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2011 Financial Services Summit
Life after Foreclosure
and Hidden Opportunities
Steve ChaoukiGroup Vice PresidentFinancial ServicesTransUnion
2011 TransUnion LLC All Rights Reserved
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While credit risk scores remain the best predictors ofrisk, certain consumers are more susceptible than others to
e mpac o ex erna orces
A clear understanding of how external forces mightinfluence those consumers is therefore critical to lending to
em success u y
An analysis of consumer mortgage behavior during- andafter the recent recession reveals segments of consumers
actually perform better than one would expect
We quantify the improvement in performance and discuss
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Credit scores are great predictors of risk, evaluating
Relationships
with Your
External
Current
Product Mix
Institution
Economic
Environment
Other LendersCrises and
Internal to
the customer
(but external to
- ven s
Family
Friends
Current & Future
Other
3
(Lifecycle/Lifestyle)
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Yet some consumers may be impacted more by external
2005 2010
Incomeen or ng neer
$6,900 / month
nemp oye
$2,300 / month
Apartment Renter Homeowner
Housing
Family
Wife Wife & 2 children
Debt Burden $2,400 / Month $3,600 / Month
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The forces exerted on consumers by the recent
teNational Unemployment Rate
Median Unemployment Duration
The unemployment rate doubled
15
2025
6.0%
8.0%10.0%
.
mploymentR
edianUnemp
Duration(W
0
5
0.0%
2.0%
.
an-04
ay-04
ep-04
an-05
ay-05
ep-05
an-06
ay-06
ep-06
an-07
ay-07
ep-07
an-08
ay-08
ep-08
an-09
ay-09
ep-09
an-10
ay-10
ep-10
Na
tionalUn
loyment
eeks)
Source: www.bls.gov as of 02/21/2011
Home value depreciation
and the duration of
unemployment nearly
tripled 250,000300,000
350,000400,000
450,000
age
ions
ev scera e e ous ng mar e
050,000
100,000150,000
,
n-05
r-05
l-05
t-05
n-06
r-06
l-06
t-06
n-07
r-07
l-07
t-07
n-08
r-08
l-08
t-08
n-09
r-09
l-09
t-09
2nd
Mor
t
Origina
t
12/05 to 12/09: 96% decrease
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Ja
Ap
J O Ja
Ap
J O Ja
Ap
J O Ja
Ap
J O Ja
Ap
J O
Source: TransUnion Credit Reporting Database
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The resulting environment caused unusual behavior. We
.
1. Defaulting on a mortgage causes temporary excess liquidity.
goes through the foreclosure process.
. recession only did so becauseof the recessionthey areotherwise good credit risks.
The abilit to identif life event mort a e defaulters versus
chronic defaulters can open up profitable, low-competitiontarget segments
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1. A consumer who does not pay his mortgage is saving all or most of
the money he would have paid on the note, until he is evicted at theen o e orec osure process.
2. This consumer only feels credit stress (if at all) once he has to startpaying rent (or another mortgage).
+ + + + + + + + + + + + + + + + ++Savings fromMortgage
Financial Stress: $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
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What does this theory mean in terms
3. The consumer will not feel credit stress from any product already
held or opened early in the foreclosure process because of themoney save rom e m sse mor gage paymen s. n y a er e
foreclosure is complete will he begin to feel credit stress.
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
Savings from
Mortgage
Financial Stress:Rent Payment
Financial Stress:
Car Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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What does this theory mean in terms
4. The closer to eviction the consumer opens a new account, the less
protection he has from saved mortgage payments and the morecre s ress e w ee .
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
Savings from
Mortgage
Financial Stress:Rent Payment
Financial Stress:
Car Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
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If the theory holds true, the effect would be quite clear
5. The account opened earlier would have no additional creditstress, while the account opened later would have a lot of additionalcre s ress.
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
$+
Savings from
Mortgage
Financial Stress:Rent Payment
Financial Stress:
Car Payment
$
$
$
$
$
$
$
$
$
$
$
$
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Accounts opened later in the foreclosure process are more likely to
go delinquent than those opened early in the foreclosureprocess, an ence s ou ex g er e nquency ra es over a
fixed performance window This is why lenders are often hesitant to lend too soon to consumers
w t goo e av or ot er t an a mortgage e au t t s e eve t eexcess liquidity allows for temporary good performance
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To test both hypotheses, we performed a Life after
Started with a random sample of 5 million consumers with an open MTtrade in 01/2008
Selected the subset who:Had at least 1 non-MT trade open as of 12/2007
+
Opened at least one additional trade after the MT went bad
This left us with ~129,000 consumers
Evaluated the product mix for these consumers post-foreclosure
Calculated each consumers VantageScore in the month prior to the
Evaluated the delinquency rates of those new trades with 7-11 and12-17 months of performance through 08/2010 (~65,000 new trades
1212
opened)
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T1 T2
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T1: The time between the mortgage 120+ DPD default and the opening
T2: The performance period of the new tradeline(generally, T2 = 12 - 17 months in this study)
MO: Mort a e Onl A consumer who oes 120+ DPD on a mort a ebut has no other delinquent existing tradelines at the time thenew tradeline is opened
MD: Multiple Delinquencies A consumer who goes 120+ DPD on amortgage but has at least one delinquent existing tradeline atthe time the new tradeline is o ened
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As expected, new tradeline openings were not uniform
Mortgage Only Multiple DelinquenciesOther
17.9%CreditCard
Other25.8%
Credit
CardReal
Loan (non-Dfd) 8.6%
.
.
Auto18.2%
2.3%
Auto
StudentLoan (non-Dfd) 19.4%
.ea
Estate
1.8%
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= ,= ,
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Nor was the distribution by score the same; the study
VantageScore Distribution at New Account Opening
30%
Multiple Delinquencies Mortgage Only
15%
20%
5%
10%
0%
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Result #1: The data do not generally support
P(60+ DPD), Performance (T2) = 12-17 Months
Product 0 - 6 Months 7 - 11 Months 12+ Months
Auto 10.4% 9.7% 9.3%
me o pen ng o ew ra e ne
Other 18.9% 17.0% 16.4%
Credit Card 15.5% 18.5% 18.7%
Overall 18.8% 21.3% 20.5%
Delinquency rates do not generally get worse over time
Auto and Other loan types actually refute the theory
While cards do show an increase in delinquency over T1, theincrease from 7-11 to 12+ is de minimis. We do not discount theseresults, but we do not consider them conclusive.
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60+ DPD Rates, All Products, Performance (T2) = 12-17 Months
60%
T1: 0-6 Months 7-11 Months 12+ Months
40%
50%
60+
DPD
Rate
10%
20%
Observed
0%
Vanta eScore Ran e
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(At New Account Opening)
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Even for a short performance window, we do not see
P(60+ DPD), Performance (T2) = 7-11 Months
Product 0 - 6 Months 7 - 11 Months 12+ Months
Auto 5.7% 4.4% 4.6%
me o pen ng o ew ra e ne
Other 12.4% 11.1% 10.5%
Credit Card 13.1% 9.3% 10.6%
Overall 14.8% 12.8% 14.5%
This is an important baseline finding, as any further resultsin the study should not then be attributed to an excess
qu ty e ect.
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Again, the excess liquidity theory does not appear to hold
60+ DPD Rates, All Products, Performance (T2) = 7-11 Months
60%
T1: 0-6 Months 7-11 Months 12+ Months
40%
50%
60+
DPD
Rate
10%
20%
Observed
0%
Vanta eScore Ran e
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(At New Account Opening)
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Result #2: An MO default during the recession indicates a
,60+ DPD Rates, Performance (T2) = 12-17 Months
Auto T1Time to Opening of New Tradeline
Class
-
Months
-
Months
Months Overall
Mortgage Only 6.6% 4.3% 6.0% 5.8%
Multiple Delinquencies 14.1% 14.0% 12.1% 13.1%
Other
0 - 6 7 - 11 12+
T1Time to Opening of New Tradeline
Mortgage Only 15.2% 13.2% 11.4% 13.1%
Multiple Delinquencies 21.2% 19.3% 19.8% 20.1%
Credit Card
Class
0 - 6
Months
7 - 11
Months
12+
Months Overall
T1Time to Opening of New Tradeline
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. . . .
Multiple Delinquencies 26.5% 28.0% 27.0% 27.1%
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Once again, this result holds true uniformly
60+ DPD Rates, All Products, Performance (T2) = 12-17 Months
50%
60%
ate
u t p e e nquenc es ortgage n y
30%
40%
ved
60+DPD
10%
20%
Obser
0%
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(At New Account Opening)
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Result #3: Scores for mortgage-only defaulters tend to
Median Improvement in Credit Score over 12-17 Month Performance Window
40
50
60
ore
u t p e e nquenc es ortgage n y
20
30
nChangeinS
-10
0
501-530 531-550 551-570 571-590 591-610 611-630 631-650 651-670 671-690 691
Media
-20
VantageScore Range(At New Account Opening)
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Identify MOsa relatively simple task at the credit file level
Adjust score cut-offs for MOs in prescreen
Adjust pricing for MOs in offer
The benefits can be material
Bu dee er without the accom an in loss rates
Avoid the tough competition currently vying for the cleanest segments
Target a segment that will not otherwise get attractive pricing
Achieve higher risk-adjusted margin than is currently available in othersegments
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Build loyalty at a time when consumer dissatisfaction is relatively high
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Data and decisioning capabilities
Formulation of specific strategyanalytical bench strength Monitorin erformance as environment chan es
Originating loans for sale or securitization
-
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There is a temporal element to looking across your-
may no longer be so
consumers can reveal acquisition opportunities your
competitors might miss The recent recession is a great example of exceptional
behavior; mortgage-only defaulters may not be as bad as
Radical changes to the environment can limit the
2626
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