Great news: Subprime auto loans up 18% in 2012

posted at 10:01 am on April 4, 2013 by Ed Morrissey

Hey, who’s up for burying consumers in ridiculous loans and selling them off as securities on Wall Street?  I mean, it’s not as is this has worked out badly in the past, is it?  Well, okay, it didn’t work out so well when Fannie Mae and Freddie Mac pulled this stunt with home loans, but it should work out wonderfully for automobiles.  After all, they never lose value on the market.  My dad’s 1978 green Pinto station wagon would be worth around $123,000 today, I’m sure, so at least the collateral would be worth it (via Ed Driscoll and Jim Hoft):

The Fed’s program, while aimed at bolstering the U.S. housing and labor markets, has also steered billions of dollars into riskier, more speculative corners of the economy. That’s because, with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities – bonds backed by subprime auto loans, for instance.

Lenders like Exeter have rushed to meet that demand. Backed by Wall Street banks and big private-equity firms, they have been selling ever-greater amounts of subprime auto loans in the form of relatively high-yield securities and using the proceeds to fund even more lending to more subprime borrowers.

Expansion of the subprime auto business was chronicled in a 2011 Los Angeles Times series. Since then, growth has continued apace. Consider that in 2012, lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011, according to ratings firm Standard & Poor’s. The pace has continued so far this year, with $5.7 billion of the securities issued, compared with $4.4 billion for the same period last year, according to Deutsche Bank AG. On Monday alone, three deals totaling $1.6 billion of subprime auto securities were announced by Wall Street banks.

I wrote about this almost exactly a year ago.  By the end of last year, subprime auto loans have risen 18% to 6.6 million borrowers, but the amount of securities sold in support of them rose 63.5%.  That suggests that the loan amounts are inflating, too, which means that these aren’t just people looking to get a low-end car for simple transportation purposes.

But at least the Dodd-Frank law and its new Consumer Financial Protection Bureau is on the job to protect consumers from bad deals of their own making.  Right? Er … not really:

To make up for the risk of taking on increasing numbers of high-risk borrowers, subprime auto lenders charge annual interest rates that can top 20 percent.

The Exeter loan Nelson and his wife got, for example, carried a 21.95-percent rate. Exeter, which is majority-owned by private-equity giant Blackstone Group, assumes that one in four borrowers will default on their loan, according to an Exeter investor pitch book reviewed by Reuters.

That 21.95% rate would be what you’d expect to pay if you put a new Chevy Volt on your MasterCard and then missed a couple of payments.  It’s an insane rate for auto financing, almost guaranteeing that the borrower will end up in bankruptcy and the holder of the loan will end up with a wreck worth cents on the dollar.  Why would either party willingly involve themselves in this kind of transaction?

Just like in the 1998-2008 housing bubble, two reasons — desperation and greed:

Critics of the Fed say the growth in subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets – junk bonds, subprime mortgage securities, and others. The yield chase delivered big windfalls to some Wall Street firms and hedge funds holding securities that soared in value. But so much money has flowed into these assets, the critics say, that the markets for some are beginning to resemble the housing boom in the run up to the financial crisis.

“It’s the same sort of thing we saw in 2007,” said William White, a former economist at the Bank for International Settlements. “People get driven to do riskier and riskier things.”

There’s no indication that the Obama administration is actively pushing this effort, but they’re not doing much to slow it down, either.  They want the big numbers in car sales as badly as Detroit does, thanks to their politically risky decision to bail out GM and Chrysler four years ago.  The White House needs those sales numbers to push their claims of a steady recovery, and for at least the past couple of years have turned a blind eye to the ridiculous and unsustainable bubble forming in subprime auto loans.  Instead of Cash for Clunkers, we’re heading for a Crash With Clunkers.


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Don’t worry. I’m sure Princess Fauxcohontas of Massachusetts will set things right, because she’s a genius.

Good Lt on April 4, 2013 at 10:05 AM

Don’t worry. I’m sure Princess Fauxcohontas of Massachusetts will set things right, because she’s a genius.

Good Lt on April 4, 2013 at 10:05 AM

Yeah well when everybody is making more than a minimum wage of $22/hour there will be no high-risk borrowers. Or something.

Happy Nomad on April 4, 2013 at 10:08 AM

This has been par the course for the industry as a whole since 2004 (and really before that, it burned Mitsubishi pretty bad back in ’02.)

Chrysler, Nissan, GM, Hyundai, Kia, Toyota, Mitsubishi, Suzuki, Fiat, just about all of the major players in the auto market do it to some degree.

But not to worry, its nothing a little employee pricing for everyone and cash for clunkers rebates won’t fix!

Gatsu on April 4, 2013 at 10:10 AM

Yeah well when everybody is making more than a minimum wage of $22/hour there will be no high-risk borrowers. Or something.

Happy Nomad on April 4, 2013 at 10:08 AM

To paraphrase Irwin M. Fletcher, “Give each other $22 and put it on Fauxohontas.”

Steve Eggleston on April 4, 2013 at 10:11 AM

I wonder what happens when subprimes loans go bad? Too bad it hasn’t happened before in history. Oh, wait…

This just goes to show that there has been zero growth during the Obama Presidency. It’s just all one shot gimicks and lies.

Oil Can on April 4, 2013 at 10:11 AM

Probably some rule that says all these loans are only available for Government Motors (GM) autos…

albill on April 4, 2013 at 10:12 AM

We all decry the housing bubble now, but without it there would have been virtually no economic growth for 10 years.

We can only “grow” the economy with propped up bubbles now.

happytobehere on April 4, 2013 at 10:16 AM

Actually, Ed, these loans are indeed for the daily drive. The LA Times did an article on one stop auto shop (in which the dealer also makes the loan — or a lease) and found that some cars had been sold/leased, repossessed, and resold (for the exact same price) many times. Miss one payment — even by a day — and your car disappears into the night at the back of a pickup tow truck. These dealers customarily outfit the cars with GPS and remote ignition immobilizers, so that the business of repossessing them becomes easier.

The cars are sold with the intention of being repossessed, so there is a slight problem here, which the Feds are certainly going to fuel.

I mean — if the Feds are driving up home prices so that our kids can’t buy homes but speculators can — there you go.

http://articles.latimes.com/2011/oct/30/business/la-fi-buy-here-pay-here-part1-storyb

http://articles.latimes.com/2012/aug/15/business/la-fi-boomerang-cars-20120815

http://articles.latimes.com/2011/dec/30/business/la-fi-car-leases-20111230

unclesmrgol on April 4, 2013 at 10:20 AM

We all decry the housing bubble now, but without it there would have been virtually no economic growth for 10 years.

We can only “grow” the economy with propped up bubbles now.

happytobehere on April 4, 2013 at 10:16 AM

By definition, a bubble does not result in economic growth.

Here’s a novel idea to solve the problem: Live within your means! Personally, locally, nationally, and globally.

Happy Nomad on April 4, 2013 at 10:20 AM

a new Chevy Volt on your MasterCard

FWIW, that’s not allowed in Australia – no merchant would suffer the card fee imposed by the govt.

OldEnglish on April 4, 2013 at 10:20 AM

Next will be a Sub Prime IPhone and IPad market. Ohh, yeah, Best Buy already does that, at 18%

bbordwell on April 4, 2013 at 10:22 AM

Seems like a business based on reposession couldn’t possibly be profitable for anything beyond a very limited term… This doesn’t smell right.

WitchDoctor on April 4, 2013 at 10:25 AM

I would also remember that this is a symptom of larger auto industry problems and the economy as a whole. People don’t have jobs, but the manufacturers are also overproducing cars/trucks/SUVs due to union contracts.

I can remember reading that it cost more to idle a plant than it would to just make the cars and sell them at a loss.

Mindboggling.

Gatsu on April 4, 2013 at 10:26 AM

Insanity reigns supreme, it seems.

sadatoni on April 4, 2013 at 10:32 AM

We all decry the housing bubble now, but without it there would have been virtually no economic growth for 10 years.

We can only “grow” the economy with propped up bubbles now.

happytobehere on April 4, 2013 at 10:16 AM

So we could have had genuine but modest growth without the crash that has resulted in the current insanity? I’d have preferred that.

forest on April 4, 2013 at 10:33 AM

Isn’t part of the problem here that Geithner is pumping $50B a month in QE∞, and it goes to the banks, who are so desperate for investment vehicles that their standards for those investments are degraded?

slickwillie2001 on April 4, 2013 at 10:35 AM

By definition, a bubble does not result in economic growth.

Happy Nomad on April 4, 2013 at 10:20 AM

Exactly. But we called the bubble from 98-2007, economic growth. Slice off that bubble created by the ludicrous housing boom and we’ve been basically flat for many years.

happytobehere on April 4, 2013 at 10:36 AM

So we could have had genuine but modest growth without the crash that has resulted in the current insanity? I’d have preferred that.
forest on April 4, 2013 at 10:33 AM

Incredibly modest, yes. About as modest as we see now.

happytobehere on April 4, 2013 at 10:37 AM

Incredibly modest, yes. About as modest as we see now.

happytobehere on April 4, 2013 at 10:37 AM

“Growth” isn’t growth when it’s propped up by insane amounts of government spending and debt.

It would be far better to deal with the economy as it really is instead of dealing in unicorn farts, rainbow bridges, green chutes, and make-believe that will wind up putting our children and grandchildren in a state of penury.

At the end of the day, the free market would correct the economy and it would start growing again – if government would only let it.

DRayRaven on April 4, 2013 at 11:02 AM

At 21.95% – if 1 in 4 defaulted – they are making a killing.

CycloneCDB on April 4, 2013 at 11:04 AM

the economy is going down the toilet and the GOP remains mute. remember when under bush the democrats would have a stroke if unemployment went over 5%?

renalin on April 4, 2013 at 11:10 AM

At the end of the day, the free market would correct the economy and it would start growing again – if government would only let it.
DRayRaven on April 4, 2013 at 11:02 AM

It’s a nice thought. Shame we’ll never try it. That decision would result in such an enormous and painful “corrective” phase that it’s politically impossible to enact.

The really troubling thing is economic growth is not eternal, but government spending is.

happytobehere on April 4, 2013 at 11:27 AM

20% auto loan? Ron White is correct “You can’t fix STUPID!”

GarandFan on April 4, 2013 at 11:35 AM

Well, okay, it didn’t work out so well when Fannie Mae and Freddie Mac pulled this stunt with home loans, but it should work out wonderfully for automobiles.

It’s a merit raise to the UAW for services faithfully rendered.

timberline on April 4, 2013 at 11:42 AM

the economy is going down the toilet and the GOP remains mute. remember when under bush the democrats would have a stroke if unemployment went over 5%?
renalin on April 4, 2013 at 11:10 AM

We’re all doing our best to jack up home prices again, don’t worry. It’s the best way to get the economy “roaring” again.

/

happytobehere on April 4, 2013 at 11:50 AM

Shame on you people. Consumers Portfolio Services has been providing a very valuable service to Subprime Borrowers for a number of year.

Yes, they had to drastically cutback on making loans for the past few years because people were reluctant to buy the packages of loans, but now they are coming back to full speed.

They generally loan only to where this is the first car and the person needs it to go to work.

They have a loss rate of about 5% and when they can sell the packages of loans make a fair profit.

On D Ball on April 4, 2013 at 12:56 PM

“Hey Jose….whats the point of having a drivers licence if we don’t have a stinking car, man?”

BobMbx on April 4, 2013 at 1:14 PM