I googled buying a used car in the Boston area upon arriving here, and now I get ads like: “$0 dollar Down/Low Monthly Lease Payment. Bad Credit, No Credit, No Problem!”
No problem for whom? Subprime car loans did not get much coverage in the financial crisis compared to bigger brother subprime mortgages. But the business model is similar, and it is partly based on predatory lending. This picture was taken on a car lot that I visited last week.
Hedge funds and insurance companies have found a high return product in securities backed by auto loans. Banks made 36% of their car loans to subprime borrowers during the last quarter. Bloomberg notes that lending standards are dropping. So buyers can borrow more and put less money down as competition between lenders heats up. New debt issuance for cars is back at pre-crisis levels.
Lenders that were attracted to this market at low financing cost now risk being kicked out as soon as the Fed reverses its current policy of easy money.
Reuters’ Carrick Mollenkamp found some sources inside the system to talk about the pressure to expand the loan book. His special report on how the Fed fuelled an explosion in subprime auto loans shows the tragedy behind the numbers. Alabama resident Jeffrey Nelson filed for personal bankruptcy after having used his shotgun for the downpayment on a car. Nelson got a loan from Exeter at a rate higher than 20%. Exeter is now part of the Blackstone group, and assumes that one in four borrowers will default. Mollenkamp also tells the story of Wayne Loveless from Tennessee putting down his TV, playstation and DVD player.
Why am I tagging this blog post with “leadership”? In democracies, the outcome of public policies depends on myriads of decisions. There was commitment in Washington in the wake of the Lehman collapse to eradicate the root causes of financial instability, which included predatory lending for mortgages. But car dealers were excluded from new consumer protection rules. Within the financial system, there are people in leadership positions who do not care at all about misleading consumers into accepting loans they clearly cannot afford. Their focus is on boosting bank assets or capital returns.