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More Subprime Borrowers Falling Behind On Their Auto Loans...Sound Familiar


AzCactus
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Yes, it does.  Although people losing their car(s) is obviously much different than losing their home.  I doubt there will be much economic significance if a large number of people default on their auto payments.

 

I am not sure about this...

 

In the last great meltdown (2008), a lot of people let their houses go & kept up on their car loans.  If worse comes to worse, you can live out of your car.  You absolutely need your car to run errands and get to work.

 

In other words, a car is more important than a house.

 

Could it be that people lost their houses in the last meltdown.  Now they are living with family/friends, have lost their jobs, and are now letting their cars go?

 

If people are now letting their cars go, why is it different this time around?

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Yes, it does.  Although people losing their car(s) is obviously much different than losing their home.  I doubt there will be much economic significance if a large number of people default on their auto payments.

 

I am not sure about this...

 

In the last great meltdown (2008), a lot of people let their houses go & kept up on their car loans.  If worse comes to worse, you can live out of your car.  You absolutely need your car to run errands and get to work.

 

In other words, a car is more important than a house.

 

Could it be that people lost their houses in the last meltdown.  Now they are living with family/friends, have lost their jobs, and are now letting their cars go?

 

If people are now letting their cars go, why is it different this time around?

 

Are you sure they are not people letting their second or third car go? or people who can't afford cars get a it on lax standards ?

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Are you sure they are not people letting their second or third car go? or people who can't afford cars get a it on lax standards ?

 

I am not 100% sure as I have not done the research on it.  HOWEVER, I am going to guess that if you are capable of buying a 2nd or 3rd car, you are paying cash or have good enough credit to get standard type loans on it.  Who is paying 20% interest on 3 vehicles?

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  • 5 months later...

 

Yes, it does.  Although people losing their car(s) is obviously much different than losing their home.  I doubt there will be much economic significance if a large number of people default on their auto payments.

 

When we're talking about the poorest borrowers their car is their lifeline.  Outside of major metro areas like NYC/DC/SF if you don't have a car you can't make money.  People can find a place to stay at night easier than finding a new job. 

 

This is much worse than homes, the impact will be smaller, but it's a canary in the coal mine for other issues.

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Yes, it does.  Although people losing their car(s) is obviously much different than losing their home.  I doubt there will be much economic significance if a large number of people default on their auto payments.

 

When we're talking about the poorest borrowers their car is their lifeline.  Outside of major metro areas like NYC/DC/SF if you don't have a car you can't make money.  People can find a place to stay at night easier than finding a new job. 

 

This is much worse than homes, the impact will be smaller, but it's a canary in the coal mine for other issues.

 

Why do you think this will be much worse than homes, by which I assume you're referring to the housing crisis?

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Yes, it does.  Although people losing their car(s) is obviously much different than losing their home.  I doubt there will be much economic significance if a large number of people default on their auto payments.

 

It was a typo, that's what happens when you take a break mid-response to go have breakfast and read a book.

 

The fallout from this will be less than the housing crisis.  Autos for most borrowers are good credits.  Subprime is a small part of the market.  My thought was when people start to default on their cars, especially people who can't afford to default on cars then it doesn't bode well for the economy as a whole.

 

When we're talking about the poorest borrowers their car is their lifeline.  Outside of major metro areas like NYC/DC/SF if you don't have a car you can't make money.  People can find a place to stay at night easier than finding a new job. 

 

This is much worse than homes, the impact will be smaller, but it's a canary in the coal mine for other issues.

 

Why do you think this will be much worse than homes, by which I assume you're referring to the housing crisis?

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With cars, people only need one or two vehicles. They don't buy 8 or 10 or 20 on spec as they would in a housing bubble. Moreover, after the 2008 crisis banks have recapitalized and are apparently much tighter so I can't see a domino effect reoccurring due to auto loans. I wouldn't see this as a canary in a coal mine.

 

What I've never seen discussed in terms of the 2008 housing crisis (2007-2011?) was what happened to the overhang (if there was one) in investor owned housing. All the focus was on the poor people that got sucked in by teaser rates and then couldn't handle the resets yet one half-successful but over-levered investor could easily equal 10 poor credit buyers. Moreover, cities had massive overhangs of unfinished condo units etc.* so I wouldn't have been surprised if there were thousands upon thousands of people that went under by leveraging up to buy multiple rental units that couldn't be unloaded to meet their cash flow needs.

 

* I believe at the time I read where Miami had 13,000 or was it 30,000 unfinished condos when the collapse occurred. anyway, it was some amazing number of units under construction in anticipation of the bubble getting even bigger.

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Ah, got it. I agree this isn't going to be as big as housing. And I get the concept of the car being more essential than the home. My concern is the 2nd and 3rd cars. If you have a family of 4 with 2/3 cars, well maybe they can manage to lose all but one of the cars.

 

Sure - but the automotive industry has secular tailwinds behind it with the massive aging of the fleet. Even if a small recession caused a temporary drop and sub-prime autos blew up, the industry would probably be fine now that it is in a much better position than 2008.

 

Further, consumers who own 3 cars aren't able to leverage those cars up to be many multiples of current net worth/annual income like was done with houses, because they typically aren't buying them with the intention of re-selling them.

 

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The difference is asset prices. Home prices were inflated. Are car prices?

 

Yes, very much so.  Especially at the low end.

 

I enjoy browsing Craigslist for cars and trucks, just browsing keeping pace with prices.  The prices that people are asking for low end junkers is crazy.

 

17 year old Tacoma with 175k miles, $7k: http://pittsburgh.craigslist.org/cto/5730759423.html

16 year old Buick Le Sabre $3900: http://pittsburgh.craigslist.org/ctd/5733247620.html (this should be an $1800 car max)

14 year old Camry: 3500 note the hood won't close, obvious accident damage: http://pittsburgh.craigslist.org/cto/5730482118.html

 

Prices for used cars at subprime lots are in the $7-10k range now.  In the past they were typically in the $3-6k range.

 

I should have just posted this and let it linger.  1998 Dodge Neon for $800, has a brand new motor (what else is bad..??) has 144k miles cracked dashboard covered with tape.  Guarantee this thing shifts like a rock around 2nd or 3rd gear: http://pittsburgh.craigslist.org/cto/5714356377.html  That's a crazy price.  I remember looking at cars similar to this back before the crisis and they were in the $350 range.

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It might be more interesting and maybe even more insightful to look at the auto market in terms of high-end vehicle prices, numbers or whatever, and not used prices of Camry's etc.  I think its the high-end that attracts the more careless, levered purchases from among those that come into new money (fracing/fracking workers, etc.), higher cash flows, etc. in bubble sectors.

 

I may have mentioned this somewhere else on this site, but I live in Canada and it's population is roughly 1/10th that of the USA.  So a general rule of thumb I always used was simply to multiply by 10 or divide by 10 to get rough equivalents in either country. It worked for a lot of things. Consumers in both countries are generally the same and want the same things.

 

However, I once figured out that the number of Hummers being sold in the States wasn't 10 times greater, it was 100 times greater than in Canada. Incredible!  Shortly after I first heard the concept that Americans 'were using there homes as ATMs'.  So rightly or wrongly I connected the dots and added one more piece of anecdotal evidence to the idea that a market collapse could occur.

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It might be more interesting and maybe even more insightful to look at the auto market in terms of high-end vehicle prices, numbers or whatever, and not used prices of Camry's etc.  I think its the high-end that attracts the more careless, levered purchases from among those that come into new money (fracing/fracking workers, etc.), higher cash flows, etc. in bubble sectors.

 

I may have mentioned this somewhere else on this site, but I live in Canada and it's population is roughly 1/10th that of the USA.  So a general rule of thumb I always used was simply to multiply by 10 or divide by 10 to get rough equivalents in either country. It worked for a lot of things. Consumers in both countries are generally the same and want the same things.

 

However, I once figured out that the number of Hummers being sold in the States wasn't 10 times greater, it was 100 times greater than in Canada. Incredible!  Shortly after I first heard the concept that Americans 'were using there homes as ATMs'.  So rightly or wrongly I connected the dots and added one more piece of anecdotal evidence to the idea that a market collapse could occur.

 

A high end auto buyer isn't getting a subprime auto loan.  Not sure how auto lending works in Canada, but in the US very few pay cash or bring their own financing.  This means the vast majority 70%+ of car buyers are financing through the dealership.  A dealership works with the auto financing group of the manufacturer if it's a new car purchase and generally a bank for used car purchases.  Most mainline banks do not originate subprime loans through dealers, instead they just deny credit.

 

You can obtain subprime financing at shady dealers.  I think every American knows what I'm talking about, but it's a lower end used car lot.  The 'office' is usually in an old mobile home and the cars are of questionable quality.  They will have signs "We finance EVERYONE" or "NO CREDIT CHECK REQUIRED" and are in less than desirable parts of town.  The financing they're advertising is subprime auto lending.  It's a lender like NICK that pushes loans through places like this.  These buyers aren't looking at BMW's they're looking at very late model cars.

 

I have two experiences with subprime lending.  In 2009 I was looking for a used car and wandered onto a used car lot near us.  There were some ok cars and I went inside to find out details and prices.  There were no prices posted anywhere on the cars, you could only get them through a salesperson.  The salesperson said "hi" and then "how do you expect to pay" I said "I'll be paying cash upfront" and she said "I'm sorry, we don't accept cash buyers here, only buyers who finance through us."  I was able to get prices out of her and they were very high.  She then told me I was wasting my time because their financing wasn't competitive, it was subprime and rates were high.

 

Worked with a woman who had made a series of bad decisions and had been through two divorces and needed a car.  She had a very well paying white collar IT job.  She couldn't get traditional financing, had zero cash.  Ended up driving an hour north to a lot that guaranteed everyone a car no matter what.  Turned out they were a combination of subprime lending with their own additional payments layered on top.  It was almost like a rent-to-own subprime type operation.  I asked her what sort of car she was looking for and her response was "anything that drives."

 

It's the same reason Aarons or Rent-A-Center doesn't have top of the line brands.  The people who are shopping there can't afford them.

 

Maybe Canada's different and you can get a subprime loan from a bank at a dealer.  I know one dealer who opened their own self-financed subprime operation themselves.  Maybe this is popular in Canada.

 

 

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It might be more interesting and maybe even more insightful to look at the auto market in terms of high-end vehicle prices, numbers or whatever, and not used prices of Camry's etc.  I think its the high-end that attracts the more careless, levered purchases from among those that come into new money (fracing/fracking workers, etc.), higher cash flows, etc. in bubble sectors.

 

I may have mentioned this somewhere else on this site, but I live in Canada and it's population is roughly 1/10th that of the USA.  So a general rule of thumb I always used was simply to multiply by 10 or divide by 10 to get rough equivalents in either country. It worked for a lot of things. Consumers in both countries are generally the same and want the same things.

 

However, I once figured out that the number of Hummers being sold in the States wasn't 10 times greater, it was 100 times greater than in Canada. Incredible!  Shortly after I first heard the concept that Americans 'were using there homes as ATMs'.  So rightly or wrongly I connected the dots and added one more piece of anecdotal evidence to the idea that a market collapse could occur.

 

A high end auto buyer isn't getting a subprime auto loan.  Not sure how auto lending works in Canada, but in the US very few pay cash or bring their own financing.  This means the vast majority 70%+ of car buyers are financing through the dealership.  A dealership works with the auto financing group of the manufacturer if it's a new car purchase and generally a bank for used car purchases.  Most mainline banks do not originate subprime loans through dealers, instead they just deny credit.

 

You can obtain subprime financing at shady dealers.  I think every American knows what I'm talking about, but it's a lower end used car lot.  The 'office' is usually in an old mobile home and the cars are of questionable quality.  They will have signs "We finance EVERYONE" or "NO CREDIT CHECK REQUIRED" and are in less than desirable parts of town.  The financing they're advertising is subprime auto lending.  It's a lender like NICK that pushes loans through places like this.  These buyers aren't looking at BMW's they're looking at very late model cars.

 

I have two experiences with subprime lending.  In 2009 I was looking for a used car and wandered onto a used car lot near us.  There were some ok cars and I went inside to find out details and prices.  There were no prices posted anywhere on the cars, you could only get them through a salesperson.  The salesperson said "hi" and then "how do you expect to pay" I said "I'll be paying cash upfront" and she said "I'm sorry, we don't accept cash buyers here, only buyers who finance through us."  I was able to get prices out of her and they were very high.  She then told me I was wasting my time because their financing wasn't competitive, it was subprime and rates were high.

 

Worked with a woman who had made a series of bad decisions and had been through two divorces and needed a car.  She had a very well paying white collar IT job.  She couldn't get traditional financing, had zero cash.  Ended up driving an hour north to a lot that guaranteed everyone a car no matter what.  Turned out they were a combination of subprime lending with their own additional payments layered on top.  It was almost like a rent-to-own subprime type operation.  I asked her what sort of car she was looking for and her response was "anything that drives."

 

It's the same reason Aarons or Rent-A-Center doesn't have top of the line brands.  The people who are shopping there can't afford them.

 

Maybe Canada's different and you can get a subprime loan from a bank at a dealer.  I know one dealer who opened their own self-financed subprime operation themselves.  Maybe this is popular in Canada.

 

In Canada, you aren't getting a sub prime loan through any of the big 6, 7 banks or the top mortgage lenders.  They are simply way too tight. No doubt there are lower tier lenders out there that I wouldn't invest in to save my life. 

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In Canada, you aren't getting a sub prime loan through any of the big 6, 7 banks or the top mortgage lenders.  They are simply way too tight. No doubt there are lower tier lenders out there that I wouldn't invest in to save my life.

 

That's not entirely accurate.

 

Scotia and TD are big players in the space.  They call it non-prime loans but it's definitely what anyone on this forum would call subprime.  Interest rates of 19% to 29% are not unheard of.

 

Here's an article about a couple who signed a 25% loan from TD and called a newspaper to complain: http://www.cbc.ca/news/canada/british-columbia/couple-feel-robbed-by-25-interest-td-car-loan-1.2483342

 

Here's a link to Scotia's Special Finance Program: http://www.scotiabank.com/ca/en/0,,4625,00.html

 

I've studied the space a little bit and from what I remember, both banks don't segregate subprime from prime auto loans in their financials so it's hard to figure out the exact exposure but they both definitely have sizeable subprime auto loan books.  I would guess that both banks have over a billion dollars each of receivables of subprime auto loans.

 

 

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The difference is asset prices. Home prices were inflated. Are car prices?

 

Yes, very much so.  Especially at the low end.

 

I enjoy browsing Craigslist for cars and trucks, just browsing keeping pace with prices.  The prices that people are asking for low end junkers is crazy.

 

17 year old Tacoma with 175k miles, $7k: http://pittsburgh.craigslist.org/cto/5730759423.html

16 year old Buick Le Sabre $3900: http://pittsburgh.craigslist.org/ctd/5733247620.html (this should be an $1800 car max)

14 year old Camry: 3500 note the hood won't close, obvious accident damage: http://pittsburgh.craigslist.org/cto/5730482118.html

 

Prices for used cars at subprime lots are in the $7-10k range now.  In the past they were typically in the $3-6k range.

 

I should have just posted this and let it linger.  1998 Dodge Neon for $800, has a brand new motor (what else is bad..??) has 144k miles cracked dashboard covered with tape.  Guarantee this thing shifts like a rock around 2nd or 3rd gear: http://pittsburgh.craigslist.org/cto/5714356377.html  That's a crazy price.  I remember looking at cars similar to this back before the crisis and they were in the $350 range.

Cars are depreciating assets. The system isn't built around the assumption that their value will always rise, which facilitated the credit card treatment of houses and exacerbated the problem when that assumption proved wrong.

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Yeah also...look at it in absolute terms. A $300 car selling for $750. A $3K car selling for $6K. A $15K car selling for $22k. These are not massive numbers. I'd also argue low oil and low interest rates are contributing factors.

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Yeah also...look at it in absolute terms. A $300 car selling for $750. A $3K car selling for $6K. A $15K car selling for $22k. These are not massive numbers. I'd also argue low oil and low interest rates are contributing factors.

 

I know a little bit about this space...

 

NOBODY is buying a $350 or $500 or even a $1,000 car on payments....Most of these cars are going to be $5k to maybe up to about $10k.  The cars typically will have a lot of miles on them, and they are certainly no beauties, but they typically don't fall apart immediately. 

 

Think about it...a dealer DOES NOT want to sell a financed car that is going to fail in 30-45-60 days.  The buyer HAS to be able to drive the thing to get to work, to get the money, to make the payments....If the car takes more than a couple of hundred dollars to fix, the buyer can't fix it.  Then they can't make the payments, then the dealer doesn't get paid.

 

NICK is also not pushing loans on anybody.  They buy them once the loans have already been initiated.

 

As for interest rates being too high...yeah, that isn't a great thing, BUT it is disclosed up front.  Unlike education, there is no FRAUD going on.  So two parties should be able to make a contract as long as terms are being disclosed, and everything is above board.

 

A loan at 20% interest is better than nothing....

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The difference is asset prices. Home prices were inflated. Are car prices?

 

Yes, very much so.  Especially at the low end.

 

I enjoy browsing Craigslist for cars and trucks, just browsing keeping pace with prices.  The prices that people are asking for low end junkers is crazy.

 

17 year old Tacoma with 175k miles, $7k: http://pittsburgh.craigslist.org/cto/5730759423.html

16 year old Buick Le Sabre $3900: http://pittsburgh.craigslist.org/ctd/5733247620.html (this should be an $1800 car max)

14 year old Camry: 3500 note the hood won't close, obvious accident damage: http://pittsburgh.craigslist.org/cto/5730482118.html

 

Prices for used cars at subprime lots are in the $7-10k range now.  In the past they were typically in the $3-6k range.

 

I should have just posted this and let it linger.  1998 Dodge Neon for $800, has a brand new motor (what else is bad..??) has 144k miles cracked dashboard covered with tape.  Guarantee this thing shifts like a rock around 2nd or 3rd gear: http://pittsburgh.craigslist.org/cto/5714356377.html  That's a crazy price.  I remember looking at cars similar to this back before the crisis and they were in the $350 range.

Cars are depreciating assets. The system isn't built around the assumption that their value will always rise, which facilitated the credit card treatment of houses and exacerbated the problem when that assumption proved wrong.

 

The funny thing about that whole debacle is that homes/buildings are also depreciating/depreciable assets, and yet for some reason we always expect their value to rise.

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Come on guys. Look at the data instead of just parroting headlines back and forth at each other.  There is no subprime auto bubble. Subprime auto securitizations are performing better than they have historically. The information is all public.

 

Looking at SC's newest ABS summary, cumulative loss rates for recent vintages are actually trending at some of the lowest rates vs historical vintages at comparable points in time.  Consolidated credit performance is normal. Performing collateral appears normal as well.

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