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A Bubble in Deceptive, Abusive Subprime Auto Lending?

posted by Jean Braucher

In a long story in today's edition, the New York Times is reporting a bubble in often deceptive and abusive subprime auto lending on unaffordable terms, including very high rates of interest.  Although not quite the threat to the overall economy that the subprime mortgage bubble created eight or nine years ago, this apparent new bubble in lending for used vehicles has some similar features (targeting vulnerable consumers, lax underwriting, securitization, investors seeking high returns) and is causing significant pain for low income and unsophisticated borrowers.  A few regulators are mentioned in the story, but oversight so far seems to have been lax.


Remember readying some 90% of auto loans are all subprime. Follow the Money once again. No surprise here unfortunately.

thanks for nice sharing

Two very different responses to the Times story were published in the letters section today--one from a credit industry lobbyist and the other by former U.S. Solicitor General and Massachusetts Chief Justice Charles Fried, now back at Harvard Law. http://www.nytimes.com/2014/07/26/opinion/two-perspectives-on-subprime-auto-loans.html?partner=rssnyt&emc=rss&_r=0

JB ... Glad you linked to the Times responses.

The reason I am commenting is that I have seen other blog links to this article.

The abusive practices by used car dealers strikes me as the same sorts of typical, vanilla abuses that have been going on forever. Used car dealers reputation has always been justifiably bad.

As far as the notion that we are in a bubble, I have to strongly disagree. Most extreme financial events like the 2008 meltdown are simply not directly repeated until an entire generation of investors retire and are replaced by investors with no direct, emotional connection. Any investment manager (buyer) that gets burned in an asset backed securities deal would not only be fired, but also ridiculed.

The loss rates on subprime auto loans is at historical lows and both the underwriting and rates should weaken to a more typical level.

As far as non standard structured credit deals, I have looked at the prospectus of two deals, and they had a lot of subordination and, at least on a superficial level, looked solid to me.

The main reason this is important is that the Times article was highly researched, yet showed a lack of understanding regarding the financial strength of sub prime auto structured credit (CDO's). And in one place seriously overstated the degree and extent of risk:

"If those losses materialize, they could pummel a wide range of investors, from pension funds to insurance companies to mutual funds held by Americans preparing for retirement. For the huge baby-boomer generation, including many whose savings were sapped by the 2008 crisis and the ensuing recession, any losses from the auto loan securities could deal them another setback."

This followed the comment: Describing the potential trouble ahead, Kevin Cole, an analyst with Standard & Poor’s, said, “We believe these trends could lead to higher losses and weakened profitability in a few years." Losses are expected and built into the pricing (interest rates and underwriting) and aren't losses in the normal sense of losses on the deal -- just, as Cole said, weakened profitability.

This is an overview of credit ratings of deals: http://www.standardandpoors.com/spf/upload/Ratings_US/US_AutoLoan_ABS_Tracker_June_2013.pdf

Here is a credit blog that discusses the same:

"“We have never downgraded a subprime auto ABS bond for credit reasons since we started covering the sector in 1991,” Risi said." Risi is a senior director of asset backed lending at S&P.

Rating agencies had their 'come to Jesus moment' following the 2008 meltdown and now tend to err by being too conservative.

I am not an investor in this market, but follow it as the 'canary in the coal mine'. As long as people are actively concerned with this issue, it is highly unlikely to become a problem. Big problems tend to be caused by things that people don't worry about.

Its pretty easy to obtain a car loan with bad credit in 2014 than in the past. Consumers should be warned that they will pay for it in steep interest rates. One website called "InfoAviator" list these poor credit lending institutions on their website at http://infoaviator.org/finance/credit/car-loans/2014/06/08/where-to-get-car-financing-with-a-bad-credit-history/. The reason I mention this site is because they have one lender that will approve people before they go to the dealership so they can maintain there bargaining edge when dealing with the dealers salespeople.

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