17
This ring-fenced, self-contained resource has more
than 100 years of combined experience, with a strong
skillset that i...
18
Section 5:
Lender case study
Executive summary: An increase in
mortgage shortfall debt recoveries of
300 per cent year-...
19
Section 5:
Continued
As seen in this graph, performance uplift has been
experienced across all of the borrower segments...
20
Section 6:
Conclusion: is now the window of
opportunity?
Executive summary: With the base rate
remaining at a historic ...
21
Section 6:
Continued
For those borrowers who do not own a property,
increasing positive economic sentiment may mean the...
22
NOTES
23
NOTES
www.hml.co.uk
www.hml.ie
www.twitter.com/HMLcorporate
www.twitter.com/HMLIreland
www.linkedin.com/company/hml
Mortgage shortfall debt recovery: making the most of the window of opportunity and ensuring favourable outcomes for borrowers
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Mortgage shortfall debt recovery: making the most of the window of opportunity and ensuring favourable outcomes for borrowers

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This good practice guide details HML’s experience of collecting mortgage shortfall debt, capitalising upon our four unique selling points (USPs) in order to maximise the value of mortgage portfolios for both lenders and debt purchasers.

The first is our market-leading analytics service, which ensures those borrowers with a high propensity to pay are contacted as a priority, enabling resources to be focused in the most appropriate places.

Our second USP is our tailored collections strategies, which focus on borrower engagement and the most appropriate outcomes. This, in turn, delivers maximum value for lenders.

Our third USP is handling reputational risk. Our subsidiary Specialist Mortgage Services (SMS) collects mortgage shortfall debt under its brand. The experienced consultants can judge each borrower’s situation (supported by analytics) to know when and how to collect debt. In addition, SMS can hold legal title for lenders and investors. This has many benefits, including removing the burden of needing to hold the relevant FCA permissions and, as a result, widening the potential purchase pool of mortgage portfolios.

Finally, our specialist mortgage shortfall debt recovery team has more than 100 years of combined experience and is a ring-fenced resource. This ensures borrowers are dealt with by appropriately experienced consultants with a robust skillset and who know how to engage and build empathy with borrowers who have this type of debt, ensuring true value can be achieved for lenders and portfolio purchasers.

There are many challenges to collecting mortgage shortfall debt, but HML’s four main USPs, experience and significant resources are combined within a single, effective solution that ensures lenders and debt purchasers can maximise the value of a portfolio.

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Mortgage shortfall debt recovery: making the most of the window of opportunity and ensuring favourable outcomes for borrowers

  1. 1. Mortgage shortfall debt recovery making the most of the window of opportunity and ensuring favourable outcomes for borrowers
  2. 2. 3 Contents Section 1: Section 2: Section 3: Section 4: Section 5: Section 6: About this paper A brief introduction to HML Mortgage shortfall debt recovery: the challenges HML – the solution Lender case study Conclusion: is now the window of opportunity?
  3. 3. 4 This good practice guide details HML’s experience of collecting mortgage shortfall debt, capitalising upon our four unique selling points (USPs) in order to maximise the value of mortgage portfolios for both lenders and debt purchasers. The first is our market-leading analytics service, which ensures those borrowers with a high propensity to pay are contacted as a priority, enabling resources to be focused in the most appropriate places. Our second USP is our tailored collections strategies, which focus on borrower engagement and the most appropriate outcomes. This, in turn, delivers maximum value for lenders. Our third USP is handling reputational risk. Our subsidiary Specialist Mortgage Services (SMS) collects mortgage shortfall debt under its brand. The experienced consultants can judge each borrower’s situation (supported by analytics) to know when and how to collect debt. In addition, SMS can hold legal title for lenders and investors. This has many benefits, including removing the burden of needing to hold the relevant FCA permissions and, as a result, widening the potential purchase pool of mortgage portfolios. Finally, our specialist mortgage shortfall debt recovery team has more than 100 years of combined experience and is a ring-fenced resource. This ensures borrowers are dealt with by appropriately experienced consultants with a robust skillset and who know how to engage and build empathy with borrowers who have this type of debt, ensuring true value can be achieved for lenders and portfolio purchasers. There are many challenges to collecting mortgage shortfall debt, but HML’s four main USPs, experience and significant resources are combined within a single, effective solution that ensures lenders and debt purchasers can maximise the value of a portfolio. Section 1: About this paper
  4. 4. 5 HML is a third-party mortgage administration company that operates in the financial services sector. It has 25 years of experience in the outsourcing industry and is based at four sites - it is headquartered in Skipton, and also has offices in Glasgow, Derry and Dublin, with approximately 1,300 employees in total. It currently has approximately £37 billion of managed assets on behalf of 50 major clients, including banks and building societies. Mortgage administration and servicing is HML’s core service, together with standby servicing and securitisation, business intelligence and asset trading as the principal service propositions. HML is also standby to around £60 billion of assets. In August 2013, Fitch announced that HML’s UK residential primary (prime and sub-prime) servicer ratings had been upgraded to RPS1- from RPS2+. HML’s new RPS1- primary (prime) servicer rating is the highest of any third-party mortgage administration company in the UK and Ireland. Its RPS1- primary (sub-prime) rating is the highest in Europe. Fitch affirmed HML’s Irish residential mortgage primary servicer ratings for both prime and sub-prime at RPS2, while its UK special servicer rating was affirmed at RSS21 . In August 2013, S&P revised upwards the outlook of HML’s primary servicing of residential mortgages in the UK from stable to positive. It also affirmed the above average rankings for HML as a primary and special servicer of UK residential mortgages, and as a primary servicer of residential mortgages in Ireland. In addition, HML’s stable outlook was affirmed for the special servicing of UK mortgages and the primary servicing of Irish residential mortgages2 . Section 2: A brief introduction to HML SKIPTON HQ (opened 2010) DUBLIN (opened 2013) GLASGOW (opened 2007) DERRY (opened 2004) 1 www.hml.co.uk/latest-thinking/2013/08/fitch-upgrades-hml-to-rps1-for-uk-residential-prime-and-sub-prime/ 2 www.hml.co.uk/latest-thinking/2013/08/hml-receives-sp-outlook-revision/
  5. 5. 6 Executive summary: The successful recovery of mortgage shortfall debt requires specialist skills. It takes time and commitment that lenders and debt purchasers may not have, or they may have no inclination to be involved in the day-to-day running of such a complex proposition. There is also the perceived reputational risk involved with attempting to collect money from individuals who have – in the main – lost their primary residence after experiencing difficult financial circumstances. This perception is why many lenders decide not to pursue mortgage shortfall debt recovery, despite the latent profit potential. There are several challenges surrounding the recovery of mortgage shortfall debt that can make it unattractive for lenders to pursue this type of outstanding balance due to the confrontational relationship this might create between the lender and borrower. Almost all mortgage shortfall debts have arisen as a result of a borrower losing their primary residence through repossession, meaning they have more than likely experienced acute financial difficulties. As such, making up the shortfall between their mortgage and what their property sold for is rarely a priority for the borrower. In some cases, they might not even be aware that they are liable for the debt and believe that once a property is sold, the problem has ‘gone away’. The four main challenges involved with mortgage shortfall debt recovery are: Section 3: Mortgage shortfall debt recovery: the challenges 4. Provisioning 3. Resource intensive 2. Complexity 1. Reputational risk
  6. 6. 7 1: Reputational risk One of the main reasons why many lenders decide not to pursue mortgage shortfall debt recovery is because of the perceived reputational risk involved. All borrowers who have a mortgage shortfall debt are currently experiencing or have experienced difficult circumstances and financial institutions can be wary about how to proceed. As such, some do not intend to recover mortgage shortfall debt and simply include it within their provisioning. On the other hand, trying to collect too soon could prove confrontational; it is essential that the situation is correctly judged to know when the best time to collect mortgage shortfall debt is. There is also the reputational risk that could arise should mortgage shortfall debt recovery strategies not adhere to those laid out within the Financial Conduct Authority (FCA) Handbook, which are particularly complex. 2: Complexity Recovering mortgage shortfall debt can be extremely complex, from drawing upon advanced analytics (which requires experienced data analysts) to having the appropriate regulatory permissions from the FCA. It is also paramount that consultants tasked with collecting the debt can empathise and have the right people skills, especially as in some cases, the lender and borrower relationship may have completely broken down. While the regulatory hurdles may not be an issue for some major lenders, a debt purchaser intending to acquire a mortgage portfolio with shortfall debt within it may not have the time, inclination or knowledge to obtain the right permissions to enable money to be recovered. In addition, it might not be commercially viable to become a regulated entity simply to collect mortgage shortfall debt. 3: Resource intensive The traditional process of recovering mortgage shortfall debt can be resource intensive. For the collection of shortfall debt to be truly effective, tools such as advanced analytics and extensive multi-channel collections strategies need to be utilised. Some lenders and debt purchasers may not have the time or inclination to establish the resources required for a targeted shortfall debt recovery strategy. Advanced analytics and other powerful data tools are not only complex, but also take time to build, test and optimise in order to trace, profile, segment and target those borrowers who have the highest propensity of recovery i.e allocate resources to where the greatest opportunity of success exists. 4: Provisioning Many lenders have already provided for the losses from mortgage shortfall debt. Therefore, effectively recovered cash would flow straight to bottom-line profit for lenders, making it an ‘immediate win’. Section 3: Continued
  7. 7. 8 4.1: USP 1: Market-leading analytics Executive summary: A successful mortgage shortfall debt recovery strategy begins with advanced analytics, which identify those borrowers with a high propensity to pay, enabling resources to be focused in the most appropriate places. Combined with the latest trace and locate, behavioural and consumer credit data, our advanced analytics enable us to deliver a bespoke collections approach tailored to each lender and each of their borrower’s circumstances. This sets us apart from traditional methods employed by debt collection companies, that often simply methodically work through a borrower list, whether or not contacting that individual is in both the lender’s and the borrower’s best interests. By continually refining our segmentation and collections strategies, we can take account of changing borrower circumstances. HML’s market-leading analytics is the first USP of our mortgage shortfall debt recovery service. A large number of typical debt companies that are tasked with collecting mortgage shortfall debt simply work their way through a borrower list, contacting each individual one by one. From the experience gained by working mortgage shortfall debt portfolios, HML has found this does not represent a good practice approach and does not result in the best outcomes for borrowers. Having access to in-depth information at the right time is essential to shape a successful shortfall debt recovery strategy, and can be used to assess each borrower’s propensity and willingness to pay. This ensures the most appropriate outcomes for borrowers can be tailored to their unique circumstances, minimising the risk of borrower detriment. Our advanced analytics are used in conjunction with credit reference agency data to ensure the borrowers who are most able to start repaying their mortgage shortfall debt are contacted first, and those individuals who are not in a position to pay are monitored for any changes in their circumstances. Our process also makes sure that vulnerable customers are dealt with by experienced consultants with the required skillset and are not inappropriately contacted. Section 4: HML – the solution “Our market-leading advanced analytics, used in conjunction with credit reference agency data, means our lenders can be confident that our borrower contact and mortgage shortfall debt recovery strategies are tailored to ensure the most appropriate outcomes for borrowers and to extract maximum value from a portfolio. In-depth information, delivered at the right time, empowers our specialist shortfall debt recovery team to have more informed and deeper conversations with borrowers. The resulting performance uplift we have experienced is testament to placing analytics at the heart of mortgage shortfall debt recovery strategies.” Damian Riley, director of business intelligence at HML
  8. 8. 9 Credit reference agency data We begin the analytics process by drawing upon credit reference agency data, which includes a monthly file of confirmed addresses and telephone numbers, credit account data and daily alerts that monitor a borrower’s credit file. For example, when a borrower makes a significant payment on a credit card, this is flagged up. By having a view of a borrower’s repayment behaviour regarding different financial products and their latest contact details, we can then use our advanced analytics to profile and segment a mortgage shortfall debt portfolio and be confident that we are contacting the right individual at the correct address and at the right time. Advanced analytics Once we have obtained the latest contact and consumer credit data and Analysed the behaviour of borrowers, we can then profile and Segment based on this information. Borrowers are segmented into several categories, examples of which can be viewed below: Being able to Segment borrowers in this way means we can prioritise our contact with them and ensure a suitable collections strategy is adopted that will result in the most appropriate outcomes for both our lenders and their borrowers. The Collections stage of the process draws upon the analytics outputs to drive the collections strategies, which includes contact that is tailored to each borrower segment. Should contact and collection not be appropriate, such as in the case of non-homeowners with a low propensity to pay, then the next stage is to Monitor. Monitoring includes the use of daily alerts which notify us if there is a significant improvement in a borrower’s financial circumstances, including new lending, settlement, balance reductions and improvements in arrears, which are all broken down by product type. This allows us to make early contact with the borrower, so we can have the relevant discussions about their change in circumstances. Finally, like all of our analytics processes, the final stage is to Review and use Management Information to provide insight into a mortgage shortfall debt portfolio and its performance. This enables us to assess the effectiveness of our collections strategies and allows us to refine them, if required. Section 4.1: Continued SegmentReview Analyse Collect Homeowners with equity Non-homeowners with high propensity to pay Buy-to-let landlords and other ‘special cases’ Non-homeowners with low propensity to pay No propensity to pay
  9. 9. 10 Section 4.2: 4.2: USP 2: Collections strategies Executive summary: Drawing upon our market-leading advanced analytics, our mortgage shortfall debt recovery collections strategies can then be shaped. Tailoring contact and collections to each individual not only ensures the most appropriate outcomes for borrowers, but also that our lender is getting the best possible value. With our resources focused on such a tailored and detailed approach, this minimises ‘waste of time and effort’, freeing up our specialist team to closely work with borrowers. Increasing borrower engagement through a targeted approach is key to recovering mortgage shortfall debt. Borrower engagement can take time to build and requires the right balance between collecting debt and understanding the individual’s circumstances. This is a balance that requires experience and a specific skillset. Placing advanced analytics and conduct risk at the heart of our shortfall debt recovery collections strategies means we can ensure they are as effective as possible and that the right borrowers are targeted at the right time3 . We tailor our collections strategies to each individual within each segment. Our collections strategies are as follows: The experienced forensic consultants within HML’s specialised mortgage shortfall debt recovery team are responsible for deploying the collections strategies for identified homeowners who have equity in other identified properties. Using Land Registry records, they assess the equity within a borrower’s property and review their credit profile before deciding upon the most appropriate action to take. Equity within the property If there is equity within a property, the litigation process will commence and an interim charging order placed against the property. Our consultants will then attempt to contact the borrower in line with relevant FCA regulations. Conduct risk issues are mitigated throughout the process by employing a compliant call framework and letter suite and always completing an income and expenditure review in order to assess any repayment offers from a borrower. This ensures that the borrower’s offer is appropriate for their circumstances. If no repayment resolution or contact with the borrower is made, we will place a full charge against the property and eventually progress to a forced sale. However, throughout this process we continue to try and engage with the borrower to negotiate a settlement or repayment plan which is acceptable to both the lender and the borrower. No equity within the property If there is no equity within a home, we will look to proceed to an interim charge to ensure our lender is recognised as holding an interest in the property. If we have successfully engaged with the borrower regarding a full and final settlement, we will remove the charge following repayment. However, if this has not been possible, we will regularly monitor the value of the property until there is sufficient equity to further progress the case. 3 www.fca.org.uk/your-fca/documents/corporate/fca-risk-outlook-2014 Homeowners with equity
  10. 10. 11 Section 4.2: Continued If a borrower is identified as a non-homeowner, but with a high propensity to pay, this means they have recent good consumer credit behaviour and no repayment defaults or county court judgments (CCJs) within the last 12 months, amongst other criteria. This segment can further be broken down into those borrowers who are already in a mortgage shortfall debt recovery arrangement and those who are not. In an arrangement Our team will work with the borrower to ensure they continue to meet the conditions of their arrangement or increase it further, and use consumer credit information and analytics to regularly assess their propensity score to check their circumstances have not changed. Regular borrower contact is central to this collections strategy, for both those borrowers who continue to meet their arrangement and those who break it. We use a variety of contact channels, including a bespoke letter suite, telephone calls, field agents and, if required, solicitor services. If circumstances improve, our collectors will ask for increased repayments in line with the borrower’s affordability. Not in an arrangement For non-homeowners who are not in an arrangement, our collections strategies are shaped to their propensity score. This ensures resources are appropriately focused on those accounts with the highest expected ability to service the mortgage shortfall debt, resulting in value for our lenders and the most appropriate outcomes for borrowers. For borrowers who are identified as having a very high or high propensity to pay, the following strategies are adopted: Very high propensity The collection strategy for borrowers segmented as having a very high propensity to pay includes daily telephone call attempts until contact is made and the potential to instruct field agent visits or instigate legal action all within eight to 12 weeks of the initial review, dependent on the individual case. If appropriate, there will be a court hearing in order to establish the borrower’s assets and an attachment of earnings to allow us to recover repayments directly from their wages. The borrower will always be sent letters requesting to discuss the mortgage shortfall debt, before we would make the decision to either refer their case to a field agent or take legal action. The borrower is always notified ahead of any referrals to field agents or legal entities. High propensity These cases are progressed as above, except there will be a minimum of three telephone call attempts a week and the potential to instruct field agent visits or instigate legal action within three to six months of the initial review, dependent on the individual case. In order to benefit from a more detailed understanding of our propensity segments, please get in touch using the contact details at the end of this document. Non-homeowners with high propensity to pay
  11. 11. 12 Section 4.2: Continued Borrowers who are identified as buy-to-let landlords and other ‘special cases’, such as owning multiple properties or having multiple mortgage shortfall debts, also have collections strategies tailored to their unique circumstances. Where litigation is identified as being the best route of action, an experienced legal representative is appointed to manage the process. For those borrowers who are currently insolvent, the consultant will liaise with the insolvency practitioner, ensuring the mortgage shortfall debt is acknowledged and that we receive the relevant dividend payments. This is continually monitored to make sure the agreement is met. Those borrowers who own multiple property portfolios or have several shortfall debts and who have been segmented as having a very high or high propensity to pay are managed by an experienced forensic investigator, and the case will progress as per the collections strategies laid out in the earlier homeowners process. Finally, there are special cases with no propensity to pay, such as borrowers who were repossessed more than six years ago and have received no lender contact or are not in an arrangement. In England, Wales and Northern Ireland, a lender has six years to contact a borrower to seek repayment; this stands at five years in Scotland4 . 4 www.cml.org.uk/cml/consumers/guides/debt www.fshandbook.info/FS/print/handbook/MCOB/13 Buy-to-let landlords and other ‘special cases’ HML’s propensity segments Customer has recent good credit behaviour on core credit V HIGH Customer has recent good credit behaviour on non- core credit HIGH Customer has no recent good behaviour, but also no recent CCJs/defaults MED Customer has recent CCJs and/or defaultsLOW
  12. 12. 13 If a borrower is identified as a non-homeowner, but with a medium or low propensity to pay, this means they have no recent good consumer credit behaviour and may have defaulted or received a CCJ within the last 12 months, amongst other criteria. For borrowers who are identified as having a medium or low propensity to pay, the following strategies are adopted: Medium propensity Borrowers identified as having a medium propensity to pay will receive a minimum of one telephone call attempt per month and there is the potential to instruct field agent visits or to instigate legal action within six months of the initial review, dependent on the individual case. Our consultants are empowered to adopt a flexible approach depending on the borrower’s circumstances, and may instead decide to ‘park’ the case and monitor their consumer credit file for a significant change in circumstances. Low propensity Borrowers identified as having a low propensity to pay are contacted in the first instance to notify of the intention to collect, but that due to their current financial circumstances, action will not be immediate. Following validation, there is no regular contact and the case is placed on hold and the borrower’s consumer credit behaviour monitored as per medium propensity cases. There will be circumstances where borrowers do not have the propensity to repay their mortgage shortfall debt. We will look to offer external free debt advice to help borrowers with their overall indebtness. In conclusion, HML does not adopt a ‘one-size-fits-all’ approach when it comes to its collections strategies. As can be seen from our results detailed in Section 5, tailored, analytics-driven collections strategies supported by regular borrower contact does work and results in increased bottom-line profit for lenders and appropriate outcomes for their borrowers. Section 4.2: Continued Non-homeowners with low propensity to pay No propensity to pay
  13. 13. 14 Section 4.3: 4.3: USP 3: SMS Executive summary: The third USP is handling reputational risk. Our subsidiary SMS collects mortgage shortfall debt under its brand. The experienced consultants can judge each borrower’s situation (supported by analytics) to know when and how to collect debt. In addition, SMS can hold legal title for lenders and investors. This has many benefits, including removing the burden of needing to hold the relevant FCA permissions and, as a result, widening the potential purchase pool of mortgage portfolios. As mentioned in Section 3, there are several challenges to collecting mortgage shortfall debt that mean many lenders have traditionally stayed away from doing so. One of the biggest reasons is the perceived reputational risk involved. One of HML’s unique selling points is our oversight and legal title wholly-owned subsidiary SMS. Lenders can either have shortfall debt collected under their brand using their regulatory permissions, or use the SMS vehicle, with the latter option particularly attractive when there is a perceived reputational risk involved. All contact and collections will then be carried out under the SMS brand by experienced consultants who can judge each borrower’s situation (supported by analytics) to know when and how to collect debt. Another benefit of using SMS is that it can also hold legal title for a lender or mortgage portfolio investor. Mortgage book ownership can be viewed as two elements; beneficial owner and legal title. Whoever is the beneficial owner takes on the credit risk, but also benefits from the financial returns. Whoever owns the legal title is responsible for the regulatory and conduct risk. In order to hold legal title, the relevant permissions are required from the FCA. There is effort, cost and resources involved with applying for these, and investors may not want to go through the process and instead wish to remain focused on the core of their business - finding investment opportunities and generating a healthy return. Mortgage shortfall debt portfolio SMS Buyer Financial return Legal title Beneficial title Collections and recovery of mortgage shortfall debt
  14. 14. 15 Section 4.3: Continued Outsourcing legal title to SMS means it will hold the regulatory permissions, including the requirement to develop and implement policies. SMS will provide the regulatory risk management and Approved Persons; it is the lender in the eyes of the FCA and borrowers. The option to outsource legal title therefore provides the opportunity for a wider potential purchase pool of mortgage portfolios, with a number of different types of investor able to enter the market and benefit from the available returns. In addition, investors who outsource legal title can also sell their portfolios to others who do not have the relevant FCA permissions. This widens the potential purchaser pool and is therefore an attractive option. Existing lenders with mortgage books that are closed to new business and are currently in run-off can also benefit from outsourcing legal title. Run-off has been relatively slow since many lenders tightened lending criteria, and many lenders face having to manage these books for a number of years. This is because the prices that asset purchasers are offering for portfolios are often lower than the amount that lenders are willing to sell at. Outsourcing these books instead – some of which have high levels of arrears – takes the administrative burden of managing future regulatory change off the shoulders of lenders. In addition, investors who outsource legal title can also sell their portfolios to others who do not have the relevant FCA permissions. This widens the potential purchaser pool and is therefore an attractive option.
  15. 15. 16 Section 4.4: 4.4: USP 4: Specialist shortfall debt recovery team Executive summary: HML’s mortgage shortfall debt team has more than 100 years of combined experience and is a ring-fenced resource. With the individuals within this team fully focused on collecting mortgage shortfall debt, true value can be achieved for lenders and portfolio purchasers. It also means that borrowers are dealt with by appropriately experienced consultants who can empathise with their situation and ensure the right contact and collections strategies are deployed for the most appropriate borrower outcomes. Collecting mortgage shortfall debt is a complex process, and therefore requires an intelligent, targeted and comprehensive approach that is deployed by individuals with the relevant skillset and experience. HML has a specialist shortfall debt recovery team that dedicates its entire resource to recovering this type of debt from borrowers. The structure of the team can be seen below: Director of Business Intelligence (BI) Head of BI Analytics Shortfall Debt Recovery (SDR) Collections Manager SDR Team Leader SDR Senior Consultant BI Analytics Team BI Analytics Manager Specialist Forensic Collections Team Business as Usual Collections Team Admin Support Team
  16. 16. 17 This ring-fenced, self-contained resource has more than 100 years of combined experience, with a strong skillset that is aligned to each role. Our forensic and other collections consultants not only have robust operational experience of recovering debt, but also the soft skills that are required to empathise with borrowers who have often experienced difficult financial circumstances. While, of course, our targeted approach driven by analytics helps to realise value for our lenders, at the centre of our collections strategies is the need to treat borrowers fairly and ensure the most appropriate outcomes for borrowers. Unlike many debt collection agencies that have to attempt contact and engagement with numerous customers to allow them to build a customer profile and look to maximise recoveries, our specialist team (informed by our analytics) know exactly who to contact, when and how. The team also consists of forensic consultants who deploy the collections strategies for homeowners and non- standard cases, as the circumstances surrounding these collections are often more complex, such as establishing a borrower’s assets and their value, particularly in cases where there are multiple shortfalls and/or properties. In addition, our administration support team deal with tasks such as creating and sending the legal letter suite, which allows our collections staff to solely focus on deploying the right collections strategies for effective and efficient mortgage shortfall debt recovery. Section 4.4: Continued
  17. 17. 18 Section 5: Lender case study Executive summary: An increase in mortgage shortfall debt recoveries of 300 per cent year-on-year was enjoyed by one of our lenders as a result of our analytics-driven campaign. Recovery uplifts were particularly strong for special cases, showing how having a dedicated shortfall debt recovery team with forensic consultants who deploy targeted collections strategies provides value and maximises the use of resources. As seen in the following graphs, the performance uplift enjoyed by one of our lenders is clear, and shows how a complete advanced analytics-driven solution can increase shortfall debt collections and ensure the most appropriate outcomes for borrowers. By performance uplift, we are referring to the monthly level of cash collected and negotiated full and final settlements. As seen in this graph, when HML commenced a segmentation strategy for a lender in October 2012, overall performance uplift significantly increased. Taking the average (100 per cent) recovery rate pre analytics as a benchmark, this increased to 300 per cent post analytics being implemented. 65% 85% 137% 95% 101% 109% 115% 107% 86% 213% 139% 110% 455% 108% 308% 382% 378% 65%594% 212% 177% 347% 481% 197% 472% 216% 205% 410% 100% 300% Start of analytics-based segmentation strategy Jan 12Feb 12M ar12Apr12M ay 12Jun 12 Jul12Aug 12Sep 12O ct12N ov 12Dec 12Jan 13Feb 13M ar13Apr13M ay 13Jun 13 Jul13Aug 13Sep 13O ct13N ov 13Dec 13Jan 14Feb 14M ar14 Pre-analytics average Post-analytics average uplift 100% 200% 300% 400% 500% 600% Monthly Results Vs. Pre-Analytics Average Post-Analytics Average Uplift
  18. 18. 19 Section 5: Continued As seen in this graph, performance uplift has been experienced across all of the borrower segments, particularly for special high and low propensity to pay cases and homeowners. This is a year-on-year comparison for 2012 vs 2013. For special high propensity to pay cases, a performance uplift of 1,700 per cent has been seen, which is testament to the experienced forensic consultants employed within our specialist shortfall debt recovery team who deal with these special cases. What our lender says: “We were really pleased with the results - the use of predictive scorecards and credit alerts ensured the HML team made far better use of resources than with our previous untargeted approach, and this, combined with an experienced, skilled team of agents, led to an increase in recoveries of 300 per cent year-on-year.” 248% 846% 1700% 700% 853% 389% Arranged non-hom eow ner H om eow ner Specialcases w ith a high propensityU narranged non-hom eow ners Specialcases w ith a low propensity Average recoveries as % ofrec. 200% 400% 600% 800% 1000% 1200% 1400% 1600% 1800% Performance Improvement
  19. 19. 20 Section 6: Conclusion: is now the window of opportunity? Executive summary: With the base rate remaining at a historic low of 0.5 per cent as of June 2014, now could provide lenders and mortgage portfolio investors with the perfect window of opportunity to collect mortgage shortfall debt. The combination of more manageable mortgage repayments and potentially more affordable unsecured debt products means many consumers may currently have some financial breathing space to tackle their mortgage shortfall debt. In addition, with house prices in the UK generally climbing, those lenders that decide to progress with forced sales could find they obtain a higher selling price than they may have expected to. This results in a more favourable outcome for the borrower, who should hopefully have their previous debt cleared by the funds raised through the sale. The positive impact upon bottom-line profit is one reason why it is attractive to collect mortgage shortfall debt; however, it could be argued that now presents the optimal window of opportunity due to the historic low base rate of 0.5 per cent and increasing house prices. However, with the potential for the base rate to rise over the next 12 to 18 months, mortgage portfolio owners need to prepare for what this may result in for borrower affordability; the key message is act now. In those cases where shortfall debt belongs to a homeowner, the more manageable mortgage repayments due to low interest rates should provide the borrower with breathing space to make mortgage shortfall debt repayments. However, in those cases where a forced sale is progressed, higher property prices are favourable to both the lender and borrower. In the case of the lender, it can obviously achieve a higher selling price. The higher the amount that can be used to clear the previous shortfall debt, the less the borrower will owe – with the most favourable outcome being that the debt is completely serviced by the sale of a property. HML’s recent negative equity report also noted that in Q1 2011, there were 826,800 mortgages in the UK advanced since 2005 in negative equity. By Q4 2013, this had declined to 463,415, and therefore shows how many borrowers now have more equity in their properties. SP servicer evaluation report, September 2013: “HML’s risk management discipline is robust and operates in a controlled environment, in our view5 .” 5 http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTMLassetID=1245357525005
  20. 20. 21 Section 6: Continued For those borrowers who do not own a property, increasing positive economic sentiment may mean their unsecured debts and other financial commitments are more manageable, allowing them to make repayments towards the mortgage shortfall debt. However, it is also important to contact these individuals not only to seek repayment, but also to make sure contact made to them is within the Council of Mortgage Lenders and FCA guidelines. Increasing positive sentiment surrounding the mortgage market and economy also makes now an ideal time for debt purchasers to acquire portfolios. HML has the advanced analytics, skills and 25 years of experience within the third-party mortgage administration market to provide a complete intelligent shortfall debt recovery solution, deployed within a compliant quality framework. HML’s longevity and experience have contributed to our leading servicer ratings. Our UK residential primary (sub- prime) rating by Fitch is the highest in Europe and our prime rating is the equal highest rating of any servicer in the world. Both Standard Poor’s (SP) and Fitch refer to our quality culture. It is paramount that both lenders and investors can draw upon an experienced, ring-fenced mortgage shortfall debt recovery resource that solely focuses on the recovery of this type of debt. This allows specialist skills to be developed and allows a culture of compliant, quality-driven collections activity to be embedded. This ensures borrowers are fairly dealt with by appropriately experienced consultants. Once you have access to market-leading advanced analytics, tailored collections strategies, the experienced skillset and an entity that provides the right permissions and regulatory oversight, the four main challenges to successful mortgage shortfall debt recovery can be overcome. 6 http://www.fitchratings.com/creditdesk/press_releases/detail.cfm?pr_id=799778 Fitch report into HML’s ratings upgrade, August 2013: “HML’s internal control and risk management framework are particularly robust, which when combined with an increased focus on staff training, allow HML to have an excellent level of control and efficiency6 .” To find out how HML can assist you with mortgage shortfall debt recovery, contact Damian Riley, director of business intelligence, on damian.riley@hml.co.uk or 07824991857.
  21. 21. 22 NOTES
  22. 22. 23 NOTES
  23. 23. www.hml.co.uk www.hml.ie www.twitter.com/HMLcorporate www.twitter.com/HMLIreland www.linkedin.com/company/hml

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