Subprime shifts gears
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Yesterday, US auto sales posted their biggest month in the last six and a half years. Ed Yardeni 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 McDuling wonders if auto lending numbers are telling us a story about America’s post-crisis debt habits. Housing debt has fallen since 2008, but “non-housing debt, which includes credit cards and car loans,” he writes, “is actually back at pre-crisis highs.” Subprime loans, meanwhile, made up 36% of new vehicle loans in the second quarter, David Henry reports, up from 34% a year earlier.
“The market for subprime borrowing is once again becoming frothy”, in the car loan business, Bloomberg writes. Which is why borrowers with a 500 credit score can get loans for new cars and shotguns can serve as down payments. One auto dealer suggested to Bloomberg that auto loans are safe simply because they’re the last debt that Americans neglect: “A person that has to get from point A to point B, they’re not going to jeopardize their job.” 18-29-year-olds, however, seem to be borrowing less frequently.
David Dayen wonders if cars are America’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; the Consumer Financial Protection Bureau has said these fees disproportionately affect minorities. Here’s Dayen:
The “markup” 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 dealer’s discretion, and hidden from the borrower. When an auto dealer tells you, “I can get you a loan at 10 percent,” 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 Fernholz is a bit less worried. In this dalliance with subprime, ratings agencies aren’t necessarily rushing to assign high ratings to less-than-stellar loans – in May, Fitch refused 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 Look takes a look at this shift from banks’ perspective. Subprime auto loans are now being extended over longer periods, with some now offering 8-year terms. Banks’ risk departments, Sober Look writes, are fighting the “last war” by avoiding home loan exposure, while simply piling into the latest hot, seemingly safe asset class. – Ryan McCarthy
On to today’s links: