The financial crisis that rolled through the economic landscape a decade ago was — among many things — a financial reset button. Interest rates plummeted as the Fed held the federal funds rate at zero in the hopes of stimulating lending in an environment where credit went from dangerously free-flowing to dangerously non-existent in the span of a few months.
A decade later, however, things have gotten back to “normal” by many accounts, with the caveat that normal is a relative term when one is talking about the U.S. economy. It is undeniable that broadly speaking, the landscape a quarter into 2018 doesn’t bear much resemblance to the crater it resembled by the end of 2008.
At the time, lending to consumers and small businesses was choked off nearly entirely, unemployment skyrocketed to over 10 percent and the housing market ground to a halt and contracted suddenly. Today, unemployment is at a historic low of 4.1 percent, household debt has recovered and surpassed its pre-Great Recession peak and consumer spending (despite a rough start to the year) seems to be humming along. People are buying houses such that there is now a supply shortage in the market.
So back to normal, more or less, for consumers?
Yes, in many respects — particularly on the surface. Today’s consumers spend and borrow a bit more like their pre-2008 selves than who they were immediately following the financial meltdown, and this is particularly true when it comes to their use of credit.
But a little under the surface, it becomes clear that today’s normal is a new normal — particularly when it comes to borrowed funds and how some classes of customers are gaining access to them.
The New Subprime Lending Path
Not all that long ago, a customer looking for a car loan would very likely be seeking it from a bank — even if they were a subprime borrower with a FICO score below 600.
But today, for a subprime consumer, that is a somewhat rarer experience. Big banks have moved away from the segment in general — and from subprime borrowers in specific. Wells Fargo closed its subprime lending subsidiary during the ending days of the Great Recession and moved more broadly away from auto lending two years ago. Citigroup’s auto lending unit has been nearly entirely sold off.
But big banks haven’t stopped lending to subprime borrowers, according to recent reporting in The Wall Street Journal — they’ve just moved away from doing so directly. Instead, they are lending to non-bank financial direct lenders like Texas-based Exeter Financial — and letting Exeter extend loans to subprime customers.
And in some cases, they’re lending quite a lot. Citigroup and Wells Fargo, for example, have extended Exeter enough credit for the firm to underwrite $1.4 billion in subprime auto loans. Loans to non-bank lenders like Exeter sextupled between 2010 and 2017 to $345 billion, according to a WSJ analysis of regulatory filings. That makes them one of the larger categories of bank loans to companies.
Subprime borrowers end up with the funds — though on average, their poor credit score (of around 570) means they pay a high rate on the loans, generally around 15 percent. Exeter makes its money on the difference between the rate it charges and the 3 percent or so the banks charges them on their loan. Exeter, which is majority-owned by private equity firm Blackstone Group LP, eventually bundles its loans into securities and sells them to private investors. It then uses those funds to repay the banks and pay off their fees. They report a charge-off rate of around 9 percent — as compared to the 1-2 percent that is common on bank loans.
If all of that sounds a bit familiar to you — yes, it has some structural similarities to loans to nonbank lenders that got several banks into trouble during the crisis, as well as various attempts to package off the risk of lending by unloading the risk of sub-prime loans onto third-parties.
This time around, banks claims they have discovered the correct way to structure the credit so as to avoid direct risk or liability. Some experts, however, have their doubts.
“It’s very easy for people to deceive themselves over whether risk has migrated,” said Marcus Stanley, policy director at Americans for Financial Reform, a nonprofit organization that advocates for tougher financial regulation, told The Wall Street Journal.
Others have noted with some concern that this has also seen funds flow back into areas that had seen credit standards tighten sharply since the Great Recession — the mortgage markets. Non-bank lenders, as of 2016, do the majority of lending in the mortgage market — though often financed by traditional banking players that have radically scaled back their involvement.
LoanDepot, for example, recently revealed a $250 million line of credit from Bank of America Corp, in a recent filing — funds that Bryan Sullivan, loanDepot’s finance chief, referred to as “the lifeblood of our business.”
A Bank of America spokesman, meanwhile, said that the bank limits its subprime exposure in line with its approach to responsible growth.
And it may be the case that this more expansive look at who can get loans — and for how much — that non- bank lender specialize in, might be something the housing market will need more, not less of.
And soon.
The Quietly Creeping Costs Of Buying — And The Changing Debt Profiles It’s Creating
The cost of housing is going up, driven largely by a supply gap that is pushing prices up — particularly in desirable major metros. Concurrently, interest rates have been steadily on the rise. As of last week, the average rate for a 30-year, fixed-rate mortgage (the most common mortgage type take out by consumers) had hit 4.4 percent. As of the start of 2018, it was at 3.95 percent.
These factors “are working against affordability, and that’s why you get the pressure to ease credit standards,” Doug Duncan, chief economist at Fannie Mae, told The Wall Street Journal.
One area of flexibility that seems to be favored at present, according to reports, is loosening up debt-to-income requirements for buyers. Debt-to-income measures how much of a household’s pretax income goes towards paying down debts — mortgage, student loans, car payments, etc. As a general rule, 45 percent is where bankers tend to like to cap those loans out of concern that accepting ratios higher than that could leave buyers stretched a bit too thin each month.
“Every month is going to be tight,” noted Todd Jones, president of BBMC Mortgage.
But as of last month, Fannie Mae moved to back more loans for borrowers with debt-to-income ratios of 50 percent. Freddie Mac also started backing more of those loans, according to industry researchers. A big move, since Fannie and Freddie Mac collectively own or insure about half of all U.S. mortgages. The private sector has followed suit. Caliber home loans, for example, says about 25 percent of its funded loans have debt-to-income ratios of greater than 45 percent. A year ago that figure was around 10 percent.
Uptick aside, buyers with debt-to-income levels above 45 percent are still below the all-time high of 37 percent just before the crisis kicked off in 2007. Moreover, other than increased debt levels, the borrowers otherwise show strong credit histories at this point — 78 percent of the high debt-to-income ratio loans were made to customers with credit score north of 700.
Still, some are concerned, given that interest rates seem primed to continue to rise — and the housing market, by all indications, is getting hot.
“The problem,” said Guy Cecala, chief executive of Inside Mortgage Finance, “is you’re going to run out of [prime] borrowers.”
And what happens then is an interesting question. Particularly as there are more lenders out there — well-funded by banks — who are getting more open minded about taking on subprime borrowers, waiting in the background.
We get a lot of press releases here at PYMNTS. We consider all of them, and some are more newsworthy than others. But this one really got our attention. This past week, Diebold Nixdorf made headlines with its announcement of successfully installing two new automated teller machines (ATMs) at the U.S. National Science Foundation’s McMurdo Station in Antarctica. This achievement marks a significant milestone in banking accessibility, to be sure. We would like to meet the crew that installed them. We’d also like to know why they needed two. Was there a line at the first one? More to come on that.
According to Diebold, McMurdo Station is Antarctica’s largest research and logistics hub, supporting a fluctuating population that ranges from fewer than 200 residents during the winter months to up to 1,100 individuals during the summer (October through February). The presence of these ATMs is crucial, it says, as the next closest banking facilities are thousands of miles away, making them the only ATMs on the entire continent. How’s that for a value proposition?
The DN Series ATMs are designed for always-on availability. And why do they need two? One ATM is actively in use, while the second serves as a backup for spare parts, ensuring uninterrupted service in this isolated area. These machines are connected to the DN AllConnect Data Engine, which leverages Internet of Things (IoT) connectivity, machine learning, and artificial intelligence (AI) to monitor their performance. A dedicated team continuously aggregates and analyzes technical data to identify potential issues, enabling remote diagnostics and repairs. The ATM can be maintained by trained staff at NSF McMurdo Station, or the Diebold Nixdorf service team can remotely guide them through the repair process.
Anyway, it got us thinking. Are there other surprising ATMs in extreme locations? Well, of course, there are. Here’s a sampling of what we found.
At an altitude of about 5,364 meters (17,600 feet), the Mount Everest Base Camp in Nepal is another unexpected place to find an ATM. Although it’s not a permanent fixture and is often set up seasonally, it caters to climbers and trekkers who need cash for local transactions. This temporary ATM service underscores the adaptability of banking services in extreme environments.
In some parts of the Amazon rainforest, particularly in Brazil and Peru, ATMs can be found in small villages and towns. These machines are vital for local communities, providing access to cash in areas where digital payment options might be limited. The presence of ATMs here demonstrates how banking services can reach even the most remote communities.
Located in the Tibet Autonomous Region, Nagqu is home to one of the highest ATMs in the world. This region is very remote, with limited infrastructure, making the presence of an ATM a notable example of banking accessibility in extreme environments.
In the Thousand Islands (Kepulauan Seribu) off the coast of Jakarta, Indonesia, there’s a floating ATM. This unique ATM serves the local community and tourists on the islands, demonstrating how banking services can adapt to isolated marine environments.
Longyearbyen, the administrative center of the Svalbard archipelago in Norway, boasts the most northerly ATM. This location is one of the most remote inhabited places on Earth, with limited access to mainland Norway, making the ATM a vital service for residents and visitors.
On a more serious note, the installation of ATMs in places like Antarctica and other remote locations highlights the evolving nature of banking technology. With advancements in IoT, AI and remote diagnostics, it’s becoming increasingly feasible to provide banking services in areas previously considered inaccessible. As we look to the future, it will be interesting to see where else ATMs might appear. Whether it’s on a remote island, at the top of a mountain or even in space, the ability to access cash is becoming more universal than ever. And who knows? Maybe one day, we’ll see an ATM on Mars, serving the first interplanetary travelers.
For now, the presence of ATMs in unexpected places reminds us that banking is not just about transactions; it’s about connecting people and communities across the globe, no matter how remote they might be.
