I Would Really Like to Get Elizabeth Warren and Other Progressives On the Record Right Now About Sub-Prime Auto
To me, the sub-prime auto loan market looks exactly like the home mortgage market in about 2006.
Back before 2009, Progressives were pushing like crazy to get banks to write mortgages to low-income borrowers with bad credit. Banks that refused to do so would face the wrath of the banking regulators and lawsuits over redlining and ever other thing the Left could think of. Seriously, if you had tried to stop sub-prime lending in 2006 the Progressives would have excoriated you as being racist, hating the poor, etc. When the whole mess inevitably collapsed, the Progressives suddenly were there blaming this lending to low income people on the banks, accusing them of predatory lending practices.
OK, so now it is 2006 in the consumer credit market, and specifically in auto loans. Banks are making crap loans to no-credit individuals on cars and getting them off the books by securitization. So let's get Elizabeth Warren on the record right now. Should banks stop lending to these no-credit low-income people? My bet is that she would support this lending, doubly so because the Obama Administration feels on the hook still for their GM and Chrysler bailouts and would rather not see these companies tank (which they would if sub-prime credit suddenly dried up). So, before she can piously accuse banks of predatory practices 3 years hence when it all collapses, I want to know what Elizabeth Warren thinks of all this right now.
Update: Well, good news and bad news. Good news is that Elizabeth Warren has criticized sub-prime auto. Bad news is she appears to be totally on the wrong track with causes, talking not about the fact the loans should not be written at all but about the fact that she thinks dealers are reaping huge profits marking up the loans. It would be interesting to see what the Obama Administration would think about a clamp-down on sub-prime auto. Methinks they might freak out at that, knowing sub-prime loans are all that is keeping US automakers out of a new recession.
J_W_W:
It is insane what new cars cost nowadays. Likewise it is insane to finance some of these cars at all.
March 17, 2016, 8:12 pmDaniel:
Would love to see your thoughts on this new credit card refinancing personal loan boom. Feels like they're just throwing cash away on unsecured loans.
March 17, 2016, 8:29 pm3rdMoment:
I don't anticipate this will be a big problem for banks.
Repossessing a car is MUCH easier that foreclosing on a home. And loan performance should be improved by new technology, as described here:
March 17, 2016, 10:35 pmhttp://dealbook.nytimes.com/2014/09/24/miss-a-payment-good-luck-moving-that-car/
ano333:
While she might still be on the wrong track, Warren is correct that dealer markups for subprime buyers are outrageous. Companies like Drive Time have markups of somewhere near 100% of average private-sale value on many older cars.
March 18, 2016, 5:39 amjohnnycello:
Yes, outrageous, but they gave me a loan when no one else would let me in the door. I was a huge credit risk, they took that risk, and they got paid. I needed a reliable car in the worst way, and I got it. Everyone's a winner. (PS - Paid the loan off on schedule)
March 18, 2016, 8:10 amDan Wendlick:
Sure, taking back the collateral may be easier, but reclaiming the outstanding value of the loan becomes much more difficult. The typical car loan is underwater pretty much from day one until something like 2/3 of the amortized life. Houses hold their value much better than cars do. Add in the fact that someone behind on their payments is probably not keeping up on oil changes and other scheduled maintenance, and it is unlikely the banks and finance companies are going to be able to recoup much on the resale market.
March 18, 2016, 8:42 amMaddog:
AUTOMAKERS AVOID RECESSION BY SELLING CARS TO DEADBEATS WITH NO CREDIT, ON CREDIT . . .
. . . you might want to lubricate your check writing hand because it looks like taxpayers will be writing some checks to cover this fiasco.
If the government was not suffering from Keynesian insanity we would likely already be in a recession. The beauty here is while we are not in a recession now, due to this Keynesian insanity, once it hits it will be much worse than it would have been. The auto industry is on life support. Selling to deadbeats on credit might be a bad idea, but hey, taxpayers will come to the rescue!
This is what the end of progressivism looks like.
One of the real head scratchers in this is the idea that progressives, the people who think everyone should live in high density urban environments, ride rail transit, and not even own a car, are the supporters, and creators of this problem. Perhaps, what they want is to bankrupt the poor, permanently eliminating their ability to buy a car, they just chose new car purchase as the mechanism!? No, I'm not buying that either. They are simply clueless. They want both the poor buying new cars, and only riding rail transit.
Welcome to progressive la la land.
March 18, 2016, 10:21 amMatthew Teague:
I work in the auto industry doing B2B for large groups.
I was talking to the largest "Buy Here Pay Here" chain in the country on their operations end and what they said should terrify you. Typically in a normal environment they target Tier 3 credit customers, who normally struggle with traditional loans. However, GM and Ford are loaning to these customers in such volume that it has forced the distressed credit chain to target tier 4 credit in a way they haven't had to since 2008.
Those loans are on rapidly depreciating assets that are rolled into new loans (essentially refinancing) every 3-5 years the same way ARMs were run. At some point, the music will stop playing and this will blow up.
March 18, 2016, 10:28 amJim Collins:
Is this some of the fallout from the Cash for Clunkers program?
March 18, 2016, 10:38 amOrion Henderson:
I think you may be thinking of two different things. Subprime auto loans and buy here/pay here are not the same thing.
Subprime loan rates, through a bank, are high and are marked up by the dealer as much as they can get away with. There is a legal max (18.9% in my state last I heard). Assuming it hasn't changed, the dealer is on the hook for some charge back if the buyer defaults. The banks also watch the LTV pretty darn closely-so if the car does come back on a repo-they should be OK at auction. The dealer takes some of the risk; so they get some of the margin.
Buy here/pay here is different-there are no banks involved. Generally, the down payment covers the actual cash value of the vehicle purchased. Every additional payment becomes the profit margin. So by the time the payments are done the customer has paid many multiples of the vehicles price.
But just like usury laws restrict access to money by those that need it most-cutting off the margins to dealers and banks will result in these folks not getting cars. Which results in them not being able to get, or keep, jobs. And the cycle continues forever.
I am not saying we should incentivize (sp?-is that even a word?) sub prime-or prime for that matter-just that we shouldn't restrict it through regulation.
March 18, 2016, 11:09 amHerb:
Have you considered the price of cars is influenced by the availability of credit? Perhaps not as much as homes but in the end if I could sell cars to 10 people with price X and adding subprime loans allows 20 people to bid on those cars in the end the price of a car won't be X but some Y > X.
Yes, I know all the costs in building a car and pricing but in the end if the most that cars can sell for is X only the auto companies that can get a car out the door for X will sell cars. Using credit to inflate the prices of cars can sustain the inefficiencies of companies (see the OP's nod to GM and Chrysler) or allow efficient companies greater profits but by allowing a greater number of buyers for the same number of cars it will increase price.
In fact, given changes in consumer credit in the past 30 years in general I suspect a significant amount of the cost of goods increasing is due to easier credit and that in studying inflation we need to look both at money supply and credit supply combined. Looking at credit contraction since 2008 despite money supply run up is one way to explain why QEnfinity didn't run up inflatation as many expected.
March 18, 2016, 11:28 amHerb:
You are welcome to gather investors and enter that business at "fair" prices. I'm sure after all the risk you assume will still be less than your markup to prove the others are just gouging people and you'll make a "fair" profit.
I, however, will await your five year financials to see if you even have a positive return.
Subprime buyers are high risk and hard to recover. Some of these dealers have remote turnoff that prevent your car from restarting after being stopped if you miss a payment. We had it happen to a delivery driver at the Dominos in Vernon, CT one shift) which reduces their failure to pay and recover costs. Oddly enough, in that instance, they were the cheapest buy her/pay here lot around.
March 18, 2016, 11:34 amjoshv:
So, you repossess, 5 million cars 3 year old or less - and then what? Well, you've got to sell them. Good luck with that, and good luck selling new cars into that market.
March 18, 2016, 3:35 pmJ_W_W:
Oh yes, I a agree with your point completely!
March 18, 2016, 9:07 pmxtmar:
Cars are also better now, so you're getting more for your money. Even if the upfront price is higher, the increased reliability means that the annualized cost is less than in the olden days, when cars didn't last as long.
The other thing that's influenced the market is the availability of certified pre-owned cars, which have substantially reduced the price discount for recently built used cars.
March 19, 2016, 5:28 pmxtmar:
Good luck with that, and good luck selling new cars into that market.
That's part of the reason why more automakers now offer certified pre-owned. They can extract more value out of repos and lease returns by inspecting the car, putting a warranty on it, and then jacking the price up to a substantial percentage of new.
For most new cars, so long as they haven't been grossly abused or otherwise neglected, 80k-100k miles should be achievable without major expenses, and given that the average lease allows for something on the order of 10k-12k miles a year, they're foolish not to have CPO for repo'd and lease return cars.
March 19, 2016, 5:34 pm