Attention Points Regarding Potential Mortgage Payment Problems

Five themes deserving market-wide attention

March 2022

2 Mortgage Payment Problems

Table of Contents

Introduction: Five themes deserving market-wide attention 3

1. Preventive Management 4
   i. Reactive Preventive Management
   ii. Active Preventive Management

2. Effectiveness Measurements of Suitable Solutions 8
   i. Use of the Correct Solution and Documentation of Considerations
   ii. Measuring the Effectiveness of Solutions
   iii. Customers with Recurring Payment Problems

3. Distressing Situations 11
   i. Awareness of Distressing Customer Situations
   ii. A Careful Process for Distressing Situations

4. Residual Debt Management 13
   i. Customer Contact in Residual Debt Management
   ii. Suitable Residual Debt Arrangement
   iii. Quality Controls in Outsourcing; Making the Right Agreements

5. Customer Communication 17

Annex 1: Handles for Positive Communication 19
Annex 2: Supervisory Mandate 21
Annex 3: Sources 22

3 Mortgage Payment Problems

Introduction

The group of households with mortgage payment problems has been declining for several years; this is good news. Nevertheless, at the end of 2020, there were still over 39,000 Dutch people with a mortgage arrears of at least 3 months. Additionally, at the end of 2020, there were 21,000 persons with a residual debt.1

The corona crisis has shown that concerns among homeowners about the affordability of their mortgage can increase significantly in the face of uncertainty about income or its temporary disappearance. We saw this, for example, in the mortgage pauses granted at the beginning of the corona crisis. Flexible workers and self-employed individuals appear to be financially more vulnerable. Although the corona crisis seems to be receding, the lag effects of this and rising inflation may still lead to financial stress or payment problems for this group.

The AFM considers it important that mortgage providers are ready now and in the future to assist customers who have concerns about the affordability of their mortgage or who are already experiencing payment problems. The number of households with mortgage payment problems is currently at a historic low, but this downward trend could also reverse. Providers must be prepared for this so that they can carefully assist customers at all times.

Five Themes to Get Started With

In 2021, the AFM conducted research among six large mortgage providers regarding preventive and arrears management, also looking at residual debts. In this publication, we ask providers to pay attention to five themes related to the subject (expected) payment problems with mortgages; these stem from the research. We provide concrete recommendations and expect providers to follow up on them. We provide insight into good and bad practices and communicate the AFM's expectations for setting up effective processes with the customer interest at the forefront.2

Theme 1: Preventive Management
Theme 2: Effectiveness Measurements of Suitable Solutions Theme 3: Distressing Situations Theme 4: Residual Debt Management Theme 5: Customer Communication

1 hypotheekbarometer.pdf (bkr.nl).
2 The recommendations in this document apply to all mortgage providers; small and large. The extent and manner in which follow-up can be given to the recommendations depends, among other things, on the size of the mortgage portfolio.

4 Mortgage Payment Problems

Theme 1: Preventive Management

The research into mortgage arrears in 2021 (the research) shows that several providers can improve preventive management for mortgage customers to see risks of payment problems in time and help customers. For example, some parties do not yet use high-quality risk models to signal vulnerable customers early, while others already do. There are also significant quality differences in the visibility of services in the field of preventive management. This concerns, for example, information on the website or in customer portals. In this first theme, we have elaborated on what the AFM expects from providers regarding preventive management. Here, two forms of preventive management are distinguished, namely reactive and active. These components must both be structurally embedded in the organization of a mortgage provider.

i. Reactive Preventive Management

By reactive preventive management, we mean helping customers who contact us due to (beginning) money worries and encouraging customers in this situation to make contact.

Recommendation: Ensure that customers know where to go with concerns about their mortgage and what you can do for them

The AFM expects providers to make efforts so that customers with (beginning) money worries can contact them in a low-threshold manner, for example, by placing an inviting button in the 'My Environment' to contact regarding beginning money worries. The AFM also expects providers to make efforts to inform customers who contact them themselves as well as possible about the ways in which they can be helped and take action themselves. This way, customers feel invited to contact in case of emerging financial problems, and mortgage providers explain in understandable terms what they can do for customers. Good communication takes place through the use of various channels such as the website, letters, app, 'My Environment', and media campaigns.

Recommendation: Make your communication inviting; use behavioral and communication insights for this

Customers with money worries often do not take action, even if it is actually necessary or advisable. This behavior is called inertia, and can have various causes: people are, for example, not motivated to take action, they find it unimportant ('What do I have to gain from it?'), or they put off actions because they are complex. They also often experience feelings such as shame and a lack of control.3 Often, this leads people to do nothing, seeing it as the safest option. Even – and sometimes precisely especially – when a creditor insists on action, certainly if that uses a strict tone.4 To encourage customers to contact their provider, it is important that contacting is inviting and low-threshold. Customers must also feel that contacting the provider is meaningful for them, and in other words: that it yields something for them, for example, a feasible payment arrangement.

When designing the customer contact strategy, it is important to use behavioral and communication insights. For example, applying empathetic and motivating language, for example by showing understanding for the customer's situation and by stating that the customer is not the only one with money worries, can lower the threshold to take action.5 It is also important that the mortgage provider emphasizes looking for a suitable solution for the problems together with the customer.6

The AFM encourages mortgage providers to set measurable behavioral goals, gain insight into consumer behavior, use behavioral insights to promote sensible choices, and measure effects. In general, people are more likely to exhibit the desired behavior if it is made as easy as possible.

Recommendation: Use specialists to attend to your customers

When customers with money worries knock on the door at the contact point for (beginning) money worries about the affordability of the mortgage, it is good that they are received by employees specialized in preventive management. Ideally, these are employees who have followed courses on motivational interviewing techniques and at least possess general knowledge of debt counseling and financial coaching. They have various possibilities at their disposal to help customers with an expected future payment problem appropriately. They can refer customers to external or internal aids, such as budget tools, saving tips, and debt counseling. It must be clear to customers that this service is available. In certain cases, it may be helpful to also refer these customers to, for example, the mortgage advisor7 or debt counseling agencies, but this does not absolve the provider of its own responsibility to support these customers as well as possible.

For consistent customer treatment, it is good if the policy, processes, and work instructions of preventive management align with the customer treatment processes in regular and arrears management, but also with similar services for other financial products (e.g., payments, consumer credit).

Positive Examples from Practice

• Targeted communication to customers with increased payment risks via 'My Environments' and apps. For example, by means of conspicuous banners.
• On the web page about preventive management, there is a direct telephone number of a financial coach that customers can contact for free.
• The organization has its own behavioral and language experts or hires them in for, for example, the information on the website, letters, and emails.
• Work is done with customer panels to which customer communication is submitted.

5 Goosen & van Geuns, 2019.
6 See for further insights the AFM report from 2021 on arrears management in Consumer Credit. Link to the report.
7 When referring to a mortgage advisor, it is good to know that there is an exemption from the commission ban in case of (foreseeable) payment problems. Link to further explanation.

6 Mortgage Payment Problems

ii. Active Preventive Management

By active preventive management, we mean identifying customers with increased payment risks using an early-warning model, to make targeted contact and offer assistance where necessary. Here, we go deeper into the functioning of an early-warning model.

Recommendation: Use an early-warning model to identify vulnerable customers in time

Partly because customers with payment arrears are often difficult to mobilize, the AFM considers it important that providers set up processes by which customers with a risk of payment arrears can be identified before an arrears situation arises. A good aid is designing an early-warning model that identifies customers based on multiple risk indicators. In this way, the provider makes demonstrable efforts to gain insight into risk customers in the portfolio.

Recommendation: Measure the effectiveness of the early-warning model and implement improvements if necessary

The AFM expects providers to periodically check whether the indicators for detecting vulnerable customers are still effective or if they need to be adjusted. Insights from other risk models, for example for credit risk management, can also be used to identify customers with increased payment risks. It is important that providers have sufficiently specialized employees available who maintain the early-warning model and analyze the results.

Recommendation: Use internal and external data sources

Both internal and external data sources can be used as the basis for the risk indicators, which can be defined at both the product and customer level. Internal sources are based on existing knowledge about existing customers and on historical customer data about recurring causes for payment problems and customer groups that fall into arrears relatively quickly. External sources can be public or obtained from another organization. Providers must independently ensure that the legal basis for collecting and processing data is sufficient.

Ensure at customer acceptance that risky customers, such as custom mortgages or based on other risk factors, are easily findable in the customer administration. Recording customer characteristics such as the working sector or type of employment contract can be valuable when a customer is about to get payment problems. This facilitates, for example, data analysis from preventive management.

Examples of Internal and External Data Sources for Early Warning

Internal Sources

• Type of employment contract (e.g., ZZP, sector)
• Labels for risky customers at acceptance (e.g., in pilot or override situations)
• Payment history (e.g., returns, previous arrears)
• Payment transaction data (e.g., deposit of benefits, declining income, rising expenses)
• Previous measures such as payment pauses

External Sources

• Signals of arrears or payment problems with other creditors (health insurance, energy, drinking water, municipality, tax authority)
• Chamber of Commerce, WOZ value portal, Cadastre, Calcasa for determining property values
• HDN data (e.g., student loans, UWV, Pension Overview, with customer consent)

7 Mortgage Payment Problems

• Other debts (e.g., consumer credit, insurance, rising red balances on payment accounts)
• Credit risk parameters (e.g., Probability of Default, Loss Given Default, Cure Rate)
• Loan characteristics at customer acceptance (e.g., Loan to Income, Loan to Value, income level, customer age)
• Risk data from years of experience in arrears management: identified characteristics of vulnerable customer groups
• BKR Mortgage Barometer: risk indicators such as age categories (41-60) that have relatively many arrears, regions with relatively many payment arrears
• Outcomes of AFM research such as the AFM-CPB stress test on financially vulnerable households (Link to the report), and the AFM analysis on vulnerability to payment problems (Link to the report)

Recommendation: Develop a customer contact strategy for customers emerging from the early-warning model

Based on the results of the early-warning model, providers approach customers with increased payment risks proactively to determine if an assistance offer is suitable. The provider substantiates and documents in which cases contact is made and defines a customer contact strategy per customer group. There is a schedule for approaching these customers, the progress of this trajectory is monitored, and the effectiveness of the customer contact strategy is tested. When approaching customers, account is taken, among other things, of age and literacy. The AFM expects that there is sufficient capacity to follow up on the results, such as for contacting the selected customers.

A structured process for the early-warning model supports securing the quality of activities regarding preventive management. We give below examples of important elements that can be part of this process.

Example: Important Elements Within a Process for an Early-Warning Model

a. Building and maintaining data position
Examples: Inventory available internal/external sources, collecting and updating data

b. Defining signals via defining risk indicators, triggers, etc.
Examples: Use of data to identify customers with (the highest) payment risks

c. Receiving and analyzing signals at portfolio level (verify, link, prioritize)
Examples: Check if there is broader problematics or recurring signals, and focus on the biggest risks. Periodically perform signal analysis. Draw up and evaluate a weighing framework to determine which risk groups to contact first

d. Making contact (email, letter, whatsapp, phone, home visit) Examples: Defining strategy and effort obligation for customer contact, and measuring the effectiveness of the chosen strategy and effort for customer contact afterwards

e. Verifying and collecting information
Examples: Investigating whether the signal was justified, collecting relevant information (desk research and with the customer) to establish potential payment problems

f. Making an assistance offer
Examples: Offering suitable help such as offering a budget coach, referral to mortgage advisor and/or debt counseling, referral to special management

g. Monitoring and evaluation
Examples: Further developing the risk model, monitoring risk indicators in reports, performing periodic evaluations, and (randomly) conducting follow-up conversations with customers

8 Mortgage Payment Problems

Theme 2: Effectiveness Measurements of Suitable Solutions

The AFM has observed in its research that mortgage providers pay too little attention to conducting effectiveness measurements of solutions deployed with customers with payment problems. Mortgage providers have various solutions to help customers with (expected) payment problems. The payment arrangement is a frequently used solution, but there is more possible. One can think of, for example, restructurings, payment pauses, and job and budget coaches.

A solution must lead to a customer coming out of payment problems and being able to meet their financial obligations again. Here, it also applies that the customer does not experience payment problems again within a few months. The solution must be financially sustainable. We see that many providers can make clear how often a solution is used, but not whether it has proven effective. The AFM requests within this theme extra attention for a careful consideration and documentation of the choice for a solution and the subsequent measurement of the effectiveness of a solution.

i. Use of the Correct Solution and Documentation of Considerations

The AFM expects mortgage providers to have established policy and work instructions and to offer training to their own employees. These must ensure that employees possess the correct knowledge and skills to offer customers a suitable solution.

Recommendation: Record in customer files why a solution is used

We expect that the policy elaborates on which solutions can be used when, including who is authorized to do so and what conditions are attached to them. The AFM expects providers to document in customer files why a specific solution is used to help the customer. Documenting this consideration contributes to optimal treatment of the customer. When, for example, it is found that a chosen solution has not proven effective and the customer falls into payment problems again, then in reconsidering the customer strategy, one can look at the considerations taken into account in the choice for the previous solution.

Recommendation: Document in policy at what times it is checked whether the customer situation is still current

It happens that a customer has an arrears on the mortgage for a long time or that there are recurring arrears. Precisely in these files, documentation and effectiveness measurement of the chosen customer strategy is extra important. For these customers, the provider is expected to have documented in policy when interim information is gathered about the customer's situation to check if the agreed solution is still effective and if other or additional measures are necessary.

ii. Measuring Effectiveness of Solutions

It is an unpleasant situation for both the customer and the mortgage provider when payment problems arise. It is in everyone's interest that a solution is deployed whereby the customer recovers sustainably. This means that payment problems do not arise again (just) after a solution is deployed. Providers are expected to keep track at the customer file level which solutions are deployed to help the customer. Subsequently, it must be monitored whether the solution has actually led to the recovery of the payment problems in the customer.

Recommendation: Determine after how many months it can be established that a solution has been effective

Here, the question is central whether the solution has proven effective. Providers must set up processes by which they can measure whether solutions are effective or not. This means, among other things, thinking about monitoring customers where the payment problems have been resolved. After how many months that the payment problems have been resolved, can it be stated that a customer has recovered sustainably? Providers can, for example, use historical data about customers with recurring payment problems for this. By looking at, for example, after how many months a customer gets payment problems again on average.

Recommendation: Use outcomes of effectiveness measurements to help future customers better

Effectiveness measurements must provide insight into how promising a solution is. One can think of studies into the number of customers who recover sustainably after being offered two payment arrangements. Suppose it emerges from this that customers who do not comply with a first payment arrangement also do not comply with a second one in 85 percent of cases, then it can be deduced that this approach is not (always) effective. One of the next steps is to investigate what suitable alternatives are.

iii. Customers with Recurring Payment Problems

Unfortunately, the AFM sees that providers have many customers with recurring payment problems. This can mean that the solution deployed earlier was ineffective and no longer suitable for the customer's situation. It can also be that the customer's problems require a different solution. In these cases, one must look again at a financially and mentally suitable solution. The learning effects of the effectiveness assessments can be used to provide future customers with payment problems with better solutions and to make better reconsiderations for customers with recurring payment problems.

Recommendation: Investigate the causes for customers with recurring payment problems

Research from the BKR shows that the chance of payment problems is greater for consumers who have had payment arrears once in the past. In 18.7 percent, there is again a payment problem within half a year. Five years after a payment problem, the chance of new problems is still five times greater compared to someone who has never had a payment problem.8

8 See for further insights: https://www.bkr.nl/nieuws/2021/6/de-schulden-monitor-2020-komt-eraan/.

Executing Effectiveness Measurements of Solutions

• The effectiveness of measures is measured. For example, monitoring is done up to six months after the customer's recovery to see if payment problems arise again.
• It is kept track of which measures have been deployed and how often this happens. The success rate is monitored via reports.
• Insights are gathered from the effectiveness measurements regarding the suitability of solutions. These are used to optimize the deployment of solutions.

(Note: The provided text ends abruptly here.)