Use of customer segmentation to reduce payments from predicted trouble borrowers

1. John Taylor
Principal, Experian Global Consultancy Practice, N.A.
April 2014
U.S. Mortgage Crisis
Lessons for Mortgage Pre-Delinquency

2. “Conventional wisdom”
The conventional view
serves to protect us
from the painful job of
thinking.
“
”– John Kenneth Galbraith
2

3. 3©2012 Experian Information Solutions, Inc. All rights reserved.
Experian Public.
Historic Warning Signs
U.S. Mortgage Crisis

4. U.S. Real GDP Growth
Historic Warning Signs: Default Indicators Through The Crisis
The United States financial system and mortgage crisis resulted in a severe recession which resulted in severe
negative GDP growth eroding almost 9 million jobs and persistent high unemployment that peaked above 10%. Two phases
– Slowdown Volatility and the Panic Phase were “pre-cursors” to unfolding events. The crisis was caused by a number of
factors including an unsustainable housing boom evidenced by accelerating home prices – a leading indicator to peaks in
mortgage loan delinquency and real household net worth
U.S. Unemployment Rate
Source: Bureau of Labor Statistics
U.S. Delinquency Rate – Single-Family MortgageU.S. Real Home Prices
4

5.  The market boom in housing had signs of weak underpinnings…
► Collective actions of banks, consumers, and government resulted in more
risk than was quantified
● Unsustainable home price appreciation
● Borrower debt to income overload
● Mortgage “Cash-out” for living expenses ended
● Customer segmentation overlooked
 Risk models that factor in micro-geographic (zip + 2)
current-loan-to-value localized effects of increasing
distress sales
 Borrower characteristics segmentation needed
 Geographic effects of home price devaluation analytics needed
Historic Warning Signs: Mortgage Crisis Impact on Risk Management
5

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Experian Public.
Government & Industry Response
U.S. Mortgage Crisis

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Experian Public.
Government & Industry Response: Various HARP Borrower Assistance
Home Affordable Foreclosure
Home Affordable
2nd Lean
Home Affordable
Unemployment
Program
(HAMP) Home
Affordable Modification
Program
Borrowers not able to
afford monthly mortgage
payments due to a
financial hardship
Unemployed borrower
assistance program
Assistance for borrowers
already having permanent
refinancing under HARP
Borrower alternatives to
settle debt – possible
relocation assistance
8
2.7 million families benefit from HARP…

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Government & Industry Response: HARP Mortgage Modification Results
Redefault rates for borrowers receiving a HAMP modification average 26% through April 30, 2013. These rates are
somewhat consistent by geography at a total level, however in micro-geography analysis there is evidence of widely varying
default rates based on home devaluation contagion effects. Redefaulting HARP borrowers exhibit three attributes important
to pre-collections segmentation and prudent lending – High Debt-to-Income, Increasing Loan-to-Value and High Risk
Borrower Credit Worthiness are unique to redefaulting borrowers. Customer segmentation is critical!
Cum Redefaulted HAMP Permanent Mods – 4/30/13
26% total redefault rate
Regional Redefaulted HAMP Permanent Mods – 4/30/13
Source: “Rising Redefault of HAMP Mortgage Modification Hurt Homeowners, Communities and Taxpayers”, SIGTARP, July 24, 2013 9

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Experian Public.
Mortgage Pre-Delinquency Implications
U.S. Mortgage Crisis

10.  Bottom up default models
 Micro-geographic analysis of home price depreciation
 Segment and monitor current-loan-to-value (CLTV) and migration of CLTV
 Segment borrower ability-to-pay and debt-to-income
 Build “pro-active” pre-delinquency strategies
 Connect across the bank
Connect the dots… Segment customers using
Custom Risk Models, CLTV, Debt-To-Income,
micro-geography analysis and external data such
as Experian’s MosaicTM life-stage segments to
improve performance and efficiency of pre-
delinquency efforts.
Historic Warning Signs: Pre-Delinquency Strategy Segmentation
11

11.  Custom loan-level probability of default (PD) estimate models are a
key ingredient to a proactive pre-delinquency strategies
► Greater accuracy in prediction with more granular data
► Credit Bureau Attributes for individual borrower credit behavior
► Aggregated Credit Statistics (ACS) to account for micro-
geographic drivers of default behavior representing contagion
effects
● Local home market data (sold/list price ratio, distressed-sale
prices etcetera)
● Local area credit variables (# foreclosures, pending distress
sales recent delinquent etcetera)
● Local neighborhood indicators of stability
such as change in wealth indicators
► Combined-current-loan-to-value (CCLTV) is a
measure of all observed current mortgage
secured balances for all properties owned by
a consumer
Mortgage Pre-Delinquency Implications: Alternative PD Models
12

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Experian Public.
Mortgage Pre-Delinquency Implications: Loan Level Default Models
Custom Probability of Default (PD) models account for unique risk factors. Experian has
demonstrated the use of micro-level aggregated geographic variables and borrower credit
attributes and CCLTV result in highly predictive models which can be used in segmentation of
Pre-Delinquency Customer Treatment
Base Model –
Includes CCLTV
Base + Premier Credit
AttributesSM
Base + Premiers Credit
Attributes + *ACS
Receiver Operator Characteristics Curves (ROC)
Source: “Home equity indicators with new credit data methods for improved mortgage risk analytics”, Straka, J., Robida C.
and Sklarz, M., Experian Decision Analytics White Paper, 2012 p. 5.
*ACS data used within PD model limits adverse
action in the U.S. but not segmentation purposes
13
As much as 23% lift
in rank ordering “bad”
loans (90+DPD)

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Experian Public.
Mortgage Pre-Delinquency Implications: Strategic Approaches
Custom PD model and Combined-Current-Loan-to-Value can be used to monitor key risk
segments. Implementing specific treatment strategies to assist borrowers with alternative
refinance options and to determine if outreach designation is “proactive” or “reactive” will
minimize operating expense and enhance customer satisfaction
Low
High
High Experian Debt-to-Income InsightsTM Low
65%+ <20%
Borrower
Probability of
Default (PD)
“Watch Segment”
Subprime Risk Score <620
High DTI >50%
Lower Income generally
“High Value Segment”
Prime Risk Score >700
Lower DTI <20%
High Income or Low Debt
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“Middle Risk”
Near Prime/Pime Score 660+
Medium DTI 20% to 30%
Middle to upper income

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Experian Public.
Mortgage Pre-Delinquency Implications: Strategic Approaches
Absent robust information from customer multi-product ownership, using Mosaic
FinergyTM segments provides a window to identifying distressed borrower segments.
Experian custom default models can be developed using marketing segments can result in a
strong tool to use to identify pre-collection segmentation treatment groups
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Experian Public.
Mortgage Pre-Delinquency Implications: Strategic Approaches
Portfolio customer segmentation strategies assists in determining which customer
segments warrant proactive pre-collections and which customers should receive reactive
pre-collections based on likelihood the consumer will need bank assistance.
DTI InsightsTM
Should we contact this
mortgage customer for
pre-collections?
Segment
“High Value”
Mortgage Loan Portfolio
Treatment
Strategy
High Home Price Devaluation or
wealth decrease geography
Source: “Home equity indicators with new credit data methods for improved mortgage risk
analytics”, Straka, J., Robida C. and Sklarz, M., Experian Decision Analytics White Paper, 2012 p. 16

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Experian Public.
Mortgage Pre-Delinquency Implications: Home Equity Triage Scenario
Experian’s PowerCurveTM Customer Management platform is used to design
and execute account and customer lifecycle strategies including pre-collections
treatment strategies for all consumer banking productsDTI
17
CollectionsFlow
Up to 10 different scorecards
Collection Action Parameters
Block codes and charge-off
reason code settings
Assignment and routing of
Segment Triage Strategies
Places delinquent accounts in
action paths enabling
collection strategy sequencing
Sets unique account payment
plan and settlement options
Enables outsourcing and
debt sale decision actions
PowercurveTM customizable
pre-collections module
administers segmented
treatment strategies

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Experian Public.
Mortgage Pre-Delinquency Implications: Home Equity Triage Scenario
Experian’s PowerCurveTM Customer Management pre-collections strategy
module is user defined and managed to allow bank risk management staff
flexibility to deploy new strategies quickly and easilyDTI
18
PowercurveTM enables easy
deployment unique
treatment strategies such as
for very low and high risk
segments

18. 18©2012 Experian Information Solutions, Inc. All rights reserved.
Experian Public.
Mortgage Pre-Delinquency Implications: Home Equity Triage Scenario
Account
view
Account
action
Credit card
Opened six years ago
Balance
$900
Limit:
$5,000
Good
Home Equity Loan
Opened four years ago
Balance
$10,000
Limit: $75,000
Current
“High Value Segment”
Good
Checking account
Opened eight years ago
Balance
$10,800
Direct Deposit Active
Online Banking
$100k Savings
OD Protection Active
Good
Offer new
limit – $1,500
No
action
Debt
recovery
Optimal
Treatment
- No Active
Marketing
- No Limit
Change
NO Proactive
Pre-Collection
Intervention
and “Watch”
utilization for
signs of
distress with
no immediate
line decrease
Overall
customer
view:
GOOD
Secured home equity loan customer in “High Value Segment”. Resides in
geography with high home price depreciation, exhibits no borrower distress signs
and has high liquid net worth. No pre-delinquent contact or HEL decreaseDTI
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Experian Public.
Mortgage Pre-Delinquency Implications: 1st Mortgage Triage Scenario
Account
view
Account
action
1st Mortgage Loan
Opened two years ago –
no other banking products
Balance
$120,000
110% CCLTV
Current
“Middle Risk” Good?
Kids and Careers
MOSAIC Segment
F20 – New Homemakers
Age: 30-40
Young Children
Lower Risk
Rising Wealth
Not a risky
segment but
borrower
specific
conditions
Good?
Offer new
limit – $1,500
No
action
Debt
recovery
Optimal
Treatment
May be
homeowner that
took on too
much and could
benefit from
refinance to
lower payments
Outreach with
mail proactive
pre-collection
effort
Overall
customer
view:
??????
1st mortgage customer in “Middle Risk” segment. Customer is in geography
with high home price depreciation and has a higher CCLTV and custom risk score
which may signal trouble. Initiate immediate pre-delinquency mail outreach
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Experian Public.
Mortgage Pre-Delinquency Implications: 1st Mortgage Triage Scenario
Account
view
Account
action
Credit card
Opened three years
ago
Balance
$1,200
Limit: $1,200
Paying minimum only
P+22% APR
Good?
1st Mortgage Loan
Opened two years
ago
Balance
$125,000
90% CCLTV
Current
“Watch Segment”
Good?
Checking account
Opened three years
ago
Balance
– $70
Two NSF and Direct
Deposit ceased for
three pay periods
Bad
Offer new
limit – $1,500
No
action
Debt
recovery
Optimal
Treatment
Review for
Limit Decrease,
No Marketing
Initiate proactive
pre-collection
outbound call
with letter to
determine if
unemployed
and possibly
modify debt
obligation
Overall
customer
view:
BAD
1st mortgage customer in “Watch Segment”. Customer is in geography with
high home price depreciation and exhibiting signs of distress in both segmented
and actual customer behavior. Initiate immediate pre-delinquency outreachDTI
21

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Experian Public.
Historic Warning Signs: Summary of Pre-Delinquency Strategy
 Leverage customer segments...
by focusing on borrower credit attributes
and micro-geographic aggregates and
Mosaic customer life-stage profiles
 Develop custom scores...
By including various borrower specific
data such as (CCLTV), (ACS) and
borrower attributes to increase
predictive power up to 20% or more
 Develop customer watch segments...
by using PD scores, “back-end” DTI and
micro-geographic characteristics
 Work effectively across your bank...
by aligning proactive/reactive pre-
collection strategies to treatments that
lower operating expense by 5%+,
improve collection efficiency and results
by 5-10% while improving customer
satisfaction
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Experian Public.