Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Has the Fed Let the Inflation Genie Out of the Bottle? - 10th Aug 20
The Strange Food Trend That’s Making Investors Rich - 10th Aug 20
Supply & Demand For Money – The End of Inflation? - 10th Aug 20
Revisiting Our Silver and Gold Predictions – Get Ready For Higher Prices - 10th Aug 20
Storm Clouds Are Gathering for a Major Stock and Commodity Markets Downturn - 10th Aug 20
A 90-Year-Old Stock Market Investment Insight That's Relevant in 2020 - 10th Aug 20
Debt and Dollar Collapse Leading to Potential Stock Market Melt-Up, - 10th Aug 20
Coronavirus: UK Parents Demand ALL Schools OPEN September, 7 Million Children Abandoned by Teachers - 9th Aug 20
Computer GPU Fans Not Spinning Quick FIX - Sticky Fans Solution - 9th Aug 20
Find the Best Speech Converter for You - 9th Aug 20
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Next Subprime Debt Crisis Has Already Started

Interest-Rates / US Debt Jan 16, 2015 - 05:06 PM GMT

By: Money_Morning

Interest-Rates

Shah Gilani writes: Reading about what's going on in the subprime auto lending space is a lot like reading about drive-by shootings.

Unless you're a subprime borrower, or live in a neighborhood where drive-bys are happening, you probably don't know much about either or think they affect you.

But if you listen closely there's muffled financial "gunfire" already in your neighborhood.


And it's much closer to your doorstep than you think.

Here's what you need to know…

Yield Chasers Have Found a New Target

Subprime auto borrowers are getting killed by dealerships, their financing agents, and banks putting them on the financial frontline for default.

Even if not everyone is a subprime auto borrower the trend is rippling out into the U.S. economy.

New and used auto dealerships and their finance arms, manufactured lending partnerships, banks, private equity companies, insurance companies, mutual funds (and the usual cadre of lap-dog lobbyists and paid-for legislators) are doing to subprime auto borrowers what coddled mortgage lenders did to subprime housing borrowers.

They are teeing them up for a long drive down a dead-end road.

The game at both ends and in the middle is just the same. So are a lot of the players.

On the output end are the investors. Fixed income investors from mutual funds and insurance companies to mom and pop investors are once again desperate for yield.

When the Federal Reserve kept interest rates low through the 2000s, fixed income investors reached for yield further and further out on the risk spectrum. On the very end of the yield tree's flimsiest limbs, subprime mortgages and mortgage-backed securities blossomed. And investors picked them off like the low hanging fruit they appeared to be.

We know what happened next.

Ever since 2008's credit crisis and the Great Recession, the Fed's zero interest rate policies made it even harder for savers and bond investors to earn any interest.

So, with the mortgage tree cut down, the usual-suspect financial intermediaries cultivated the next best species of fruit-bearing trees: auto loans.

As financial intermediaries, banks make a lot of auto loans, but not as many as financing arms of auto manufacturers. And because auto loans are so profitable, lending partnerships and private equity companies and other "investors" eagerly provide abundant pools of money to borrowers in need of financing new and used cars

It's really these "intermediaries" that keep the wheels of the auto industry turning.

How fast are those wheels turning? Because of abundant financing and low interest rates, new light-vehicles sales in 2014 totaled over 16.5 million units. That's up 5.6% from 2013 and the highest new vehicle sales level since 2006.

According to Bankrate.com, loans to prime borrowers on new vehicles average 2.75% on six-year term loans.

But it's not just auto manufacturers' financing arms and banks providing money to new car purchasers that's making auto sales pop. The same banks and manufacturers' financing units, along with aggressive financing partnerships, are providing huge pools of money to dealers of used cars across the country.

According to the Federal Reserve, outstanding auto loans for new and used cars reached $934 billion at the end of September 2014. That's up from a total of $809 billion outstanding just two years ago. By the end of the first quarter of 2015 the total outstanding volume of auto loans is expected to exceed $1 trillion.

While prime borrowers financing new and used cars aren't worrisome – just as prime mortgage borrowers weren't a problem in the heyday of the housing boom – it's subprime borrowers who are eclipsing prime borrowers in the auto sales arena, just as they did in the late stages of the housing boom, that's becoming a worrisome trend.

And just like in the mortgage-money free-for-all, it's the intermediaries pushing loans on subprime borrowers. They can then charge them exorbitant interest rates. That's what's fueling the rapid increase in subprime auto lending, especially on used cars.

Of course, in the modern era, very few intermediaries keep the loans they make "on their books." Instead, they rely on other banking intermediaries or their own in-house securitization assembly lines to package thousands of auto loans into "asset-backed securities" to sell to eager investors seeking above market interest rate investments.

The difference in the new subprime rip-off game is in the input function of the financing equation.

Used car buyers in the latest push-them, plunder-them, package-their-promises, and sell them to salivating yield-hungry investors are far less credit worthy than the crap-shooting, credit-impaired homebuyers sucked into the mortgage mania game.

Sadly, it's the lowest rung of borrowers, many of them desperate for transportation to look for work, get to work, to take sick family members to and from doctors and hospitals, or to run their small transportation businesses, that get saddled with the worst high interest rate loans.

Of all outstanding auto loans made up to the end of Q3 in 2014, 23% were subprime loans to borrowers with less than a 640 credit score. That's up from 21% in 2009. Still, not as high as the 28% share subprime borrowers accounted for in pre-recession 2007.

Because of the way used car dealers are incentivized to make the biggest loans possible to subprime borrowers, they regularly roll in "extras" to the whole loan they offer unsuspecting or desperate buyers: title, taxes, dealer-prep fees, extended warranties, undercoating and rustproofing charges, sometimes collateral insurance, and the cost of buying out an existing loan on a trade-in.

As a result, on approximately 23% of subprime loans, the outstanding principal owed exceeds the resale value of the purchased vehicle by 200%.

Experian Automobile, a unit of credit rating company Experian, recently reported that as of September 2014 the average loan-to-value on all financed autos was close to 115%.

Of all auto loans made last year, 31% went to subprime purchasers. That's up 17% in two years.

With interest rates often starting at 22% annually, it's not hard to see why delinquencies are on the rise…

Of all auto loans made from January 2014 through November 2014, 2.6% were delinquent by 30 days or more. But, according to Equifax, of all subprime auto loans made in just the first quarter of 2014, by November, 8.4% had missed at least one payment. For comparison purposes, in 2008 the delinquency rate was 9%.

Mark Zandi of Moody's Analytics recently said of subprime auto loans, they're "eroding now, and pretty quickly."

Regulators Have Taken Notice

While the FTC generally oversees auto sales practices and is looking into several dealers and financing operations, the Consumer Financial Protection Bureau (CFPB) has been especially aggressive in attacking dealer "mark-ups" (the profit dealers earn for putting buyers into expensive financing schemes).

Asserting their responsibility to enforce "fair lending" laws the CFPB extracted a $98 million settlement from Ally Financial (formerly General Motors' financing arm) in 2013 for unfair mark-ups. The CFPB has threatened American Honda Finance, Toyota Motor Credit, and others. They are believed to be cooperating with the Bureau's ongoing inquiries.

In addition, the Justice Department has subpoenaed GM Financial, Santander Consumer USA Holdings, and others over their lending practices and dealer mark-ups.

Not to be left out of the action, the Securities and Exchange Commission (SEC) is believed to be investigating Ally Financial and others, and has hinted of possible forthcoming settlements.

The strange thing is not a lot of people are overly worried about excessive subprime auto lending blowing up and undermining markets or the economy.

Institutional investors seem happy with the extra yield they're taking in on the packaged loans they're buying and comfortable believing borrowers will continue to pay up.

Securitizers and raters are confident, for the most part, that auto buyers, many of whom have already declared bankruptcy, aren't able to do so again for another seven years, so they can't easily discharge their new obligations.

And many investors and financiers point to the fact that autos aren't homes. They can be easily repossessed. An increasing number of sold autos are being fitted with automatic cutoff switches that allow dealers to turn off cars remotely if a payment is even a few days late.

All that may be well and good. Still, with the proliferation of subprime auto loans to an increasingly stressed and increasingly delinquent army of struggling borrowers, sooner or later dealers may run out of discredited buyers to sell their repossessed vehicles to.

While I'm not worried about stray bullets in drive-by shootings wreaking havoc in my neighborhood, I am worried that subprime auto drivers might shoot themselves in the foot. That foot's on the accelerator, and the market and the economy are heading into another ditch.

Up Next

Sleazy auto lenders are just one of the lurking threats to your money. Click here for a no-charge subscription to Wall Street Insights & Indictments… and find out just who else is helping themselves to your money. 

Source : http://moneymorning.com/2015/01/16/the-next-subprime-crisis-has-already-started/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules