Great news: Subprime lending escalating again

posted at 11:36 am on April 11, 2012 by Ed Morrissey

Hey, who’s up for the hair of the dog that nearly destroyed the American financial system in 2008?  The good news is that the sudden increase in subprime lending hasn’t hit the mortgage market yet.  The bad news is that it’s hitting just about everywhere else:

But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.

Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.

Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost.

Lenders are targeting auto loans, one of the few areas left outside of the new Consumer Financial Protection Bureau established by Dodd-Frank in 2010.  At least, it’s outside of their jurisdiction at the moment. The NYT reports that the CFPB hasn’t yet decided on whether to extend their power in that direction.  Let’s see — Obama and a Democratic Congress gave a bunch of activist bureaucrats the ability to set their own boundaries.  I’m certain that they won’t use that ambiguity to claim jurisdiction over every facet of American life they possibly can … aren’t you?

This wouldn’t be such a problem if the lenders kept the risk to themselves.  That would force them to proceed cautiously and would contain any damage resulting from large-scale defaults on debt.  Unfortunately, they are taking a page right out of the housing bubble to spread the risk back into the financial sector:

At the same time, the market for securities made up of bundles of auto loans is heating up. Last year, investors scooped up $11.7 billion in auto loan securities, up from $2.17 billion in 2008. The pace of securitization in credit cards is slower, with lenders selling roughly 30 percent of their card portfolios to investors, down from 60 percent before the financial crisis, according to S&P.

Steve Bowman, the chief credit and risk officer for GM Financial, an auto lender, said he expected subprime auto loans to continue to grow. Unlike mortgage lenders, Mr. Bowman argued, auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

But Moody’s was already sounding the alarm last year that some very risky borrowers were getting auto loans. The market, Moody’s wrote in a report in March 2011, could be growing “too much too fast.”

What was the definition of insanity — doing the same thing over and over and expecting a different result?

Breaking on Hot Air

Blowback

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On a bright note, the number of foreclosed homes around my area should decrease. Yeah they will still look and smell like crap, but at least someone will be living in them. O_o

Bishop on April 11, 2012 at 11:39 AM

Ed, just so you know, video ads I can’t turn off = I close the window.

Darth Executor on April 11, 2012 at 11:40 AM

Gotta keep that “recovery” going strong…

PatriotRider on April 11, 2012 at 11:40 AM

First to blame Obama for this! :)

And I also blame Buddy Roemer

Durandal on April 11, 2012 at 11:41 AM

…auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

Yeah, right. Just like Fannie and Freddie.

Ya can’t fix stupid. Whether they’re borrowers or lenders.

GarandFan on April 11, 2012 at 11:41 AM

Now hearing radio ad’s for borrowing against the equity in your car…

PatriotRider on April 11, 2012 at 11:41 AM

Unlike mortgage lenders, Mr. Bowman argued, auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

Oh, well that’s a relief. They’re smarter, so there’s no way anything could go wrong.

Doughboy on April 11, 2012 at 11:43 AM

Aaaaaannnnnnnd, the QE3 is about to set sail. All aboard, whether you want to or not…

JohnGalt23 on April 11, 2012 at 11:44 AM

What’s good for General Government Motors is good for America the Government.

Greg Toombs on April 11, 2012 at 11:49 AM

Fascism is a perfect system: Heads the cronies win; tails the taxpayers lose.

logis on April 11, 2012 at 11:49 AM

Do the bric countries ditch the dollar in the next decade?

tom daschle concerned on April 11, 2012 at 11:52 AM

Ed, I really have to speak up after reading your headline.

There was NOTHING wrong with the Sub Prime mortgage market until Fannie Mae and Freddie Mac took it over and destroyed it. SP secondary markets were stable and healthy up until 2002 when Fannie decided to enter that arena. High risk loans (Poor credit and lack of income documentation)were priced accordingly and large downpaymens were required.

If it had been left alone, the SP market would have remained stable, but two events intervened:

-Community Reinvestment Act mandated lenders to serve ‘underserved’ markets…meaning more loans had to be made to high risk borrowers.

-Fannie Mae changed the way it’s managers were paid..from loan quality to loan quantity.

I respect our opinion and I’m a faithful reader, but every time you bash SubPrime lending my head nearly explodes. Perhaps we can agree on a compromise; can you refer to bad or reckless sub prime lending as GSE Sub Prime or mabye Barney Frank’s Sub Prime?

DrW on April 11, 2012 at 11:53 AM

They will call us racist if we pass laws requiring banks to check credit scores before handing out loans.

social-justice on April 11, 2012 at 11:55 AM

Free, sound advice. Don’t borrow money except for a home. Put down at least 20%. Don’t even own a credit card.

Charlemagne on April 11, 2012 at 11:55 AM

Entitlements….It’s a culture now.

Oil Can on April 11, 2012 at 12:02 PM

Great news: Subprime lending escalating again

Americans have clearly stuck their heads back in the sand, I’m not sure if they’ve done it of their own accord or if it’s because they are being shielded from the truth by the media, (but the Internet is available), misdirected even by people like Karl Rove and Axelrod, because the truth is harmful to their political interests. They don’t want to stop spending and be responsible stewards of America, they’re not interested in making the future for our progeny brighter, they want power. They want their hands in the cookie jar.

Republicans seem to have stuck their heads back in the sand as well as the Dems, considering they’re on course to nominate a variation of Obama with an an R next to his name.

FloatingRock on April 11, 2012 at 12:03 PM

Unbelievable. shakes head in disgust….

D-fusit on April 11, 2012 at 12:05 PM

And the looting continues, but most folk(present company excluded) are oblivious to the game. Bad/subprime loans go belly up…requiring yet another papering-over by the govt, silly Americans cannot see they are bankrupting themselves before their very eyes. At the end of the day the corporate execs and govt cronies walk away with it all while us peons are left to scrounge for crumbs.

NY Conservative on April 11, 2012 at 12:06 PM

Oh boy, just what we need to fix the economy, more debt! This graphic from the Weekly Standard shows just how much room the government has left to pay for this latest round of welfare: http://www.weeklystandard.com/sites/all/files/images/-3_0.img_assist_custom-640%C3%97465.png

Doomberg on April 11, 2012 at 12:06 PM

Don’t worry. These loans are backed by solid assets, that will only appreciate as time goes on.

/sarc off

As Charlemagne hinted at, car debt (beyond basic transportation that is needed) is one of the dumbest forms of debt around.

Borrowing…

$1,000 for clear coating
$2,000 for navigation
$2,000 for rims
$2,000 for heated seats
$1,000 for sun roof
$2,000 for bigger engine
$2,000 for 4 wheel drive

There are no shortage of ways to go Full Retard into auto debt.

MNHawk on April 11, 2012 at 12:08 PM

Just because the media says the race is over, that Santorum’s exit paves the way for Romney, doesn’t mean we the voters have to follow their command. If the not-Romney vote consolidates behind Ron Paul, if you give him a chance, polls have shown that he has a higher ceiling against Obama than any other candidate, and the same is theoretically true against Romney as well. Ron Paul his a higher ceiling than Newt or Romney. Even with Rush Limbaugh and the rest of the GOP establishment unfairly smearing and maligning Ron Paul he still polled well against Obama, better than the others, so if people still want to beat them it’s not too late. This isn’t the Fox News primary or the Wall Street Journal primary that wants Obama, not Ron Paul. This isn’t over.

Don’t listen to the left wing media that says it’s over, the choice in ’12 is between to flaming liberals. That doesn’t have to be so.

Don’t give up the game before it is over.

FloatingRock on April 11, 2012 at 12:13 PM

If the banks start this and it gets out of control again, say in 10 years, will Obama get the blame like Bush did? Nope, it will be whomever the president is at that time. Clinton’s name was only thrown around on the last collapse by ppl who understood what was happening, most ppl are still in the dark on who started the whole mess……..

angrymike on April 11, 2012 at 12:13 PM

CFPB is another act of congress that must be on the list for repeal. It’s only slightly less evil than Obamacare.

slickwillie2001 on April 11, 2012 at 12:14 PM

Correction: …This isn’t the Fox News primary or the Wall Street Journal primary that wants ObamaRomney, not Ron Paul. This isn’t over.

FloatingRock on April 11, 2012 at 12:14 PM

“Sub-prime” lending in and of itself is not a bad thing, and neither is securitization of debt. Investors should understand what they are buying and be able to make the appropriate risk-reward computation. There were a myriad of problems that caused the 2008 collapse, not the least of which was the collapse of housing prices (leading to many mortgage defaults, not just in the sub-prime area) and the inexplicable rating of mortgage backed securities as AAA by the rating agencies. When the banks could no longer properly assess the value of their holdings, the ‘fat was in the fire’, so to speak.

Anyway, there are huge differences between auto loans, credit card balances, and home mortgages; lumping them all together is probably a meaningless exercise. The bottom line is that risky lending is in and of itself an important part of the financial system – if it didn’t exist, there would be no high yield bond market. I don’t mind buying junk bonds – just as long as I know they are junk bonds, and are not being passed off as AAA. I suspect that most of the investors that are buying these securities are well aware of what they are purchasing.

TouchdownBuddha on April 11, 2012 at 12:14 PM

Lather. Rinse. Repeat.

Yikes!!

Bitter Clinger on April 11, 2012 at 12:18 PM

Ed, I really have to speak up after reading your headline.

There was NOTHING wrong with the Sub Prime mortgage market until Fannie Mae and Freddie Mac took it over and destroyed it. SP secondary markets were stable and healthy up until 2002 when Fannie decided to enter that arena.

Not quite correct-Fannie really didn’t start investing in the subprime mortgages bigtime until 2004.

As for “subprime secondary markets being stable and healthy” before that time, it’s important to remember that until 1993, when (Democrat) Bill Clinton took office, subprime mortgages only made up about 5% of the total mortgage pool. In the first four years Clenis was pResident, that percentage almost tripled. So in reality, the entire “history” of subprime mortgage lending only truly began in 1993, or only 11 years before Fannie started to get heavily involved. That is way too short of a time period to ascertain whether or not the subprime mortgage market was “healthy” before Fannie got involved.

And it’s also important to recall why Fannie started investing in those subprimes to begin with-it was to satisfy the demands of Democrats in Congress to lend more to those who couldn’t possibly afford to pay it back.

Del Dolemonte on April 11, 2012 at 12:22 PM

This wouldn’t be such a problem if the lenders kept the risk to themselves.

Exactly. Wall Street made “risky” investments in derivatives because they knew the govt would bail them out. T/4 they were not risky! Who wouldn’t bet the house in Vegas if they knew the govt would make good their losses!

I am sure that in this case, somewhere down the line you will find Obama policy that is driving this lending. It’s not stupid, it’s on purpose. Evil, yes. stupid no.

PattyJ on April 11, 2012 at 12:27 PM

They never fixed the root problem.

ITguy on April 11, 2012 at 12:29 PM

I am sure that in this case, somewhere down the line you will find Obama policy that is driving this lending. It’s not stupid, it’s on purpose. Evil, yes. stupid no.

PattyJ on April 11, 2012 at 12:27 PM

His entire career has been a journey, shared with his “fellow travellers”, to bring a capitalist “Empire” to its knees…

But my journey is part of a larger journey – one shared by all who’ve ever sought to apply the values of their faith to our society. It’s a journey that takes us back to our nation’s founding, when none other than a UCC church inspired the Boston Tea Party and helped bring an Empire to its knees.

Barack Hussein Obama

ITguy on April 11, 2012 at 12:35 PM

Lenders are targeting auto loans, one of the few areas left outside of the new Consumer Financial Protection Bureau established by Dodd-Frank in 2010. At least, it’s outside of their jurisdiction at the moment. The NYT reports that the CFPB hasn’t yet decided on whether to extend their power in that direction.

Don’t forget that taxpayers and unions still own 2/3 of the Big Three automakers. Moving Chevys and Dodges off the lot is more important than political grandstanding about “protecting consumers.” As President and Chief Auto Salesman Obama once said, “I’ve got cars to move, people.”

Outlander on April 11, 2012 at 12:36 PM

Another wet dream!

KOOLAID2 on April 11, 2012 at 12:39 PM

Calling ‘Rockmom’.

That lady know her $hit when it comes to this stuff…past and present…

Oh, and this:

And it’s also important to recall why Fannie started investing in those subprimes to begin with-it was to satisfy the demands of Democrats in Congress to lend more to those who couldn’t possibly afford to pay it back.

Del Dolemonte on April 11, 2012 at 12:22 PM

BigWyo on April 11, 2012 at 12:41 PM

Ed,

You are wrong. The sub-prime crisis wasn’t a crisis because lending went to less credit worthy borrowers. It became a crisis because the gov’t got involved and subsidized sub-prime lending causing financial institutions to ignore risk parameters. Gov’t money causes price inflation/asset bubbles.

This wouldn’t be such a problem if the lenders kept the risk to themselves. That would force them to proceed cautiously and would contain any damage resulting from large-scale defaults on debt. Unfortunately, they are taking a page right out of the housing bubble to spread the risk back into the financial sector.

Securitizing risk does not create financial instability, it relieves it. Spreading out risk did not cause the housing bubble. Again, the gov’t got involved in subsidizing risk but they also distorted the market by keeping interest rates too low for too long. This caused people who wanted to earn a return on their money to reach for riskier assets. This is happening now. The solution is no more QE or other central bank shenanigans.

Bill C on April 11, 2012 at 12:53 PM

And it’s also important to recall why Fannie started investing in those subprimes to begin with-it was to satisfy the demands of Democrats in Congress to lend more to those who couldn’t possibly afford to pay it back.

Del Dolemonte on April 11, 2012 at 12:22 PM

Agreed.

Del, I was there…I originated mortgages during that entire period (and by the grace of god i still do) and I can tell you that Sub Prime in 1997 meant 20-30% down and a lot of scrutiny. By 2000 lower down payments were permitted, but those loans went through a microscope, and we used some pretty sophisticated techniquies to verify income for ‘stated income’ or ‘low doc’ borrowers.

By 2003 Fannie was in it with both feet and all of the Sub Prime giants..Meritage, Associates, Option 1, etc etc had to drop their guidelines to compete. By the time Bear Stearns, Wash Mutual and Countrywide were funding any loan where the borrower could ‘fog a mirror’because now Wall Street had caught on to the scam, the old subprime lenders were gone..out of business. Destroyed by governement intervention in what I still refer to as a healthy and stable market.

DrW on April 11, 2012 at 12:55 PM

Securitizing risk does not create financial instability, it relieves it. Spreading out risk did not cause the housing bubble. Again, the gov’t got involved in subsidizing risk but they also distorted the market by keeping interest rates too low for too long. This caused people who wanted to earn a return on their money to reach for riskier assets. This is happening now. The solution is no more QE or other central bank shenanigans.

Bill C on April 11, 2012 at 12:53 PM

+1000 You are right on the mark.

Funny how the auto industry was exempted from Frank Dodd huh? It’s almost like somebody wants to give special treatment to GM and the UAW, and has to extend that special treatment to the entire industry to get political cover. I wonder who in the DC wants GM and the UAW to be allowed to run amok?

DrW on April 11, 2012 at 1:03 PM

Aaaaaannnnnnnd, the QE3 is about to set sail. All aboard, whether you want to or not…

JohnGalt23 on April 11, 2012 at 11:44 AM

I would like to go! Can I put it on my new credit card? I’ll drive down to the pier in my chevy volt, after leaving my forclosed upon house!

Signed

The Government

buckeyerich on April 11, 2012 at 1:11 PM

What was the definition of insanity — doing the same thing over and over and expecting a different result?

And they all know that Uncle Sugar will bail them out once again, hence the continued insane actions. You can’t blame them, once again its the government gone insane…

cigarcamel on April 11, 2012 at 1:15 PM

…auto lenders understand how to manage risk while still making loans to borrowers with poor credit.

Yeah, right. Just like Fannie and Freddie.

Ya can’t fix stupid. Whether they’re borrowers or lenders.

Well, if nothing else, a car is a lot easier to repossess than a house somebody is living in.

Socratease on April 11, 2012 at 1:38 PM

Exactly as conservatives warned when the banks were bailed out by the taxpayers, they’ve learned that they can keep screwing up without having to pay for their mistakes.

Socratease on April 11, 2012 at 1:39 PM

They never fixed the root problem.

ITguy on April 11, 2012 at 12:29 PM

Bingo.

“Evasion is the root of all evil.” — Ayn Rand

ShainS on April 11, 2012 at 2:04 PM

I see the hand of the regime in this. The MSM says people are buying newer fuel efficient cars to save money and car sales are booming.

The fact is unless you drive an F250 (ahem…) the ROI of replacing your 7 year old car with a slightly more efficient one is still in the 5+ year range at best.

CorporatePiggy on April 11, 2012 at 2:24 PM

And by the by, that new F150 ‘ecoboost’ POS that is supposed to get 25 mpg doesn’t. And that turbo will cost you $5k when it blows up, which it will.

CorporatePiggy on April 11, 2012 at 2:25 PM

Barney Frank’s Sub Prime

Ewwwwwwww!

ghostwalker1 on April 11, 2012 at 4:02 PM

It wouldn’t be “targeting” and “preying” if they had to eat their own loss.

Not-a-Marxist on April 11, 2012 at 4:22 PM