Anyone looking for an anecdote illustrating the QE-fueled madness that is subprime auto lending, take a look at this Reuters report on what constitutes a down payment in the subprime world.
And still, though Nelson’s credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294 loan from Wall Street-backed subprime lender Exeter Finance Corp so Nelson and his wife could buy a charcoal gray 2007 Suzuki Grand Vitara.
All the Nelsons had to do was cover the $1,000 down payment. For most of that amount, Maloy accepted Jeffrey’s 12-gauge Mossberg & Sons shotgun, valued at about $700 online.
Sub-prime auto loans were up 18 percent in 2012, thanks to a bubble created by the Fed’s quantitative-easing program. As QE has driven up inflation and kept interest rates low, global investors are looking at riskier investment vehicles that offer better potential returns. Bonds backed by subprime car loans are one of those vehicles that everyone from hedge funds to institutional investors have gravitated towards. In 2012, $18.5 billion in subprime backed securities were sold, up from $11.75 billion in 2011.
With subprime lenders expecting 1 in 4 creditors to default on their loans, interest rates can easily top 20 percent, and dealers can easily repossess and sell the same car over and over again while reaping enormous profits. Meanwhile, the process appears to be fueling yet another credit-driven asset bubble similar to the mortgage crisis that torpedoed everything in the previous decade.
Despite a focus on used cars in the Reuters report, many of the players in the used car field, such as Santander, GM Financial and Ally Financial are tied in with the new car side as well. Santander is Chrysler’s financing unit of choice, while GM has GM Financial as a separate subprime financing arm, in addition to Ally. Delinquencies are slowly creeping upwards as well. GM alone claims that 8.5 percent of its auto contracts are delinquent higher than Ford, Toyota and Honda combined.
News of yet another month with a SAAR of over 15 million is an encouraging sign for the auto industry, but in light of reports such as this one, one can’t help but wonder how much of the market is being driven by subprime lending, and whether this level of auto sales will be sustainable. Adding additional capacity to meet demand that is fueled by a lending bubble could be disastrous if we witness a 2008-style deflation in auto sales thanks to a subprime contraction.