The Wall Street Journal-20080202-A Formula Shift In Good Time Preserves a Lender
Return to: The_Wall_Street_Journal-20080202
A Formula Shift In Good Time Preserves a Lender
Full Text (648 words)The heads of banks hard-hit by subprime losses might want to spend a moment picking the brain of Tommy A. Moore Jr.
Mr. Moore runs First Investors Financial Services Group Inc., which makes auto loans to people with shoddy credit histories -- and which ranks among the rare lenders that got the recent credit bust right. The firm's most recent credit-loss and past-due-loan numbers are very low for any type of subprime lender. They are also far better than those of much bigger rivals such as AmeriCredit Corp. and Capital One Financial Corp.
How did Mr. Moore manage to sidestep the latest blowup in this highly volatile business? He abandoned the industry's traditional measure of creditworthiness for subprime borrowers, and came up with his own formula instead.
The impetus for that change started two years ago, Mr. Moore says, when he looked at the subprime-debt splurge going on and decided look for a way to cut back on lending, even though others were loosening their lending standards on auto loans.
"You've got to lend in the good times like you would in the bad times just to get through the bad times," says Mr. Moore, 51 years old.
At the end of October, loans more than 30 days past due amounted to just 0.7% of First Investors' $480 million loan book. Loans categorized as "unrecoverable" amounted to 3.1% of its portfolio. By contrast, at the end of December, 9.8% of AmeriCredit's total loans were more than 30 days past due and 6.2% were considered unrecoverable.
Credit indicators for subprime auto loans worsened a lot in the last two months of the year. But Mr. Moore says First Investors' delinquencies and losses for the quarter ended Jan. 31 won't differ much from the previous quarter's figures.
Granted, other lenders were prescient enough to pull back when rivals were making loans hand over fist. Among regional banks, analysts credit Westamerica Bancorp. and Bank of Hawaii Corp. for avoiding lending excesses. One key difference: As a subprime-only lender, First Investors can't get by on income from prime loans.
Making auto loans to subprime borrowers is tough even in the friendliest lending environments. First Investors typically makes about $25 million of loans a quarter in 36 states to borrowers who have an average FICO credit score of 590, which is deep in subprime territory.
Mr. Moore says the job of deciphering who could repay became a lot harder after 2005, when subprime borrowers were able to take on large amounts of mortgage-related debt. Complicating matters: It wasn't immediately clear that debt burdens were rising sharply because mortgages had features like "teaser" rates, making them appear cheaper to repay than they actually were.
So he stopped focusing on the auto-finance industry's traditional yardstick -- debt payments per month as a percentage of monthly income -- because that often understated true indebtedness. In its place, Mr. Moore compared total debt to total income, and if that was above 30%, First Investors wouldn't lend to that borrower.
"We'd just say 'no'," Mr. Moore says.
That "no" had a price. It caused a big drop in lending, with loan- approval rates sinking to 20% of applications in 2006 from its typical range of 30% to 40%, Mr. Moore says.
"It took a lot of guts to shrink," says Sy Jacobs, who sits on First Investors' board and is a managing member of Jacobs Asset Management LLC, which owns 14% of First Investors' stock. "Tommy left plenty on the table, but the benefits of that will be seen shortly."
Mr. Jacobs attributes Mr. Moore's ability to ride out credit cycles to his having cut his teeth as a banker during the Texas banking crisis of the 1980s, in which scores of banks collapsed amid a frenzy of speculative lending. "A cynic would say it scarred him, but an optimist would say it prepared him," Mr. Jacobs says.
