Commercial Real Estate Development & Investment Banking Services Profile

Representative Client List:

Law Firms:

Jones, Day, Reavis & Pogue
Dorsey & Whitney
Dykema Gossett
Vinson & Elkins
Locke, Liddell & Sapp
Fulbright & Jaworski
Carlton Fields
DLA Piper Rudnick
Fowler White
Baker & Hostetler
Baker Botts
Holland & Knight
Ruden McClosky
Thompson Coburn
Shughart Thomson & Kilroy
Hinshaw & Culbertson
Baker, Donelson, Bearman, Caldwell & Berkowitz
Stinson Morrison Hecker
McGlinchey Stafford
Jones, Walker, Waechter, Poitevent, Carrere & Denegre
Best, Best & Krieger
Miles & Stockbridge
Stevens & Lee
Quinn, Emanuel, Urquhart, Oliver & Hedges
Stradling, Yocca, Carlson & Rauth
And over 200 others nationwide.

Banking:

The World Bank
Citigroup/CitiFinancial
Bank of America
Bank of America - Canada
NationsBank
JP Morgan Chase Bank
Bank One
First Union Bank
Wachovia Bank
SouthTrust
U.S. Bancorp
Wells Fargo
National City Corp.
Credit Suisse First Boston Mortgage Capital, LLC
Provident Bank
Bank of Oklahoma
Sunbelt Savings
Sunbelt Federal Bank
Bluebonnet Savings
Standard Pacific Savings Bank
First National Bank of Brewton, AL
Southeast Bank of Miami, FL
Barnett Banks, Inc.
Bank of the Southwest
Priority Bancorp
KeyCorp
Tanzania Institute of Bankers
Bank of Tanzania (central bank)
Goldome Realty Credit Corp.
Western Gulf Savings & Loan
American Savings & Loan
BEI Golembe (Banking) Consultants now EDS

Governmental:

FDIC
Resolution Trust Corp.
Federal Savings & Loan Insur. Corp.
Federal Home Loan Mortgage Corp.
U.S. Department of Education, Inspector General's Office
Farm Credit Bank
State of Texas, Savings & Loan Department (Regulators)
Internal Revenue Service, U.S. Treasury Department
Ten Municipalities in CA and CO
Tanzania Revenue Authority (tantamount to IRS)
United Nations Conference on Trade & Development
U.S. Agency for International Development (Washington, D.C.; Kiev, Ukraine; Moscow, Russia)
U.S. Air Force, Judge Advocate General's Office, Guantanamo Bay, Cuba and CA.
New York Governor George Pataki's Office of Regulatory Reform

Insurance:
AIG
CNA
St. Paul Travelers
State Farm
Liberty Mutual Insurance Co.
Erie Insurance
Acadia Insurance Co.
Military Premium Managers
North River Insurance Co.
American Casualty Insurance Co.
National Union Fire Insurance Co.
Continental Casualty Insurance Co.
Physicians Mutual Insurance Co.
Physicians Life Insurance Co.
Employers Mutual Insurance Co.
Crum & Forster Managers
Xerox Financial Services

Corporate:

Ford Credit
Cisco Systems
International Accounting Standards Board (London)
IBM - Lotus Development
Wal-Mart Stores, Inc.
Wal-Mart Real Estate Business Trust
Doral Mortgage
Network Software Associates
NAPA Auto Parts
Darryl's Restaurants
Sears
Heritage Motels. Inc.
Calco Aerospace
Ruby Tuesday
Phivos Karnaos (London & Moscow)
Jancik Concrete Specialties
George B. Kaiser, Forbes 400 List
Concord Boat Corp.
Houlihan's Restaurants
Fillette Green Shipping
Zapadnoe Koltze (Russia)
Benchmarking Partners
Tharaldson Motels, Inc.
Kilimanjaro International
Boston Credit Corp.

Don Coker - Investment Banking, Commercial Real Estate Finance, and Due Diligence Services.

Education:

College & University:

• University of Alabama, BA.
• University of Alabama, post-graduate work.
• University of Houston, post-graduate work.
• Southern Methodist University, executive education work.
• Spring Hill College, graduate-level work.
• Harvard Business School, Harvard University, Certificate in Business Valuation.

Professional Education & Activities:

• Phillips College, former Adjunct Professor of Business.
• U.S. League of Savings Institutions, approved instructor of banking, lending, investment, and management subjects.
• American Bankers Association - American Institute of Banking: financial statement analysis, business finance, bank investments, principles of bank operations, bank management, trusts.
• National Institute of Real Estate Boards, commercial real estate finance.
• International Council of Shopping Centers, shopping center finance.
• National Hospital Association, one-week workshop in healthcare entity finance and valuation.
• Mortgage Bankers Association, workshops in multi-family and SFR lending.
• Federal Home Loan Bank of Dallas, training workshops on financial institution management, lending, investments, operations, et. al.
• Texas Savings & Loan Department, training workshops on financial institution management, lending, investments, operations, et. al.
• Federal Home Loan Mortgage Corp., real estate financing workshop.
• First National Bank of Mobile, AL (now AmSouth Bancorporation), financial statement analysis, business finance, bank investments, credit card operations, deposit operations, bank management, trusts.
• Gibraltar Savings Association (now Bank of America), commercial real estate finance, valuation, joint-ventures.
• Citicorp, business, corporate, and real estate finance, valuation, deposit products, investments.
• Southwest Bancshares (later Bank One, now JP Morgan Chase Bank), business finance and real estate investments.
• Commercial Credit Corp. (now Citigroup), one-week Corporate Marketing Conference covering in-depth training in all financial products, plus 28 CDC Learning Center courses in business and economic subjects.
• Frost Bank, advanced credit analysis and business finance.

Books, Publications and News Media:

• Complete Guide to Income Property Financing & Loan Packaging, Prentice Hall, 1984.
• Self-Management: A Guide to Career Advancement and Development, written under contract for Prentice Hall, 1985.
• Complete Real Estate Computer Workbook, Technical Editor, Prentice Hall, 1986.
• The Complete Loan Officers Handbook, presently writing.
• "Money Laundering: A Dirty Business," White-Collar Crime Reporter, Oct. 1991.
• Treasury Magazine published by The Economist. Interviewed and quoted in an article written by a U.S. News and World Report Editor.
• "How You Can Help Your Client Get a Loan to Finance Real Estate Projects," Practicing Attorney?s Newsletter, April 1984.
• "Getting a Grip on Core Deposit Intangibles," American Banker newspaper, 1996.
• "The Dollars and Sense of Business Valuation," published on the website of the American Bank Attorneys Association, April 1996.
• "Putting a Cash Value on a Business," interviewed by Lawyers Weekly, May 6, 1996.
• "Business Valuation Techniques," Business Locator, May 1996.
• "Valuing Businesses," TAB Letter, Technical Assistance Bureau, June 1996.
• "Using Business Value to Achieve Ad Valorem Tax Reductions on Commercial Real Estate Properties," Journal of Property Management, June 1997.
• What's Working in Credit & Collection, interviewed, quoted re: bank drafts, March 1997.
• "Making Sense of Internet Stock Values," TAB Letter, July 1999.
• Africa Today, extensive video coverage by Reuters News Agency of Tanzania Revenue Authority training program, Arusha, Tanzania, March 11, 2001 and other dates.
• Interviewed by ITV Television Network on the subjects of banking, taxation, economic growth and development, and capitalism in Tanzania, in Arusha, Tanzania, March 16, 2001. Aired on March 17, 2001, and subsequent dates.
• March 16, 2001. Aired nationwide on March 17, 2001, and subsequent dates.
• The Atlanta Journal-Constitution, interviewed for an article on banking regulatory policies and procedures, and banking practices, August 21, 2001.
• The Atlanta Journal-Constitution, interviewed for an article on banking practices and procedures to help deter terrorism, September 19, 2001.
• Collections & Credit Risk, interviewed regarding banking practices, Sept. 20, 2001.
• The Atlanta Journal-Constitution, interviewed for an article on banking practices and procedures involving funds transfers and money laundering by terrorist groups. September 21, 2001.
• The Baltimore Sun, interviewed for an article regarding considerations for the future of Allied Irish Banks, PLC?s, American subsidiary Allfirst Bank. May 30, 2002.
• The Atlanta Journal-Constitution, interviewed for an article on the effects of the Sept. 11, 2001, terrorist events on banking practices and procedures, August 29, 2002.
• Credit and Collections World magazine and website, interviewed regarding bank account opening practices and identity theft, September 20, 2002.
• Outside the Lines television show and ESPN.com website, interviewed regarding identity theft matters. November 1 - 3, 2002.
• Lending Intelligence magazine and website, interviewed regarding lending practices and interest rates, November 25, 2002.
• NBC Evening News, interviewed regarding identity theft, November 25, 2002.
• Lending Intelligence magazine and website, interviewed regarding credit scoring and loan approval policies and procedures, December 10, 2002.
• Charlotte Observer newspaper, interviewed regarding bank branching and operations policies, January 21, 2003.
• Street & Smith?s SportsBusiness Journal, interviewed regarding business ethics and corporate governance issues involving the U.S. Olympic Committee's Chief Executive Officer, February 25, 2003.
• Family Finances column that appears in The Boston Herald, the Pittsburgh Post Gazette, the Palm Beach (FL) Daily News, and some Scripps Howard newspapers. interviewed regarding credit card debt matters, September 23, 2003.
• The Denver Post, interviewed regarding banking economics and bank branching January 21, 2004.
• Mortgage Lending Compliance Alert, interviewed regarding housing market outlook, economic and interest rate outlook, and lender profitability strategies. Feb. 2004.
• CFA (Chartered Financial Analyst) Magazine, published by the Association for Investment Research, which recently became the CFA Institute. Interviewed by this professional certification organization that promulgates ?standards for investment professionals worldwide? regarding business ethics and corporate governance issues. May 2004.
• Continental magazine, interviewed regarding banking and its effect on economic resurgence, especially as it relates to Ireland. July 6, 2004.
• European Business School, International University; Schlo? Reichartshausen, Germany. Interviewed regarding intellectual property and business valuation techniques. July 24, 2004.
• San Francisco (CA) Daily Journal, a legal newspaper, quoted regarding the alleged bank fraud and credit card fraud factors related to alleged Guantanamo Bay, Cuba, U.S. Air Force translator spy Ahmad Al Halabi, July 28, 2004.
• Bank Tech & Security Newsletter, provided direction to a bank on the proper way to handle an attempted fraudulent international wire transfer. September 30, 2004.
• Small Business Times, provided information concerning business valuation issues. September 30, 2004.
• Mortgage Lending Compliance Alert, interviewed regarding the Bank Secrecy Act and Suspicious Activity Reports (SARs). October 12, 2004.
• Mortgage Lending Compliance Alert, provided input for an article concerning compliance with the rules and regulations of lending. November 4, 2004.
• Mortgage Lending Compliance Alert, provided input for an article on the Fair and Accurate Credit Transactions Act of 2003, a/k/a/ FACTA or FACT Act. Mar. 16, 2005.
• Bank Technology & Security Alert, provided input for a question and answer section regarding online bill paying. April 11, 2005.
• Mortgage Lending Compliance Alert, provided input for a question and answer section regarding closing costs for home mortgages. May 18, 2005.
• Newark Star-Ledger newspaper, interviewed on the subjects of check cashing and the need for enhanced identification verification systems. May 26, 2005.
• Bank Insurance & Securities Marketing Magazine, interviewed regarding ethical training considerations and the Securities & Exchange Commission?s recently enacted Investment Adviser Code of Ethics. June 21, 2005.
• Mortgage Lending Compliance Alert, provided input for an article regarding the legal, regulatory, and marketing considerations of providing lending services to Spanish speakers. June 21, 2005.
• Bank Security & Technology, provided input for a question and answer section regarding bank facility security. August 11, 2005.
• Bank Security & Technology Alert, provided input for an article regarding the security of bank computer systems. November 9, 2005.
• Chicago Sun-Times, interviewed on bank marketing issues. January 9, 2006.
• American Prospect Magazine, provided input for an article on business and banking ethics written by a reporter for the Philadelphia Daily News. February 1, 2006.
• Bank Security & Technology Alert, provided input for a question and answer section regarding bank record retention. February 8, 2006.
• Chicago Sun-Times, interviewed on checking account issues, March 13, 2006.
• ABC News - Miami, interviewed for a national radio broadcast regarding credit card fraud and identity theft issues. April 21, 2006.
• AML (Anti-Money Laundering) Compliance Alert, provided input for an article about the BankAtlantic money laundering case and anti-money laundering policies and procedures. May 5, 2006.
• WJNO AM 1290 Clear Channel Radio, live on-air telephone interview by John Howe regarding the loss of credit information on 26.5 million veterans. May 23, 2006.
• Mortgage Lending Compliance Alert, provided input for an article about documentation requirements for closing a loan. June 12, 2006.

Other Professional Experience:

• Former governmental financial institution regulator.
• Over twenty years experience in high-level positions in all areas of mortgage banking, banking, real estate finance, corporate finance, and all areas of lending.
• Consultant on various economic, valuation, real estate, marketing, and banking matters for clients in 45 states and 25 foreign countries in the Americas, Europe, Asia, and Africa.
• Expert Witness, for plaintiff and defense, listed in both the American Association for Justice's and the Defense Research Institute's databases of recommended consultants, plus state and local databases in AR, CO, DC, HI, IL, IA, LA, MN, MS, NY, NC, OH, PA, SD, WA, and San Francisco.
• Institute of Financial Education, approved instructor for the educational arm of the U.S. League of Savings Institutions.
• Prentice Hall Publishing, Simon & Schuster, Paramount Communications, technical editor and consultant on banking and real estate subjects.
• Holiday Inn, Lender Advisory Panel.
• Rodeway Inn, Lender Advisory Panel.
• Novick's Money Market Seminars, panelist.
• National Directory of Corporate Distress Specialists, approved management consultant.
• Licensed Sports Agent, approved by the NCAA, Major League Baseball Players Association, and the AL Athlete Agents Regulatory Commission.
• American Arbitration Association, approved Professional Commercial Arbitrator.
• State of Texas Real Estate Commission, approved instructor and writer of courses.
• Texas Real Estate Broker's License held for over ten years.

Past Professional Memberships:

• American Bankers Association
• American Institute of Banking, Chapter Officer and Bank Consul
• U.S. League of Savings Institutions
• Institute of Financial Education, Instructor
• Mortgage Bankers Association
• Texas Mortgage Bankers Association
• American Council of State Savings Supervisors
• American Bankruptcy Institute - Committee assignments: Public Companies, Real Estate, International, U.C.C., Commercial Fraud Taskforce, Real Estate, Healthcare.
• Board of Realtors
• National Association of Homebuilders
• International Council of Shopping Centers
• Houston (TX) Chamber of Commerce, Economic Development Committee, 9 years

Special Experience:

• Extensive experience with major financial institutions of all types.
• Extensive governmental and regulatory experience.
• Experience as a member of a Board of Directors.
• Recognized expert consultant on business ethics, banking ethics, and financial ethics.
• Extensive experience with all property, financial institution, and corporation types.
• Considerable experience in Turnaround Management, Interim Management, Troubled Debt Restructuring, and the Management and Disposition of Significant Repossessed Collateral.
• Familiar with many varied business, financial, economic, and governmental systems worldwide.
• Published author in finance, lending, and banking subjects.
• Listed in Who's Who in America, Who's Who in the World, and many others.

Mr. Coker serves clients worldwide from his office in the northern metro Atlanta, Georgia USA area.

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Business Start-up Advice and Services

Advice and services provided for start up businesses and paid for by the issuance of stock in the startup business will be considered on a case by case basis.

Services that can be provided include:

•  Business plan preparation.

•  Start-up cost estimate.

•  Feasibility and market studies.

•  Financial structuring and planning.

•  Financial projections.

•  Site location.

•  Merger and acquisition analysis.

•  Expansion analysis and planning.

•  International activities.

•  Management structure planning.

•  Cost cutting programs and analysis. 

•  Management consulting.

A Primer on Business Valuation 

  Managing Troubled and Failed Banks for Maximum Advantage

By Don Coker, Banking, Management, Valuation, Economic & Real Estate Consultant and Interim Manager

 And, we’re back…!

Remember the banking meltdown of the mid-1980s to mid-1990s?  Here we are twenty years later, except that this time, the vexing problem is single-family residential financing instead of commercial real estate financing.

Institutional Management Considerations

When a financial institution encounters a high volume of problems with a particular loan type or with their entire portfolio, then the institution has to be managed in a highly specialized way in order to address the unique problems with the portfolio.  It is not logical to expect that the management that brought the financial institution to its present troubled condition will have the objectivity and the ability to shift gears and properly manage the financial institution and its problems in a manner that will allow it to survive.  This is when an experienced interim financial institution manager must be brought in.

Identifying Desirable and Undesirable Assets

From the first day, the interim manager must undertake the matter of getting a handle on the quality of the assets contained in the various segments of the financial institution’s asset portfolio.  For example, today many institutions have decent quality loans to consumers, businesses, and perhaps also to commercial real estate owners, but have clearly recognizable problems in their single-family, construction, and acquisition and development loan portfolios.  The nature and severity of these problems must be estimated, and a plan established and implemented to capitalize on the institution’s strengths and to mitigate and shore up its weaknesses.

As one small example that often works, it is sometimes desirable to rent out REO and OREO rather than let them sit, incur tax, insurance, and maintenance expenses, and physically deteriorate without producing any financial return at all.  And sometimes, the residential renters turn into purchasers down the line.  I have successfully implemented the same renting practice for commercial properties as well.  It depends on the circumstances.

A realistic net present value analysis is useful in making these decisions.

Identifying Who is a Part of the Problem

Another decision area that has to be addressed beginning the first day on the job is the matter of which personnel stay and which ones have to leave.  This can best be accomplished by an interim manager brought in to run the institution since he or she will not have any established relationships with the staff that would affect his or her decisions.

Some employees will have an unreasonable attachment to and expectations for some of the troubled assets, usually those assets that they originated.  Some employees will refuse to accept that their institution has hit the wall and expect the entire unpleasant situation – including the new interim manager – to simply go away, therefore viewing you as a nuisance.  And some employees simply have poor judgment, poor business skills, a poor attitude, and a poor work ethic.

These employee decisions have to be made regardless of the intended future of the institution.  Even if the assets of the institution are to be sold off and the institution closed, people who are a part of the problem will be a hindrance in managing the institution and the assets and getting things cleaned up to the point that the assets can be sold.  And if the entire institution is to be sold or merged, stripping out the obvious problem personnel beforehand will help facilitate the sale since a purchaser will certainly bring in its own management team that understands the purchaser’s goals and systems.

“Live or Die” Decision

At some point, a decision has to be made as to whether the institution can be salvaged.  While the interim manager may have some input into this decision, the actual decision usually will be made by the governmental regulators.

Keep in mind that in light of the Bear Stearns bailout, Fannie Mae bailout, Freddie Mac bailout, AIG bailout, $700 billion subprime loan bailout, and who-knows-what-else-bailouts, it is unlikely that any federal funds will be available to fund a bailout of an institution today.  This means that the bank has to be reconstituted into a functioning and workable institution by making prudent adjustments to the present assets and liabilities as well as to assets and liabilities that are added during the reconstitution period.

This does not mean that a new alchemistic accounting trick has to be developed and applied, but rather that Adam Smith-style supply-and-demand and return-on-investment principles need to be reintroduced into the system.  How much income will this asset produce over its likely life?  What value does this asset’s anticipated income stream and residual value have to a likely purchaser?  Where are the funds going to come from to purchase this investment?

Regulatory Interface

In addition to all of the aforementioned mountainous jobs, the financial institution’s interim manager must interact with the various regulators that have an interest in the bank’s welfare.  This is no small task since it is common for an institution to be operating under a Cease & Desist Order issued by the banking regulators and specifying various items that the institution must address by certain dates.  These items might include an assessment of the bank’s staffing and management, maintenance of Tier I capital, reduction of delinquencies, write-offs, creation of a business plan, creation of a plan to reduce exposure to certain problem loans, creation of an ethics policy, etc.

Summary

Managing a troubled or failed financial institution is a tough and lonely job not recommended for the inexperienced, weak or timid.  It requires immense experience, imagination, credibility, a sense of strategy, ethics, and a personality that is oriented toward action.

About the Author – Experienced Interim Manager Don Coker

Don Coker is a heavily experienced financial institution management professional and former high-level governmental banking regulator who was previously chosen by the banking regulators to serve as an interim manager and in regulatory oversight positions.  Based upon extensive experience and achievements in banking and lending at Citicorp and entities that are now Bank of America, JPMorgan Chase Bank, and Regions Financial, he was chosen to serve as the on-site supervisory regulatory agent interim manager for two insolvent financial institutions and two bank-owned mortgage banking institutions.  Duties included the hands-on management of $1.8 billion (2008 USD) in assets including hundreds of millions of dollars in troubled assets, and participation in the review and recommendation of various recapitalization, restructuring, and merger plans.  Mr. Coker also was called upon by the governmental banking regulators to serve in regulatory oversight positions for various insolvent institutions under the supervision of the banking regulators.  In addition, Mr. Coker has been called on numerous times by the governmental banking regulators as well as the IRS to serve as their expert witness consultant in various banking litigation matters.

Mr. Coker is active in litigation consulting, serving as an expert witness consultant in over 390 cases since 1989, and has testified 98 times.  He has been engaged by hundreds of law firms including 32 of the country’s top 250.  In addition, he has been engaged by 8 of the country’s top 10 banks, over 50 banks worldwide including 10 of the world’s top 45 banks, and 8 of the country’s top 10 mortgage banking companies.

In addition to litigation-related work, Mr. Coker is active in performing business valuations, IP valuations, core deposit valuations, feasibility studies, marketing studies, business plans, anti-money laundering consulting, and advising investment funds on banking matters.

Mr. Coker’s work has involved clients in 25 countries and work covering over 50 countries.  He serves clients worldwide from his office in the northern metropolitan Atlanta area, and can be reached at Bankexpert@cs.com or at (770) 852-2286.

Entire Website © 2008 – 2009 By Don Coker

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Knowledgeable in the requirements of the Sarbanes-Oxley Act of 2002, including:

•  Sarbanes-Oxley Section 302 – Signing and certification of financial statements.

•  Sarbanes-Oxley Section 401 – Financial statement accuracy and off balance sheet liabilities.

•  Sarbanes-Oxley Section 404 – Internal controls and procedures.

•  Sarbanes-Oxley Section 409 – Material changes in financial condition and operations.

•  Sarbanes-Oxley Section 802 – Accuracy of records and record retention.

Knowledgeable in the valuation of businesses, business units, tangible assets, intangible assets, patents and other intellectual property assets.

Knowledgeable in all areas of corporate finance.

Knowledgeable in net present value, discounted cash flow, and all other important financial and valuation calculation methodologies.

Knowledgeable in financial workouts and organizational restructuring.

Former Board of Directors Executive Committee member.

Former Board of Directors Loan Committee member.

Former Board of Directors Audit Committee member.

Former Board of Directors Pension Plan Trustee.

Former governmental banking regulator.

Consultant to governmental banking regulators.

Consultant to many major corporations and over fifty banks.

Ability to cut through irrelevant extraneous material and get to the gravamen of a problem or situation.

Superb communications skills.

Widely published.

Unquestioned ethics and the discipline to speak up when necessary in order to insure compliance with the highest ethical standards.

Entire Website © 2008 - 2009 by Don Coker

A Primer on Subprime Mortgage Loans, Subprime Lenders, Alt-A Mortgage Loans, Alt-A Mortgage Lenders, Subprime Credit Cards, and Subprime Car Loans

By Don Coker, Banking, Management, Valuation, Economic & Real Estate Consultant and Expert Witness

Subprime Mortgages

It is universally desirable to own a home.  Homeownership is the financial foundation of the economy, and the personal financial foundation of most people.

Several years ago, in order to increase the level of homeownership in the country, mortgage lenders began making mortgage loans to borrowers who had less than perfect credit histories or who were new to the credit market.  Because of the increased risk present in these loans, they have been referred to as “subprime” mortgage loans.

Subprime mortgage loans refer to mortgage loans made to borrowers who have a less than prime credit condition. This less than prime credit condition may be due to a history of past credit or financial problems or simply be reflective of the fact that a person may be new to the world of credit and not have established a credit history.

Borrowers with credit scores of 600 and below (650 and below, by some definitions) often will find a subprime mortgage as their only source of mortgage financing. Late payment of bills or declaring bankruptcy could very well place borrowers in a situation where they can only qualify for a subprime mortgage. Accordingly, it is often advisable for people with low credit scores or temporary credit problems to wait for a period of time and build up their credit scores before applying for a mortgage in order to insure they are eligible for a conventional mortgage.

There are other factors that may cause a borrower to fall into the subprime category. For example, some borrowers might be classified as subprime despite having an excellent credit history because they choose not to provide the lender with the opportunity to verify their income or assets stated in the loan application process. Loans of this type are called “stated income” loans or "stated asset" (SISA) loans or "no income-no asset" (NINA) loans.  Due to a subprime lender’s perceived higher risk in making these types of loans, the borrower is considered a subprime credit.

Subprime lenders generally regard subprime lending as a "numbers game" where they have to go through many prospective borrower applications in order to weed-out unacceptable risks and determine which applicants represent an acceptable level of risk.  In order to deal with the large number of applications, subprime lenders often will use a credit scoring system to determine which applicants are acceptable risks and for which loan programs they may qualify.

In addition to using credit scoring programs to help them sort out the many applications that they receive for subprime loans, subprime lenders often make extensive use of television and Internet advertising to help bring in subprime loan applications.  Also, subprime lenders buy lists of potential subprime borrowers and solicit their business by mail or over the Internet.

The reason that subprime lenders go to the trouble of examining large numbers of applications and determining which ones represent acceptable levels of risk is that subprime lenders charge higher interest rates and fees than those charged for non-subprime mortgage loans.

Subprime mortgage loans tend to have a shorter time horizon and fewer opportunities to refinance when interest rates fall than do traditional non-subprime loans.

As of the first half of 2007, approximately 25% of mortgage originations in the United States were classified as subprime.

As of 3Q 2008, 1.35 million homes in the United States were in foreclosure; and 6.99% of all mortgage loans in the country were delinquent, according to the Mortgage Bankers Association.  Mortgage loans that were late or in foreclosure stood at 10.27% of all loans and totaled almost $1 trillion.

Alt-A Mortgage Loans

Alt-A mortgage loans are considered to be of a higher quality than subprime mortgage loans but not as high quality as a prime mortgage loan that would qualify for sale to Fannie Mae or Freddie Mac.  They can share many structural qualities with subprime loans, but the pricing of Alt-A loans is generally somewhat more favorable to a borrower than that of a subprime loan.

Examples of a typical Alt-A borrower would be one who has an acceptable credit rating but may have trouble verifying income, employment, or assets.

Subprime and Alt-A Mortgage Payment Reset Concerns

The greatest concern regarding subprime mortgages is that the vast majority of them are adjustable rate loans that start out with low "teaser" interest rates or low “teaser” monthly payment amounts that typically expire after the first year or two.

When this "teaser" period expires, the interest rate or payment amount can increase, often resulting in the subprime mortgage borrower being placed in the position of being unable to make the new monthly payments. The typical results are:

1. The subprime lender has to foreclose on the subprime mortgage, or

2. The subprime lender has to enter into a workout arrangement with the borrower which usually results in the subprime lender writing down the value of the loan on their books.

In either of these two possibilities, the subprime lender winds up with an investment value that is less than what was reflected on their books before the subprime loan went into default.

Subprime Car Loans

There are estimates that approximately $50 billion in subprime car loans were originated in 2006, the most recent year for which reliable information is available.  This accounts for over 19% of all car loans originated during that period.

Subprime car loans include some features that make them as risky as subprime mortgage loans, and some features that make them less risky.  For example, mortgage loans are secured by an asset that generally appreciates in value, whereas a car loan is secured by an asset that generally depreciates in value.  On the other side of the ledger, mortgage loans are often repaid based upon a variable interest rate and variable payment amount; whereas car loans are more likely to be on a fixed rate and fixed payment amount.

Comparing subprime car loans to prime car loans, we find that subprime car loans are usually repaid over a longer term, require a lower down payment, and are made for a higher loan-to-value ratio than are prime car loans.

In the final analysis, it is believed that subprime car loans carry slightly less risk than do subprime mortgage loans since the retention of the car is often critical in order for the borrower to continue to work.  Even so, there is always the possibility that the borrower could walk away from the car and subprime car loan and obtain transportation through another subprime car loan arrangement.

Subprime Credit Cards

Many of the issues of subprime mortgage lending apply as well to subprime credit cards. Today, about 20% of the credit cards issued in the United States are considered to be of subprime quality.

Today, the credit card industry divides customers into the "prime" and "subprime" markets. Borrowers with a credit score in the top tier (and these tiers vary from lender to lender and are adjusted from time to time) may receive a credit card with a line of credit at an interest rate around 12%.  Borrowers with a slightly lower credit score may receive a credit card with a line of credit at an interest rate of 15%, and a borrower with an even lower credit score may receive a credit card with a credit line at an interest rate around 17%. These are all considered non-subprime credit card customers.

Interest rates on subprime credit cards can be anywhere in a range from 20% to as high as 35% or so, depending upon the credit history of the borrower.  In addition, lenders charge various fees, such as an annual fee and an account maintenance fee, to help offset their increased risk.

Subprime credit card lending began in the 1990s to allow subprime lenders to provide credit cards to customers with less than perfect credit and profit from the higher interest rates and fees that subprime lenders charge for these credit cards. The subprime credit card industry's market goal was to provide a credit card with a line of credit to customers with credit scores in the 500s, little or no credit history, those coming out of a personal bankruptcy and anyone else with a recent history of credit or financial problems.

Subprime credit cards offered to subprime borrowers typically require no security deposit, as do secured credit cards. Credit limits start out very low compared to those in the non-subprime credit card industry, typically in the $100 to $500 credit limit range. Fees and interest rates are much higher than those for non-subprime credit cards. Likewise, the effect of some terms can be magnified due to the small credit line size. For example, take an overlimit fee of $29.00. This fee is of course a much greater percentage for a subprime credit card line of $500 than it would be for a non-subprime credit card of $5,000.

With these greater rewards for subprime credit card lenders come greater risks. It is reported that subprime credit card companies are writing off losses in the 15% to 17% range versus the average industry loss rate of 6.5%, according to CardWeb; and delinquency rates for subprime card companies average around 10% while those for the rest of the lending industry average around 5%.

Subprime credit card issuers use mass marketing techniques to bring in customers. Mail and Internet new account solicitations exceeded 5 billion in 2006, and were up dramatically from the total in 2005.

Secured Subprime Credit Cards

Those with the lowest credit scores and histories may still qualify for a secured subprime credit card. Essentially, even though a secured subprime credit card looks and, in terms of making purchases, acts like a regular credit card, it is basically a pre-paid card wherein the customer makes a "security deposit" to insure the payment of charges made with the secured subprime credit card.

Actually, the term "subprime" is typically not included in the term of art when discussing secured credit cards; but make no mistake about it, one only has to take a look at the terms of a secured credit card to see that it is a subprime credit card. Typical secured credit card terms include a hefty (in relation to the “credit line”) annual fee and require a minimum deposit of from $99 up to $5,000 depending upon the size of the “credit line” granted.

Despite their onerous terms, often a secured credit card is used as the first step for someone who needs to reestablish their credit.

Debit Cards

Debit cards carry the Visa or MasterCard name and give you the privilege of seeing money fly out of your checking account as soon as you make a purchase. In this way, a debit card is similar to a secured credit card except that the secured credit card essentially pays for purchases from the deposit you made earlier.

Managing a debit card that really does not offer you any credit, and coordinating all of the purchases that you make with your debit card with all of the checks that you write is a management nightmare.

Banks love debit cards because they eliminate the float that customers generally enjoy between the time a purchase is made and the time that the purchase has to be paid for, i.e., when you pay your credit card bill.

About the Author – Banking & Subprime Expert Witness Consultant Don Coker

Mr. Coker provides expert consultation, fact examination and analysis, advice, Affidavits, Declarations, reports, and sworn testimony at deposition and in court for parties engaged in litigation involving subprime mortgage lending, Alt-A mortgage lending, subprime car loans, subprime credit cards, and all areas of banking and finance.

Mr. Coker's expert witness experience and background includes over 390 cases for plaintiffs and defendants nationwide, 98 testimonies, and 12 courthouse settlements in all areas of banking, finance, FACTA issues, real estate, economic damages, identity theft, business valuation, intangible asset valuation, and many related matters going back to 1989.  Mr. Coker renders impartial opinions, and is privileged to be listed in the databases of recommended expert witness consultants of both the Defense Research Institute and the American Association of Justice.

His clients have included 8 of the top 10 banks in the country, over 50 banks worldwide including 10 of the top 45 banks in the world, 8 of the top 10 mortgage banking companies in the country, 32 of the country’s top 250 law firms, and numerous governmental clients including many banking regulators (FDIC, RTC, FSLIC, and others), IRS, USAID, U.S. Air Force, State of New York, State of Texas, World Bank, International Accounting Standards Board, and hundreds of others.

Mr. Coker's employment experience includes Citicorp and entities that are now JPMorgan Chase Bank, Bank of America, and Regions Financial, as well as Ford Motor Credit and a two-year stint as a high-level governmental financial institution regulator.

Mr. Coker holds a B.A. degree from the University of Alabama, and completed postgraduate education at Alabama, the University of Houston, Southern Methodist University, Spring Hill College, and the Harvard Business School.

In addition to subprime mortgage and subprime credit card litigation consulting and other banking and finance-related litigation consulting, Mr. Coker provides consulting services in many additional areas including business valuations, business plan writing, feasibility studies, marketing studies, bank taxation matters, anti-money laundering policies and procedures, policy and procedure manuals for financial institutions and other businesses, merger and acquisition due diligence and assistance, research, and many other related areas.

As part of his wide-ranging consulting activities, Mr. Coker has been called on by clients in 25 countries for work assignments involving over 50 countries.

Mr. Coker is widely published on banking and financial subjects, and is often sought out by the media for interviews and comments.

Mr. Coker serves clients worldwide from his office in the metro Atlanta, Georgia USA area.

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