Magazine article The Journal of Lending & Credit Risk Management

Consumer Borrowers: Handle with Care

Magazine article The Journal of Lending & Credit Risk Management

Consumer Borrowers: Handle with Care

Article excerpt

This year, the patron saint of the financial services industry died. Jimmy Stewart, as George Bailey, the savings and loan president in It's a Wonderful Life, has done more each Christmas than the combined lobbying efforts of the entire banking industry to renew the faith of America's Congress, regulators, and public interest groups that the Community Reinvestment Act and Regulations C, B, and DD can actually work. However, George Bailey's philosophy also gives new meaning to the cryptic remark, "No good deed goes unpunished."

This year also brought the world the Mike Tyson/Evander Holyfield fight. A truly tasteless brawl, pitting the unspeakable against the inedible, it gave the generally rabid fight-going public exactly what it hungered for. Yet, when Tyson delivered, the nation's sportswriters and that selfsame public emitted a combined howl of outrage. As Alan Ableson remarked in Barron's, saying that Mike Tyson has given boxing a bad name "is like complaining that Jeffrey Dahmer gave serial killing a bad name."

How do these two events relate to each other? They both have to do with giving our customers what they want - and then getting what we deserve.

The Old, Grey HELOC

Lenders have been flogging that old nag named HELOC for nearly 10 years, and you'd think by now she'd be looking a little long in the tooth. However, in the first half of 1997, home equity asset-backed securities literally exploded. Securitizations jumped to more than $21 billion, double the comparable period of 1996, replacing autos as the second largest type of collateral used in asset-backed securities and trailing only credit cards.(1)

These statistics indicate that home equity, which used to represent a very significant part of the nation's personal wealth, is now being spent at about a $200-billion-per-year clip. And it's really all being spent. Some lenders, not even stopping to catch their credit risk breath at 100% loan-to-value, will lend 125% of a horne's value, securitize the loan, and sell the package to anyone whose need for yield transcends all caution. With 40 or so national home equity originators competing with an industry of loan-starved, growth-stunted financial institutions, yield, collateral, and credit have all fallen off the back end of the cattle truck.

Further, the home no-equity loan now makes up a distressingly larger part of portfolios, whether as asset-backed pools or on lenders' own account books. Over-extended homeowners playing chicken with under-collateralized lenders, the usual formula for disaster, looks to be in the nascent stage of offering the usually predictable results.

We Auto Know Better

A Consumer Bankers Association (CBA) automobile finance study shows auto leasing volume was up 33% in 1996 while loans were flat.(2) Not bad, overall, but auto manufacturer's growing inventories show oversupply has all the earmarks of causing a shake-out. Oversupply usually leads to a host of rate subsidy programs at the dealer level that usually result in a loss of market share for banks. I say: Let it happen, even though it's going to affect earnings. But as the CBA auto study shows, that advice is easier to give than to heed. Lenders report that the creditworthiness of car buyers now reaching bank portfolios is dropping. What used to be a "B" customer just a year or two ago is now considered "A" quality. To quote Pogo, "We have met the enemy and they is us."

Lenders Laying Eggs

The number of loans outstanding has grown rapidly. Just as happened in the credit card market, rapid portfolio growth will, for a time, mask increases in delinquency and default rates - but just until loan growth slows. Then, of course, the chickens will come home to roost.

Already, according to Moody's, you can hear ominous clucking sounds outside the hen house. Delinquencies are edging up. For loans originated and securitized in 1995, 8.6% were delinquent by more than 30 days as of December, an increase from rates of 6. …

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