Subprime lending is a bad idea
I want no part of it

by Bill Lipinski, president and CEO, First Pioneer Farm Credit

The recent meltdown in subprime lending to residential homeowners is major news. Not long ago, these lenders were called innovators. Today they are lambasted in the media and the subject of governmental inquiries. At least one such company has failed..

The concept of subprime lending is beguiling:
It’s making loans to people who don’t have enough income to repay a conventional loan. Subprime lenders charge artificially low interest rates for the first years of a loan and require no principal repayment. Then interest rates and payments automatically accelerate. Hopefully the property enjoyed substantial inflation of value and the borrower can refinance at more conventional terms.

But here’s the rub …
If there is no inflation and the borrower can’t make these payments, then the lender forecloses and liquidates the property. The borrower is left with no equity and no home.

If the lender is indifferent to the repayment method — either from monthly payments or by taking the property from the borrower — then perhaps it can work. But I want no part of it.

Key to First Pioneer’s lending culture is that a loan needs to be good for the borrower and our cooperative.We will not make loans when analysis indicates that we’d have to rely on liquidating collateral for repayment.

Occasionally, First Pioneer borrowers encounter repayment difficulties. $12 milk. $15 cranberries. Five rainy weekends in a row. All contribute to difficulties, despite best efforts.When this occurs, loan officers work with customers by deferring payments, rescheduling or working out a plan to sell nonessential assets. This is not subprime lending.It’s sticking with borrowers in good times and bad. It’s what First Pioneer is about.

We sometimes stretch our lending standards to make a loan using a Farm Services Agency guarantee, usually to promising young farmers who are long on work ethic and desire, but short on net worth and credit history. This is not subprime lending. It’s working hard to make a loan without putting the borrower in a position to fail.

“ Key to First Pioneer’s lending culture is that a loan needs to be good for the borrower and our cooperative.”

Recently, the idea that subprime lending would be good for Northeast agriculture was proposed. Specifically, to promote dairy expansions. Of course, proponents (none of whom are lenders) call it “writing loans that do not meet normal underwriting standards.” Some think that First Pioneer ought to try it while others push state governments for funding. I have not heard proponents explain what happens if subprime borrowers can’t repay these loans.

I have also not heard anyone explain how, by itself, lending more money to a business that cannot support additional loans can increase its profitability. The logic is twisted. Northeast production agriculture is not short of available credit. Where there is profitability, good borrowing and lending opportunities naturally follow.

There is much that we should be working on as an industry in order to enhance Northeast profitability: better prices, market development, increased efficiency and cost control. I strongly believe that our Northeast states could do more to level the playing field for farm producers.

Subprime lending, however, is not a good choice. It’s just a bad idea. It might look good in the short term, but it hurts people over the long term. Your trust in First Pioneer as a reliable partner for you and your cooperative is our bottom line. That’s why, at First Pioneer, we say NO to subprime lending.

This letter appeared in the Summer 2007 issue of Financial Partner (F.P.) magazine, First Pioneer's customer publication. Click here if you would like to start receiving FP magazine in the mail.

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