By on June 11, 2014

12116452-subprime-auto-loan-interest-rates

The global outlook for Auto Back Securities (ABS) is steady – except in North America, where underwriting standards and borrower credit are slipping.

The latest news comes from ratings agency Moody’s, which issued a new report on the popular investment vehicle. Sanjay Wahi, Vice President and Senior Analyst, stated

“Globally, auto loan ABS pools will continue to consist primarily of loans to prime borrowers. The exception is the US, which has a sizable market for securitizations backed predominantly by near-prime and subprime borrowers.”

Moody’s has long been bearish on subprime ABS in the United States. Both Europe and China are cited as having safer loan pools due to stronger underwriting standards and more rigorous loan terms. But the United States is unique in the predominance of subprime loans, perhaps in part due to the demand for specific sections of ABS (called “tranches” in the investment world) which are comprised of the riskiest subprime loans.

ABS has become a popular security in recent years, with subprime driving much of its growth. With fixed income yields at historic lows, investors are hungry for securities that will provide decent returns. ABS, particularly the subprime tranches of these securities, are among the few products that can provide them – their greater risk profile entails the potential for a higher return. Some have argued that the demand for ABS has led to the growth in subprime financing, with looser underwriting standards (in some cases, they are laughably lax) and a number of OEM captive financing arms that are all too willing to finance buyers with poor credit so that they can “move the metal”. Traditionally, the thinking has been that most buyers are sufficiently trustworthy enough to make their payments on time, and able to offset the few delinquent buyers – but that trend appears to be reversing as of late, with delinquencies on the rise. And if the latest trends outlined by Moody’s are any indication, this isn’t likely to reverse.

 

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90 Comments on “Moody’s: Underwriting Standards, Borrower Credit Declining...”


  • avatar
    sunridge place

    Derek- cherry picking small facts to weave narratives of doom is a tactic best reserved for the political hacks of the world like Niedermeyer–not you.

  • avatar
    Jasbro1

    No job, no credit, no problem!! We’ll just bundle it up and rate it triple A and all will be copacetic…….oh wait.

    Where is the regulation from the last, hardly distant bubble?? Why are lengths of loans going longer than the useful life span of cars? Why do taxpayers have to be continually underwriting the risk of industry overcapacity and underintellectualized management?? Does it seem that credit cycles are getting shorter as the industry gets more desparate in an increasingly mature, saturated market??

    • 0 avatar
      skor

      The obvious answer is that Murica is schizo. We live in a country where the majority of people believe that austerity imposed on the poor and working classes, combined with welfare for the wealthy and big business, will increase demand.

    • 0 avatar
      danio3834

      Yes, but what are we going to do about it? Deny people the American Dream by foricing them to live within their means? Fat chance.

      • 0 avatar
        raph

        Could vehicle manufacturers afford to let people live within their means? Its well known vehicle manufacturers and dealers don’t make squat off of low or no content vehicles.

        The profit is already lean even on well contented models so where would the auto manufacturers go for money?

        It just seems to me that the drive to suppre… err keep wages in line with the global economy has created a situation where righting the boat would create a huge contraction in profit.

      • 0 avatar
        bunkie

        “Deny people the American Dream by forcing them to live within their means?”

        That’s the rub, isn’t it? Those means (by any standard) are, for most people, shrinking. As with the deficit post-2008, it’s not a spending problem, it’s a revenue problem.

        • 0 avatar
          28-Cars-Later

          How is the national deficit not a spending problem? Gov’t needs to shrink and it chooses not too.

          • 0 avatar
            krhodes1

            The government budget is not the same as a family budget, unless your family has their own money printing press.

            Hard times are WHEN the government should be spending money like it is going out of style – interest rates are low, and the spending stimulates the economy. The time to cut is when times are good.

          • 0 avatar
            28-Cars-Later

            Until they have spent themselves into a corner where if the printing press raises interests rates it crushes them.

          • 0 avatar
            bunkie

            I said deficit, not debt. The two are not the same thing.

          • 0 avatar
            cartunez

            @krhodes1 you are part of the problem. If the government doesn’t have the money they shouldn’t be spending it. Rev inflows are 2.8 trillion but they are spending 3.9 trillion. Plus current reported national debt at 17 trillion (more than GDP).

    • 0 avatar
      bunkie

      I’m reminded of the old Robert Klein bit:

      “I don’t care if you are currently in prison, I can get you financed!”

    • 0 avatar
      bunkie

      The truth is that sub-prime is incredibly profitable. You might be surprised at how many financial institutions are heavily invested in it. When you have a spread measured in double-digits when the best rates are near or at zero, it’s no surprise that these things are everywhere. One can even look at it as a tail-wagging-the-dog situation where the loan is the real product and the car is merely the bait.

      Back before the last bubble, I was speaking with the head of a trading desk at the big bank where I worked. He said “everyone is chasing yield”. It’s true today as well. This is the downside of artificially low interest rates: It drives the business heavily toward risk. The bubble inflates, it pops, whoever is stuck gets screwed and the cycle repeats.

      • 0 avatar
        Omnifan

        If the financed folks only make 1/2 the payments, the loan is already profitable. The rest is bonus money.

      • 0 avatar
        krhodes1

        Exactly this – it was long said before the recession that GM, Ford, and Chrysler were very successful banks that happened to make crappy cars and trucks.

        Ultimately, even risky auto loans are not THAT risky. People will make their car payment before just about anything else, as a car is VERY easily repossessed, unlike a house. And car loans can be priced much, much, much higher than mortgages. A risky mortgage might be 2-3% higher interest, a risky car loan can be *20%* higher!

    • 0 avatar
      krhodes1

      Why do we need regulation? The problem last time was that mortgage-backed securities were being incorrectly rated, so everyone thought they were safer than they really were. Is there evidence that ABS are having the same issue? I would say no, as this article mentions that the whole reason these investments are popular is that they pay really well, BECAUSE they are a riskier investment. No one is being led to believe these are a gold-plated AAA investment securities.

  • avatar
    snabster

    as long as it is easy to seize the car I don’t see a problem.

    However, in the event of a crisis, and a massive dump of seized cars on the market, is going to change the underlying asset value. That is an issue.

    Housing is problematic for this because, well, people need to live somewhere and seizing their houses is just plain mean. And highly disruptive for everyone. Also, you’d assume that a house appreciates in value which makes no sense. Cars depreciate.

  • avatar

    I heard an advertisement on the radio yesterday:

    YOU BREATHE? YOU DRIVE!!!

  • avatar

    If you wanna REALLY see some N.I.N.J.A loans, just wait till all those CLA250 come off-lease in 2 years!!!

    Between those and the A3 and BMW228, the streets are gonna be a mess!

    So sad that people DEMAND a N.I.N.J.A loan on a used German car, rather than buy a NEW American – or even Japanese car that they can actually afford – all so they can make people believe they “have made it”.

    Along with giving student loans to C- students who just want to get as far away from their parents as possible – living on college COUNTRY CLUBS where they can drink, smoke weed and flash their breasts for GirlsGoneWild videos – while running up $30,000 per semester debt.

    And their parents ENCOURAGE IT just to be able to say: “my child ‘got in’ to ________ University!!!”

    I shake my head…

    Fortunately, when the credit windows close and the loans become impossible to get – I can always turn on my 80″ SHARP HDTV and see these same perpetual debtors marching for “equal pay” and “$15 an hour minimum wage” increases!

    • 0 avatar
      ajla

      I’m expecting to see many 5-year old CLAs with stick on portholes, squealing brakes, and Primewell tires.

      • 0 avatar

        ajla

        I should start a new business where we just sell “AMG”, “M” and “S” badges for the CLA, A3 and 228i.

        The POSERS will continue to make men like me rich…

        • 0 avatar
          matador

          Audi S3 badges will never do. Sell RS3 badges. Much better

          Seriously, I think the CLA is not a good idea for Mercedes.

          They’ll cell as CPO and then used fodder, because, you know, IT’S A MERCEDES!

          Everyone knows a falling apart entry-level Mercedes with “Sunny Smile” tires, squealing brake pads, and a strange rattling noise is much better than a sound, better cared for Buick, Chrysler, or a *gasp* Ford.

      • 0 avatar

        Please. Today I saw an otherwise clean e46 with LINGLONG tires. Wrong on so many levels.

    • 0 avatar
      zerofoo

      I just had a similar talk with my wife. Our oldest is about 10 years from college. Our plan is two years at community college with a complete credit transfer to a 4 year state college that our kids can commute to.

      Our family asks why we don’t intend on putting our kids into a more expensive 4-year school right off the bat.

      My response is: Why would you pay more for the same degree?

      The crazy thing is that both my wife and I graduated from that local state school and we are the best paid people in both of our families. The others that went to more prestigious schools aren’t doing as well.

      For most, expensive schools are a huge waste….and we have 1 trillion dollars of student debt to show for it.

      • 0 avatar

        I went to CUNY for undergrad.
        Spent my own money and took a $20,000 loan.
        Got a National Science Admin scholarship for Grad School. Saved myself $75,000. Graduated with a 4.0 and two M.S. Degrees: Geology/Physics.

        I COULD HAVE gone to an HBC party school down south and spent $40,000 a semester getting a FILM DEGREE like one of my friends and one of my cousins. Drinking, partying and pledging a useless frat- for more partying with easy college girls who’ve never met a New Yorker as awesome as me.

        Two people who are barely working right now.

        I studied Mandarin in Fu Dan University, Shanghai, China instead.

        Choices, choices, choices.

        • 0 avatar
          krhodes1

          I did a similar educational path – small University of Maine campus for undergrad, then got a scholarship to Law School. Ended up with ~$20K in student loan debt, currently consolidated at 1.75% interest. And even that was tax deductible until I started making too much money.

          In contrast I have a friend who borrowed every penny he could to go to the University of St. Andrews in Scotland for undergrad and grad school, to get the equivalent of a Master’s in Architectural History. And then he defaulted on the loans. So he owes somewhere in the neighborhood of $250-300K. For a degree that has evidently qualified him for an entry level customer service phone rep job for $40K a year, since that is what he has been doing for about 5 years now.

          I do see some value in a private education assuming that you go for a degree that will actually get you a job, AND you can take advantage of the networking opportunities that those schools provide. I would not be where I am today without the network of people I met in college. Literally my entire career has been because I knew the right people. I have never cold interviewed for any of my professional jobs, they are all because I knew someone. Every single job. And that is just the way life works in the 21st century, if you don’t have an in at a company, you are pretty much screwed.

          I think people underestimate the value of the networking connections you make in college – that is just as important as the actual education, IMHO. And living on campus (or at least not being a commuter student) is an important part of that.

        • 0 avatar
          baggins

          BTSR never fails to amuse

    • 0 avatar
      krhodes1

      The majority of those cars are going to be sold as CPO cars. Why would you think they will be any different than any other late model fairly expensive used car?

      @BTS

      I am surprised you of all people look down on the f3x 228i, considering it has MOAR POWAH than the previous version.

      • 0 avatar

        #1 I don’t like BMW AT ALL. Interiors are boring to me. Exteriors are cute but too feminine.

        You won’t see me breaking my back for a new/used M anything.

        #2 “And then he defaulted on the loans. So he owes somewhere in the neighborhood of $250-300K. ”

        If I were in charge of that bank, He’d NEVER have qualified for that kinda loan.

        I’d only give that kind of loan to a med school student majoring in the most rare of neurosurgery.

  • avatar
    ajla

    Does $99 down deliver? Will they pay off my trade?

  • avatar

    I must give credit to whoever came up with the “144-Month Car loan = 12 YEARS A SLAVE” saying.

    Brilliant.

  • avatar
    deanst

    TTAC reporting on investment issues gives me a headache, but let me clarify:

    * from an investment point of view, there is nothing inherently wrong with subprime lending as long as its priced right. Losses are greater from some of the assets (i.e. some of the individual loans), but as long as the borrower is charger a high enough rate to compensate for this, the investment can return an attractive yield.

    * if Moodys is “bearish”, they will incorporate higher loss assumptions into their ratings, which should hopefully come close to the actual performance of the ABS structure and prevent some of the awful results seen in 2008/2009 (when predicted losses where greatly underestimated)

    * your description of “subprime tranches” is a bit muddled. Any ABS investment has various tranches. The upper tranches get paid first, the lower tranches get paid last. The upper tranches are usually rated AAA (ie. high likelihood that investors will get repaid as promised), while lower tranches get lower ratings – perhaps BBB or BB – indicating that there is some uncertainty that they will get repaid in full on a timely basis.

    Also, while the ability to seize the car is helpful, losses on repossessions are usually huge (i.e. thousands of dollars). Defaults tend to occur when the owner has negative equity in the vehicle and the costs to recover and auction the car are significant. If the car was worth more than the loan, the owner could just sell the car to pay off the loan – so there is a bit of a bias as to when the owner stops payments.

    A big problem with auto loan ABS now is that loan terms are quite long, extending the period in which the owner has negative equity. You could argue that this is one of the bigger risks to recent ABS deals.

    • 0 avatar

      deanst

      I agree with you.

      A “subprime” loan can be a lifesaver to someone who lost a job, couldn’t pay bills which drove their credit score down, and later gets a new job and now needs a car to get back and forth to work.

      I actually appreciate used car markets which help people with poor credit get into a car – or a house – so long as they’ve analyzed their finances and they can afford it.

      The problem is, the credit system punishes people far more than they should be.

      TRUE STORY: I had a “foreign couple” move here to America and refinance their house. They had been in the country for just 3 years and had credit scores SO HIGH I WAS SHOCKED. 800, 805, 810…
      Husband was a private investigator and the wife was in an education job.

      They refinanced, I got my broker fee.

      They later ABANDONED the house when the area went under from foreclosures. Took the money – FLED the country and went home with OUR MONEY.

      The house is now boarded up.

      IS THAT FAIR?

      What about the college-grad with a 530 who has to start paying his student loans and needs a basic car to get back and forth to their new job?

      The credit system unfairly rewards people who JUST GOT HERE.

      A lot of people will have a problem with what I’m about to say but I don’t care…

      The credit system UNFAIRLY rewards illegal immigrants by allowing them to qualify for loans with a tax ID.

      • 0 avatar
        28-Cars-Later

        “The credit system unfairly rewards people who JUST GOT HERE.”

        How does this work exactly?

        • 0 avatar

          28-cars-later

          People who have been Americans for a long period of time have probably applied for credit, gained credit, used credit…etc.

          Some Americans have their credit RUINED by poor behavior, divorce, or other factors over their lifetime while others are fortunate enough to balance their income and debt…

          NOW PERSON #2 comes here.

          their credit history ISN’T A FACTOR because it was in their country – usually under another name – if they had any at all.

          They start a credit line in GOOD STANDING. Their score gradually increases – but does so quickly because they aren’t in debt when they got here.

          A 2-year resident with over 805 middle score.

          vs.

          a 40-year American who has had to go through all types of BS, taxes, medical bills, etc.

          • 0 avatar
            28-Cars-Later

            Thanks for the reply. That’s interesting I suppose if you were never “in the system” so to speak you would get a fresh score but I think starting them out in the 800s is ludicrous (if I was designing the system, I would start them out at the aggregate mean for all Americans). I was never “in the system” either prior to going to college and yet I was told I would require a cosigner for my loans because “my credit wasn’t high enough”. Personally I’m reading this as another way our country’s system hurts citizens and rewards foreigners.

          • 0 avatar
            highdesertcat

            28-Cars-Later, and speaking of college…..

            The 21-yo son of a friend of ours, in his Senior year at NMSU was able to get a loan for $20K to finance a brand new car, without a co-signer, even though he bags groceries at Albertson’s part-time and shares an apartment with three other guys.

            I don’t know all the details but I bet the Bank of Dad is going to have to make some of those car payments for him.

          • 0 avatar
            dartman

            BTSR, so you are saying that Fair Isaac (FICO) is creating inflated credit scores for immigrants so their clients-the financial institutions-can make poor credit decisions and lose money…yeah right. How do you come up with this stuff BTSR? Ask any 21 year old (from anywhere)attempting to make his/her first purchase on credit; they don’t start you with an 850 and work their way down. The same applies to an immigrant or foreign national of any age with no US credit history, or equivalent reciprocal history from their homeland. By reciprocal I mean for example the person may have a credit history with Barclay’s in Europe, who also has US operations. The ultimate extension of credit will include a calculated risk that a foreign national may “skip the country”.

          • 0 avatar
            28-Cars-Later

            The Bank of Uncle helped me out on payments for a year in 2004, I wouldn’t be surprised.

            @dartman

            That was my basic point, as many of us can attest, young Americans usually have no credit. Although if you are of adult age and never have been in the Western credit system, I would be curious to know how they assess you and what your score would be.

          • 0 avatar
            dartman

            High Desert-Auto manufacturers usually have captive finance operations as part of their business. They are very interested in starting a customer relationship at a very early age to build brand loyalty over a long span. As long as the young man or woman is not a bank-robber or certified dead-beat they are willing to assume more risk than a pure lending institution like a bank. Hence why you see all the “college-grad”, “miltary” and “first time buyer’s” programs. I still hold a soft spot for Fords because of FOMOCO Credit’s willingness to work with me as young father who needed safe reliable transportation for his family. My wife refuses to this day to have anything to do with Toyota because of poor treatment we received from them 32 and 25 years ago.

          • 0 avatar
            dartman

            28 Cars–

            The ratings agencies all use the same criteria for everyone, no matter where you are from or who you are-

            1. Sources and reliability of income-Ability to repay
            2. History-How has the person used credit in the past? For how long? Absence of negative trends such as slow pay or write-offs. Responsible use of credit.
            3. Personal Finances- How much debt is the individual carrying? Are they maxed out or do they have a substantial cushion of available credit? How much equity do they have in long term debt?
            4. Demographics: This is the one that the ratings agency are most wary of discussing because of legal ramifications for discrimination etc. Your age, sex, marital status, education, profession,geographic location, geographic stability etc are all compared against your peers and other groups to create statistical databases of risk.

            Keep in mind “credit rating” has nothing do with “credit extension” –that is decided by the lender and seller using all the facts available to them of which your credit score rating is a part of.

          • 0 avatar
            28-Cars-Later

            Thx dartman.

          • 0 avatar
            highdesertcat

            dartman, thank you for your comment.

            I already knew how it worked since I was a drafted member of the auto retailing industry for more than 30 years when my brothers owned new-car dealerships in CA, AZ, TX and AL.

            What I did not put in MY comment was that I know the kids’ parents, his dad is retired Army, and they are not wealthy, living from month to month on military retirement alone, with a mortgage, in a different city.

            Your comment, “My wife refuses to this day to have anything to do with Toyota because of poor treatment we received from them 35 years ago.”….

            ….I am certain has struck a discordant note with one of the readers of ttac, an American I know who is stratospherically high in the Toyota/America operations in Long Beach, CA.

            Just in case he missed it, I emailed a copy of that line to him with the caption (ha-ha-ha!). Just to make his day!

            (Don’t worry! It is all in good fun. He is the age of my youngest brother and loves to party. Been a friend of ours for decades.)

          • 0 avatar
            dartman

            High Desert-

            …Here’s another for your pal with TMC…In 2008 I needed a new company vehicle and fell in love with the then new Tundra Crew Max Limited–Specifically the 5.7l/6 speed auto drive train. Gas in Cali was pushing $5/gallon and it seemed like the world was financially coming to an end; big trucks were not selling anywhere. Needless to say the Toyo dealer was ecstatic to have an A+ credit rated customer with a paid off trade in. The fact they had $10,000 on the hood of the big Tundra didn’t hurt matters. The wife was not thrilled but conceded it was my choice not hers, so the deal was cut. Now here’s the rub, the dealer wanted me to finance in the worst way with TMCC and they had some ridiculous interest rate like .9% or such. I however recalled shabby treatment from TMCC 25 years earlier when I tried to buy a Previa mini-van and was declined. I financed the Tundra with USAA for (I believe) 2.9% because of the good long-standing relationship USAA. I love the the Toyota product, but the Company–not so much…

          • 0 avatar
            krhodes1

            @Dartman

            You spent an extra 2% interest just to spite a company for something that happened decades ago? Seriously??

            Wow. Just wow.

          • 0 avatar
            28-Cars-Later

            @krhodes1

            People do it everyday. “I won’t drive GM/Ford/FCA”. “I won’t drive Detroit”.

          • 0 avatar
            dartman

            KRhodes1-

            I choose to view it more as I rewarded a decades long relationship with USAA that cost me a little more. Isn’t that how we would like it to work? We reward excellent service and longstanding relationships with loyalty? TMC and TMCC had the opportunity to earn that loyalty in 1982 and 1989. If I was really spiteful I wouldn’t have bought the Toyota at all, but stuck with Ford. But-at the time, IMO Toyota had the superior product.

          • 0 avatar
            highdesertcat

            dartman, I can’t fault you for your decision with the Tundra.

            I feel very strongly myself about being rejected, as I often was as a second-class citizen during my time in the military 1965-1985. Things have changed now, but I still hold a grudge.

            You clearly got the better deal even at 2% higher and I’m not going to make excuses for why Toyota wanted you to finance with TMCC. We all know why already.

            But you did the right thing going with USAA. I’m with them myself, as a retired E-7, and USAA has been excellent, to me, to mine, in all my exposure and transactions with them.

            I use their Credit Card exclusively for all my personal charge transactions that do not require the business credit card.

            Nothing but good news has been my experience when using my USAA card, including pretty hefty discounts at Holiday Inn Express, Hampton Inn and Extended StayAmerica.

            I feel like I belong with them, USAA, like I belong with Navy Fed or Pentagon Fed Credit Union, where I am an owner/shareholder in that business. There’s a lot to be said for that, a feeling of belonging.

            I haven’t had to finance anything since my purchase of my 1988 Silverado, and I did that through one of the Credit Unions I belonged to.

            My #1 and #2 sons were both US Marine Captains of Infantry at Camp Pendleton during their active duty days and they are members of Navy Fed, as well as USAA.

            Mt #3 son is a retired Army Lt Col and a member of TROA and USAA, so he does his financial stuff that way, checking, savings, mortgage, car financing, all insurances (Life, Home, Car, Boat, Motorcycle, etc etc etc.)

            And have you see today’s rates at USAA for 36-month car financing? That should stimulate some interest!

          • 0 avatar
            dartman

            highdesertcat-

            Thank you for you and your families service to our Country. On D-Day last Friday, I sent a copy to all of my co-workers and family a copy of the speech Patton gave to the 3rd Army on 5/31/44; one week before D-Day. I’m sure you have seen and read it but others may not have. Here is the link:

            http://www.5ad.org/Patton_speech.htm

          • 0 avatar
            highdesertcat

            Thank you, dartman.

            I have a copy of it, along with Abe Lincoln’s

            “I will study and be ready,
            and maybe the chance will come.”

    • 0 avatar

      Thank you for the feedback. However,
      I think it’s worth bearing in mind a couple of items.

      There is no judgement call on subprime being made here, just a brief overview of the matter at hand and a bit of information for context. It’s impossible to accurately summarize the issue with the appropriate brevity every single time we report on the matter, hence the included links to prior stories which give more in depth accounts. This is an editorial call that has to be made – in a perfect world, I would rather not make this compromise.

      • 0 avatar
        sunridge place

        Derek- I think the point might be to choose your linked story sources a bit more carefully. Headline on the Bloomberg link from March is:

        Subprime Auto Boom Besieged by Late-Payment Jump: Credit Markets

        Seriously? That link led to your ominous statement of:

        ‘ but that trend appears to be reversing as of late, with delinquencies on the rise. And if the latest trends outlined by Moody’s are any indication, this isn’t likely to reverse’

        The issue is that many, including yourself here for whatever reason, can look at, say, 10 indicators of auto loan behavior. Some will ignore the 9 indicators of normal and stable performance and hyperventilate on the one metric that shows a negative trend.

        As an example, the 30/60 day delinquencies in the Experian Q1 2014 study released last week are down year over year across nearly all lenders.

        http://www.experian.com/assets/automotive/brochures/experian-auto-2014-q1-credit-webinar-presentation-6-5-2014.pdf?WT.srch=Auto_Q12014FinanceTrends_PDF

        Should you or others wish to do so, there is probably a negative trend in there to stroke out about for dramatics. So, the latest ‘trends’ did reverse unlike your prediction.

        It is just annoying. I can respect the element of an daily cycle to fill but the consistent ignoring of normal or positive trending is obvious and the small outlying element is usually exposed and over-hyped without context.

        • 0 avatar
          dash riprock

          The correlation between loan repayment and employment is high. In other words, in an improving economy lenders can be more bullish as the income will be there to repay.

          Credit scores has a looser correlation on future repayments. Someone whose credit was destroyed in the past because of a divorce, job loss, health issue etc, or other life event, is not the credit risk that a person who lives beyond their means constantly. Good underwriting will weed out the good risk from the bad.

          deanst made a great point concerning the length of terms available. The greater the term, the greater the possibility of job loss etc. Long terms should give investors cause to be concerned

          • 0 avatar
            highdesertcat

            Some people think that the O* administration is putting pressure on lenders to lend out the money they are sitting on, in order to stimulate the economy.

            No doubt another ploy by academia that exists in its own hypothetical universe, and not the real world the rest of us have to live in.

          • 0 avatar
            28-Cars-Later

            That’s what the negative interest rates in Europe are supposed to do, from what I understand.

          • 0 avatar
            highdesertcat

            And if the US is any indicator of the success of that philosophy, Europe will be in even deeper doo-doo by the end of 2015, first quarter of 2016.

            Imagine, a customer with money having TO PAY a bank to hold on to that money!

            Then again, the US government doesn’t know what it is doing, and the rest of the world looking for leadership from the US is just following suit.

            Regardless, what matters is how we each conduct and prepare ourselves now IN CASE a total financial collapse ensues.

            In the end, all nations will come together, debts will be forgiven, the slate wiped clean, and the world will start all over again.

            A bankrupt company, a bankrupt state, a bankrupt nation. Why not a bankrupt planet?

          • 0 avatar
            28-Cars-Later

            Again I’m not in high finance but the negative rates as I understood them were being charged in bank loans at the “wholesale” level. AFAIK folks in Europe are not being charged this, yet.

          • 0 avatar
            highdesertcat

            ” AFAIK folks in Europe are not being charged this, yet.”

            I caught this scanning on one of my DVRs one night, I believe it was Gerri Willis’ show, and it only applies to Europe at this time.

            The whole concept of charging a depositor to keep money in a bank is just repulsive to me.

            It doesn’t really apply to me or my father-in-law, since he only keeps minimum operating funds in his bank account, with the rest in cash, spread out among his four daughters.

            Like many old codgers, I have also been doing the same with what little money I have by keeping it in cash.

            Money is fungible. Who’s to say which bill came from where?

            Instead of stimulating lending and/or investment, such a policy would result in more companies buying back their own stock.

          • 0 avatar
            28-Cars-Later

            “Money is fungible. Who’s to say which bill came from where?”

            I agree, until the overlords enact draconian regulations banning cash sales and develop an electronic only society. I read the Israelis are looking at a cashless society now.

          • 0 avatar
            VoGo

            In much of the developing world, people are so under-banked that they are more than willing to tolerate 5-10% negative interest just to have a safe place to keep their money.

            Sometimes we in the US forget how lucky we have it.

          • 0 avatar
            highdesertcat

            28-Cars-Later, one of my sisters is married to a Jewish-American man ~20 years her senior, and, yes, there are a lot of shenanigans going on with cash transactions between the US and Israel, also between individuals.

            Been that way for many decades.

            A “cashless” society would put a dent in some transactions.

          • 0 avatar
            krhodes1

            Investors should only be concerned if the return is not appropriate for the risk. If you want a high return, you need to be willing to take a high risk. Thus, long term loans should have significantly higher interest rates, and when they are resold as ABS then those should have much higher returns as well. The existence of these types of investments was not the issue in the mortgage crisis, the issue was that they were not rated appropriately.

          • 0 avatar
            krhodes1

            @HighDesertCat

            The majority of people currently already pay “negative interest rates” through fees on their checking and savings account. At my bank, if you have less than $500 daily balance in a checking account, you pay a $10/month fee just for having it. And that is on an account that pays less than 1% interest currently. Checking is even higher, with NO interest paid unless you have a $10K balance. In my case, I keep using that bank for a variety of reasons, even though there are cheaper options out there – I keep more than enough in savings, and I have “free” checking, but I do pay a small fee for online bill paying.

            And then there is the HUGE swath of Americans, my Brother and SIL among them with NO bank account at all. At best they are getting charged $5-10 per paycheck at Walmart, with many other institutions charging much, much more to cash their checks.

            I find the idea of keeping cash around hilarious – the stuff burns, gets stolen, etc. Do you really distrust the banks and the government that much? Really? No one with an FDIC-insured account has ever lost a penny of their money due to bank failure. Americans sure get the kookiest ideas in their heads. Maybe being only 1/2 American makes me immune to such things.

          • 0 avatar
            matador

            I’d assume that negative interest rates on bank accounts would cause more cash-only deals.

            If you eliminated cash, the barter system would do pretty well!

          • 0 avatar
            highdesertcat

            krhodes1, yeah, what you say is true about fees and ancillary charges on bank accounts.

            I do have ONE checking account that is totally free where I receive a Direct Deposit as a pre-condition from one of my Government income sources and I use that account to do all my online bill paying. Just that ONE account!

            I have other checking and savings accounts, like most people have, but all of them are free, too, or actually pay me some sorry rate of interest every month on the money covered by FDIC.

            But none of those are exposed to bill paying or check writing, because I use a credit card OR Money Order instead.

            Many (mostly) OLD people still subscribe to that “money in the mattress” philosophy, although no longer actually in the mattress; these days more likely in a gun cabinet or safe.

            Americans aren’t the only ones with such quirks. My father-in-law was born in pre-war Germany and came to the US when his dad, a German rocket scientist, was brought to the US after WWII.

            My dad was Portuguese and my Mom German,and they both pretty much preferred to keep whatever little money they had close at hand. Maybe not distrust of banks and the IRS, just a feeling of being more secure with ready cash at hand.

            My father-in-law spreads his cash money around among his four daughters in sums far greater than FDIC covers.

            He comes over to their houses periodically with a grocery bag stuffed with new Benjamins. Each of his daughters has quite a collection, including my wife.

            Not bragging. Not complaining. Just telling how and what it is! A lot of old people do exactly the same.

            It’s not OUR money, until after his death. And at age 87 that can come anytime.

            He derives his income from 25 years of US Civil Service CSRS retirement, maxed Social Security, and the real estate rental business he and his family own. A tidy sum each month!

            He hopes to end his involvement with the business by the end of this year, and turn whatever is left of it in NM, CO, WY and ID over to each daughter who lives in that state and manages those properties in that state.

            I have found that there is reason behind the madness and after the 2008 national election I started subscribing to it myself.

          • 0 avatar
            VoGo

            HDC,
            Great to see you put aside your bashing of undocumented workers for a few hours.

            What’s that I see? Oh, now you are using TTAC to spread vicious allegations about an American Jew and financial wrongdoings.

            Great. Between you, Mel Gibson and Buickman, we are all set with wacko, anti-Semitic conspiracy theorists.

      • 0 avatar
        CapVandal

        There is no judgment call on subprime being made here????

        “Some have argued that the demand for ABS has led to the growth in subprime financing, with looser underwriting standards (in some cases, they are laughably lax) and a number of OEM captive financing arms that are all too willing to finance buyers with poor credit so that they can “move the metal”.”

        Sounds very judgmental to me.

        One person argues that it is about time for credit markets to normalize since the record low levels of defaults beginning in 2009, when underwriting standards were laughably draconian. Low default levels led to huge profits for those investing in the riskier tranches of auto securitizations.

        The riskiest deals are being shunned by the premier credit rating agencies, who are still extremely defensive and risk averse. The combination of buyers whose memories were seared by losses suffered during the financial crisis and skeptical rating agencies make a return to pre 2008 levels of mispricing remote.

  • avatar
    Fred

    All this says is that people are still struggling, many dealers are desperate to sell, and bankers will use the math to keep making money. Good luck with your choices.

    • 0 avatar
      highdesertcat

      +1

    • 0 avatar
      thornmark

      The easy financing allows the price of cars/trucks to keep going up.

      Easy credit fueled the unsustainable rise in the price of homes and higher education. Somehow, government policy aimed at making homes and education affordable actually made homes and education not only unaffordable but also debt traps.

      btw, Google recently stated that they were hiring more high school grads w/o any college – a direct threat to the higher ed industrial complex.

  • avatar
    Jasbro1

    I always count on GM doing the stupid thing with financing. Are they still writing their own leases after hiving off GMAC??

    Mercedes seem to be willing to put their willies in the fan- each lease is a bet against unexpected depreciation nastiness – and I think that the CLA might chop their brisket.

    • 0 avatar
      krhodes1

      @Jasbro1

      I really don’t get the hator-aid around here for the CLA. It’s a cheapish Mercedes, which is a new concept for America. But is not anything Mercedes hasn’t been selling elsewhere for eons. What on Earth would make you think they don’t have a pretty good idea of what residuals will be for them?

      Ultimately manufacturers subvent leases all the time. It is a way to discount without seeming to discount, when most of your buyers lease anyway. In large measure, the “cost” of a single car is an accounting fiction anyway. When you are dealing with manufacturing, it often is better to “lose a little on each sale and make it up in volume” because you actually DO make it up in volume through production efficiencies. So the fact that the car returns a little less than the also largely fictional agreed-upon “residual value” of the lease is really meaningless.

  • avatar
    sirwired

    I don’t see anything interesting here; as long as the sub-prime borrowers are being charged interest rates commensurate with the risk they represent, there’s no danger to the economy or automakers here.

    That said, there IS lots of danger towards the borrowers themselves that bought a New Shiny instead of a sensible used car for half the price, or less.

    • 0 avatar
      28-Cars-Later

      Which makes/models have you seen half price of new that were not 8yo, have 90K, or were otherwise destroyed?

      Half price retail vs a new retail would make them 25-40% at wholesale in order to leave room for margin. Trouble is, many used cars are doing 50% wholesale or better.

      • 0 avatar
        krhodes1

        The cars that go for 1/2 retail when only a few years old are the ones that were never, ever, ever sold for anywhere near MSRP in the first place. Impalas, Avengers, Sebrings, other assorted turdblossoms. But people seem to forget that fact around here.

  • avatar
    Kyree S. Williams

    Eh, it is what it is. People will often pay their car note before they pay their mortgage/rent, because (a) it’s a lot more difficult to be evicted and especially foreclosed on, and (b) they need wheels to get to work and keep earning money.

    That is, until they simply can’t.

  • avatar
    Point Given

    I think the risk is lessening on the sub prime loans thanks to a little bit of technology.

    Whenever we sell a sub-prime car it comes with a little GPS unit that the auto finance company can disable the car if you don’t make your payments, and if they want to repossess it know exactly where it is. It makes a sub prime piece a bit more retrievable (and secure) and not being able to drive despite the car being in your driveway forces more people to make the payment in order to be able to drive.

    Someone like Carfinco, who sends out high interest loans (20%++) has a surprisingly small delinquency rate.

    • 0 avatar
      highdesertcat

      I wondered IF anyone would bring this up. I’m glad you did.

      It is a practice that many dealers AND finance companies still use, and repo tow truck operators are equipped with the electronics to recognize the signature provided by the finco.

      • 0 avatar
        Point Given

        Yes, it’s pretty standard for subprime peices. I would imagine it’s a strong reason why subprime companies are doing reasonable well.
        It simply isn’t as risky as before. You retain control over the asset (depreciating such as it is) and control over the clients ability to use the asset and thus pay for it….at least to a degree.

        Behind the scenes we call it the roach tracker.

    • 0 avatar
      ajla

      I find this interesting.

      Do you disclose this to the buyer when you sell the car? If the car gets paid off do you have the person come in so you can remove it? Can you just leave it on the car? If it somehow malfunctions in the future would you be liable?

      I’m not sure about every state, but it seems like in Florida this practice is okay as long it is initially disclosed to buyers.

      • 0 avatar
        Point Given

        I’m a fleet guy, I don’t deal with subprime people at all and am only vaguely aware of what goes on downstairs.

        That said, I’d bet money it’s in the contract somewhere as a term and condition. However, mr. customer just blindly signs 99% of the time (bet it’s 99.9% of the time with a subprime cust). Payment is this, sign here kinda thing.

        Should a subprime person pay off the car I’d think they’d shut it off and forget about it. I can’t imagine too many of those loans are ever completely paid off though.

        Possible that the finance company would call and arrange to remove it. When units are traded in with such devices we do take them out.

        Liability follows the installer, which we outsource to an independent shop(both cost and liability reasons), or the product manufacturer. Standard risk management practices on a non-auto manufacturer product.

  • avatar
    hybridkiller

    “The global outlook for Auto Back Securities (ABS) is steady – except in North America, where underwriting standards and borrower credit are slipping.”

    Derek, considering the context and tone of the article I’m assuming you were being serious, and this was not an attempt to be clever/witty/whatever (if it was, it’s much more misleading than amusing). Especially since it is unlikely that most readers here are fluent in investment-speak.

    ABS = Asset Backed Security

    If you’re going to address matters with such a broad scope, please pay some attention to getting the terminology right.


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