Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19
Palladium, Darling of the PGEs, Shifting into High Gear - 13th April 19
MMT is a spectacularly Dem idea - 13th April 19
The 'Silver Lines' of Opportunity - 13th April 19
Gold Stocks Bull Market Breakout Potential - 13th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Subprime Auto Loans Up, Car Sales Down: Why This Could Be Good for Gold

Interest-Rates / Auto Sector Jul 14, 2017 - 11:58 AM GMT

By: HAA

Interest-Rates

The latest monthly motor vehicle sales report released on July 3 paints a grim picture for US car sales. Overall June sales dropped by 3% compared to June of last year—the sixth successive month of lower year-over-year sales.

General Motors, Ford, and Fiat Chrysler were among the greatest losers with declines between 4.7% and 7%. Japan’s top sellers fared a little better, with Nissan seeing 2% growth and Toyota a 2.1% gain.


Economists and Street pundits seem to be stumped as to why Americans are so reluctant to buy cars. Hypotheses that are being bounced around range from tight credit markets to costlier car loans, to negative consumer sentiment about the economy.

Sales have fallen off a cliff, compared to 2016, a record year for the auto industry. In the first six months of this year, vehicle sales hit their lowest point since 2014, and consumer traffic at dealerships fell to a five-year low.

Who’s the main culprit here? Many signs point to subprime auto loans…

Subprime Auto Loans: A Wolf in Sheep’s Clothing

As car sales are plunging, the number of risky car loans is rising… and so are incidents of credit fraud. In a UBS survey, one in five borrowers admitted that their applications contained inaccuracies.

However, lenders are actively participating in building this particular Potemkin village. The biggest auto loan provider, Santander, is under investigation in at least 30 states for fraudulent lending practices and recently settled a lawsuit for $25 million.

Rating service Moody’s reported that Santander verified the incomes of just 8% of borrowers whose loans it recently packaged into a $1 billion bond issue. Furthermore, on top of unverified income, 9% of those borrowers had low or no credit scores and no co-signer.

A FICO score below 640 is deemed subprime. At the end of the first quarter, 22.3% of Santander’s retail installment contracts (RICs) showed credit scores under 540. Only 13.8% of borrowers had scores over 640.

Unsurprisingly, 12.8% of these loans were delinquent by the end of the first quarter, handing Santander a net loss of $72 million for the quarter—and further losses are expected.

Loan duration has dramatically risen as well. In the 1990s, a typical auto loan was 48 months. But due to climbing car prices and stagnating incomes, buyers are now asking for longer loan terms to reduce monthly payment amounts.

The fastest-rising class of loans is now 73–84 months, unprecedented for a quickly depreciating asset like a car. 32.1% of new vehicle loans in Q4 2016 were in that group, compared with 29% year over year. Even in the used-car financing segment, those “eternity loans” made up 18% of share.

More traditional banks like Wells Fargo have started to reduce their auto loan business amid deteriorating loan performance. The bank reduced overall loan origination by 30% and curtailed exposure to subprime loans by 27% in the first quarter.

Wells Fargo’s CEO Tim Sloan said auto loans are currently the business with the biggest potential for a “negative credit event.”

However, while major Wall Street banks like Wells Fargo and JPMorgan are more reluctant than last year to make car loans on their own balance sheets, they packaged more loans from finance companies into bonds in Q1 2017 than in last year’s first quarter, and are still among the top underwriters of the securities.

How This Could Be Good for Gold

Thankfully, this is unlikely to become a rerun of the 2008 subprime mortgage collapse.

Compared to the $8.4 trillion mortgage market, the US auto loan sector is small with only $1.1 trillion in loans. It’s also not nearly as leveraged through securitized products—and a car is much easier to repossess than a home.

However, that doesn’t mean a potential implosion of this shaky sector isn’t a threat to the US economy.

It’s quite likely that the exuberant 2016 auto sales figures were inflated by easy-to-get subprime loans with low, long-term payments, enticing buyers to purchase more car than they could afford.

Now that the loans are beginning to deteriorate and subprime buyers are no longer in the market or tapped out, we’re beginning to see the real picture—which is much less rosy than it seemed just a year ago.

Given that the auto sector is a massive part of the economy, this could be an early warning sign of a slowing economy. That, in turn, would be good for the gold price. If the Federal Reserve feels compelled to slow down or even reverse its ramping up of interest rates, gold is poised to rise.

The writing is on the wall: the Atlanta Fed just revised its GDP estimate for the second quarter to 2.7%, from previously 3%.

Get a Free Ebook on Precious Metals Investing

Right now is a great time to add some physical gold to your portfolio. But before you buy, make sure to do your homework first. The informative ebook, Investing in Precious Metals 101, tells you which type of gold to buy and which to stay away from… how to spot common scams and mistakes inexperienced investors fall prey to… the best storage options… why pooled accounts aren’t safe places… and more. Click here to get your free copy now.

© 2017 Copyright Hard Assets Alliance - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable,but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 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