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?