Moving the bankability frontier downwards
What’s the definition of a pioneer?
A guy face down in a puddle with an arrow in his back.
But there’s another definition of a pioneer:
A guy who finds the gold in them thar hills.
Like the owners of First NLC Financial Services, who have struck gold:
FBR agreed to pay $88 million in stock and cash to acquire First NLC Financial Services LLC, which makes mortgage loans in 38 states and sells the loans to investors. Most of the loans are first mortgages to “sub-prime” borrowers — that is, borrowers with problem credit histories or other higher-risk factors that require underwriting criteria different from a traditional single-family mortgage.
And the frontier they have explored is the bankability frontier.
Imagine a pyramid — number of people on the horizontal axis, income on the vertical. At the top are the few richest; at the bottom the many poorest. (You’ve seen these in many contexts.) We can further slice the pyramid into three segments:
1. Fully bankable. Those who can access all banking and credit services, effortlessly, in the private market. A small triangle.
2. Partially bankable. Those who access some banking and credit services. The affluent among them are becoming fully bankable and privatized, the poorer are
3. Unbankable. Those whose income, assets, financial literacy, or community infrastructure mean they have not been reached by the banking sector.
Between each group lies a bankability frontier. In the
Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk.
With higher risk comes higher pricing and lending opportunity:
Subprime lending — higher-interest loans to consumers with impaired or non-existent credit histories — has been the fastest-growing part of the mortgage industry.
Subprime mortgage activity grew an average 25% a year from 1994 to 2003, outpacing the rate of growth for prime mortgages. The industry accounted for about $330 billion, or 9%, of
The growth has attracted accolades and controversy. Federal Reserve Governor Edward Gramlich has said subprime lenders helped push homeownership to record levels, making it possible for a growing number of minorities to buy homes. But he also raises questions about high delinquency rates.
Lending into subprime frontier means being a pioneer. Bankers aren’t pioneers — they’re the bad guys in every Western:
In the town’s Miners’ & Cattlemens’ Bank (with capital of $50,000 and assets of $250,000 proudly displayed on the front door window), pompous, self-important banker Henry Gatewood (Berton Churchill) accepts the $50,000 Wells Fargo payroll delivery from the coach lines, declaring: “What’s good for the banks is good for the country.” A closeup of Gatewood’s snarling face is seen with the shadow of a cross behind him like a curse.
– because they are risk-averse. So they leave the frontier to the pioneers. But after the pioneers come the sodbusters:
This is a tense, violent confrontation between the fence-building homesteaders, and the open-range land cow ranchers - an allegory of the settlement and progressive civilization of the West.
Joe (insulted by them): Homesteaders, you mean, don’t you?
Ryker (threatening him): I could blast you out of here right now, you and the others.
Joe: Now you listen to me, the time for gun-blastin’ a man off of his own place is past.
Eventually the frontier becomes tamed, even respectable:
Sub-prime lending has grown substantially in recent years for several reasons, but primarily because improved credit-scoring technology allows the underlying risks in large portfolios of sub-prime mortgage loans to be accurately priced, which allows Wall Street to sell them to investors.
The pioneers sell to the homesteaders, cash out, saddle up and move on, now the richer, searching once again to expand that ol’ bankability frontier.
