Subprime shifts gears
Welcome to the Counterparties email. The sign-up page is here, itâ€™s just a matter of checking a box if youâ€™re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.
Yesterday,Â US auto salesÂ posted their biggest month in the last six and a half years.Â Ed YardeniÂ has a great chart on the post-crisis auto boom and notes that November’s 16.4 million units sold is a new cyclical high. The two-month sales average is 15.8 million units, Yardeni adds, up only slightly from the third quarter.
John McDulingÂ wonders if auto lending numbers are telling us a story about Americaâ€™s post-crisis debt habits. Housing debt has fallen since 2008, but â€śnon-housing debt, which includes credit cards and car loans,â€ť he writes, â€śis actually back at pre-crisis highs.â€ť Subprime loans, meanwhile, made up 36% of new vehicle loans in the second quarter,Â David HenryÂ reports, up from 34% a year earlier.
â€śThe market for subprime borrowing is once again becoming frothyâ€ť, in the car loan business,Â Bloomberg writes. Which is why borrowers with aÂ 500 credit scoreÂ can get loans for new cars andÂ shotgunsÂ can serve as down payments. One auto dealer suggested to Bloomberg that auto loans are safe simply because theyâ€™re the last debt that Americans neglect: â€śA person that has to get from point A to point B, theyâ€™re not going to jeopardize their job.â€ťÂ 18-29-year-olds, however, seem to be borrowing less frequently.
David DayenÂ wonders if cars are Americaâ€™s next subprime crisis. His case: growing numbers of borrowers, banks racing to securitize loans, and auto dealers doing predatory-ish things like hiding markups on loans. Dayen focuses on the hidden fees dealers tack onto loans; theÂ Consumer Financial Protection BureauÂ has said these fees disproportionately affect minorities. Hereâ€™s Dayen:
The â€śmarkupâ€ť refers to the additional points a dealer adds to the interest rate, as compensation for matching the borrower with a lender. This markup is both completely at the dealerâ€™s discretion, and hidden from the borrower. When an auto dealer tells you, â€śI can get you a loan at 10 percent,â€ť he is not required by law to inform you how much of that reflects the actual cost of financing and how much comprises the markup.
Tim FernholzÂ is a bit less worried. In this dalliance with subprime, ratings agencies arenâ€™t necessarily rushing to assign high ratings to less-than-stellar loans Â – in May,Â Fitch refusedÂ to rate a pool of loans issued by a subsidiary of Blackstone. And the CFPB is working on getting the dealers to police themselves, Fernholz writes.
Sober LookÂ takes a look at this shift from banksâ€™ perspective. Subprime auto loans are now being extended over longer periods, with some now offering 8-year terms. Banksâ€™ risk departments, Sober Look writes, are fighting the â€ślast warâ€ť by avoiding home loan exposure, while simply piling into the latest hot, seemingly safe asset class.Â – Ryan McCarthy
On to todayâ€™s links: