Subprime Madness: Shotguns Now Accepted As Car Loan Down Payments

Derek Kreindler
by Derek Kreindler

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.

Derek Kreindler
Derek Kreindler

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  • CapVandal CapVandal on Apr 03, 2013

    Walk in, drive out has been around forever. Check out this obit for Johnny -- http://articles.baltimoresun.com/1999-04-23/news/9904230159_1_wilbanks-johnny-john-h The walking man's friend. The old wall street cliche -- Price is what you pay, value is what you get. If you have a job and no transportation -- then the value of a car that runs is quite high. Just my opinion, but no ginned up structured finance product will be sold again in our lifetime. The people buying this stuff is the so called 'smart money' -- hedge funds and the like. They aren't now and never have been too big to fail.

    • See 2 previous
    • Corntrollio Corntrollio on Apr 03, 2013

      @CapVandal That makes sense. It wasn't so much the structure that was the issue as the underlying assets within the various instruments. If you have poorly underwritten loans, your baseline assumptions are worthless. If your baseline assumptions are worthless, your structured product has a much higher chance to fail, especially when markets are stretched. That's why I was trying to be very clear above for those who are interested in such things -- there is nothing wrong with traditional subprime lending, and it's a very sound business model, but the bizarre lending practices that all get summed up with the term "subprime" in newspaper articles are the ones that are often problematic because they tended to have poor underwriting standards.

  • I_Like_Pie I_Like_Pie on Apr 03, 2013

    I would like to know what Mossberg shotgun is worh $700.

    • See 1 previous
    • Jpolicke Jpolicke on Apr 03, 2013

      I hope he's better at buying cars than he is at buying guns. According to Mossberg's website the most expensive 590 is $845 MSRP. And pumps aren't subject to the current ban-related buying frenzy, and can still be had for under list. I just picked up a bolt action rifle for $160 under sticker. If he had traded in a Bushmaster, his payments would have been cut in half.

  • 3-On-The-Tree I’m sure they are good vehicles but you can’t base that on who is buying them. Land Rovers, Bentley’ are bought by Robin Leaches’s “The Rich and Famous” but they have terrible reliability.
  • SCE to AUX The fix sounds like a bandaid. Kia's not going to address the defective shaft assemblies because it's hard and expensive - not cool.
  • Analoggrotto I am sick and tired of every little Hyundai Kia Genesis flaw being blown out of proportion. Why doesn't TTAC talk about the Tundra iForce Max problems, Toyota V35A engine problems or the Lexus 500H Hybrid problems? Here's why: education. Most of America is illiterate, as are the people who bash Hyundai Kia Genesis. Surveys conducted by credible sources have observed a high concentration of Hyundai Kia Genesis models at elite ivy league universities, you know those places where students earn degrees which earn more than $100K per year? Get with the program TTAC.
  • Analoggrotto NoooooooO!
  • Ted “the model is going to be almost 4 inches longer and 2 inches wider than its predecessor”Size matters. In this case there is 6” too much.
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