State of the
Industry
Life After the Sub-Prime Mortgage Meltdown.
By Ryan Kazmark - Managing Partner
We have all read the articles outlining the fact that the American public is spending more than they bring in and saving -1% net per year; a statistic that has not been at that level since the Great Depression in the early 1930’s. Each decade since the 1970’s, Americans have saved increasingly less as their access to credit has grown significantly easier.
As we head into a recession this year, analysts are all predicting auto-loan and credit card defaults to hit record highs. Banks are already realizing increases in default rates across the board. In haste, they will adjust their lending policies from what was considered to be extremely liberal to a more conservative approach. This will decrease the size of the approved credit limit for consumers who have average credit scores or are new credit applicants. You will also see banks taking a more aggressive approach to decreasing existing account credit limits for those that show a credit score drop, minimal payment delinquency, or a significant increase in overall revolving debt load. For those in the sub-prime category you will see more turn downs than approvals for credit this year.
As a result, many consumers will uncomfortably wake from their credit feast of late with a cold slap on the face from the lack of access to credit, or much higher rates and fees. Suddenly, lifestyles that were fueled with borrowed money will come to an abrupt slowdown or end. It will be the sudden realization that their current lifestyle cannot be maintained that will create the most pain, as people believe the life they are leading now is a right, not a privilege.
Energy costs are a real concern as well this year. Escalating energy prices only put more pressure on an otherwise shrinking purse. With prices increasing faster than wages, that shortfall will need to be compensated for. In the good old days of early 2007, one of the ways people compensated for such personal budget pressure was to use credit; if credit isn’t as easily available then the solutions are more painful.
Furthermore, it remains to be seen if recent U.S. Congressional action and investigations into credit card lending and other lending practices will have a significant impact. I would expect to see an increase in action taken against lenders if a democratic administration is elected this year.
All of this equates to a massive decrease in consumer spending power over the coming years, as the system adjusts to correct itself. Consumers will be holding their mortgage payments, auto payments, utility payments, and grocery costs as their top priority, leaving little money for expendable purchases. This decrease in the consumers’ disposable income, coupled with the impending credit crunch, means collection liquidation rates will be dropping this year.
In our industry, collection agencies that are not currently using “state of the art” technology, comprehensive automated inventory management schemes, maintaining continuous training programs for their employees, or have a collection floor consisting primarily of collectors with less than 18 months experience, will see the largest decrease in liquidation rates. 2008 will certainly see a “period of adjustment,” which will undoubtedly be the gigantic equalizer of the collection industry. Survival of the fittest will become a factor in agency-client relations and their overall financial stability, more than ever before.
As a creditor who may be in a relationship with an agency that has been delivering liquidations rates that are barely on par with your recovery or ROI goals, this might be the time to consider forming new relationships with other agencies, in anticipation of this year’s decline. Maintaining your present agencies, while establishing new relationships, will enable you to move your inventory to the highest performers more efficiently, raising the competitive edge of your recovery department. Chances are, if your current agency has been delivering mediocre rates to you over the last several “good” years, they are probably the aforementioned “un-adaptable” type of agency, and will be hit hardest in the coming years.
Please feel free to contact me by
clicking here, or calling P&B directly. If you are considering establishing new collection relationships, our procedures and methodology will be the fuel you are looking for within your recovery department’s competitive scheme. Now is the time to begin a new relationship with P&B, and let us put our technologically advanced capabilities to work for you.