Most immigrants, who now make up 12 per cent of the US population, have either no or limited credit history. A subprime mortgage is the only way for many of them to buy a home. At the same time, demand for affordable homes by low-to-moderate income families is expected to grow by 1 per cent per year.
There is likely to be significant consolidation in the market as a small number of lenders develop the best packages for the most attractive set of customers and carve out the biggest slices of the pie. This happened in the credit card industry where ten companies now have 87 per cent of the market, versus 59 per cent a decade ago.
Many of the top lenders will also start to integrate different functions under one roof to improve the speed and attractiveness of the service to the customer. This vertical integration includes loan origination with securitisation, collateralised debt obligation structuring and asset management.
The industry will be affected by more regulation following the recent shake-out, which will increase costs and reduce processing time. However, it won't prove to be a serious impediment and will encourage companies to make their processes more efficient.
A large portion of subprime mortgages are sold through brokers. Therefore, lenders will have to get better at identifying the most effective and successful brokers and incentivising them to sell. Some lenders are also looking at the direct-to-consumer model.
Subprime mortgage lenders can take lessons from consumer goods companies in using research methods to find the best customer segments and identify their needs and decision-making processes. The subprime-mortgage market is too complex to easily automate it. But lenders can create a 'lean-cell' system to improve productivity and cut down cycle times. This is a self-contained origination unit, responsible for end-to-end execution of all processing activities.
Surviving - and prevailing - in the US subprime mortgage market
By David B. Chubak, Piotr Kaminski and Sean O'Connell
The McKinsey Quarterly Online, June 2007
Review by Morice Mendoza