By on February 21, 2015

finance

Alan Zibel and Annamaria Andriotis of the Wall Street Journal (subscription required) report that consumer loans to borrowers with bad credit, including those for cars and light trucks, are now approaching 40% of loans issued, the highest percentage since the start of the financial crisis in 2007-08.

Almost four of every 10 loans for autos, credit cards and personal borrowing in the U.S. went to subprime customers during the first 11 months of 2014, according to data compiled for The Wall Street Journal by credit-reporting firm Equifax.

That amounted to more than 50 million consumer loans and cards totaling more than $189 billion, the highest levels since 2007, when subprime loans represented 41% of consumer lending outside of home mortgages. Equifax defines subprime borrowers as those with a credit score below 640 on a scale that tops out at 850.

Part of the increase in subprime loans is attributed to new companies that aren’t traditional banks entering that market. Large banks have reduced their portfolios of riskier loans due to increased scrutiny by regulators in the wake of the financial crisis. The new lenders say they are being more diligent than subprime lenders have been in the past, saying that they are only giving loans to borrowers in the top bracket of bad credit scores and actually reviewing bank account and income histories.

In case you’re nervous, subprime mortgages, whose derivative securitizations were at the heart of the financial meltdown, and which made up about 20% of mortgages in 2008, have not increased and currently make up less than 1% of mortgages issued.

Ronnie Schreiber edits Cars In Depth, a realistic perspective on cars & car culture and the original 3D car site. If you found this post worthwhile, you can get a parallax view at Cars In Depth. If the 3D thing freaks you out, don’t worry, all the photo and video players in use at the site have mono options. Thanks for reading – RJS

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42 Comments on “Subprime Auto Loans Climb to Highest Level Since Financial Crisis...”


  • avatar
    CapVandal

    About time. Defaults have been too low. People need cars to work, and the national fleet is too old.

    The traditional non prime and sub prime lenders are still too conservative, their default rates are too low, and their prices are too high. And the criteria for prime has risen since 2008.

    If non banks want to enter this space, great. There is more to heaven and earth than FICO. Either they have better underwriting criteria or they will lose some money. That is how a credit cycle works.

    Supply and demand. Credit risk has been misplaced, and the traditional players have been making too much money. Time to compete for business. It is the American way.

    • 0 avatar
      highdesertcat

      It’s a sign of the times. Credit costs next to nothing these days and granting everyone loans is just another way to stimulate the US economy in the auto sector, et al.

      Bloomberg, CNBC and NBR covered this topic last week and none of the guests or talking heads were concerned. In case of defaults, the US tax payers will come through again and save the day. Too big to fail has gotten even bigger in spite of Dodd-Frank.

      An interesting off-shoot of subprime lending was that the people with money in America have done exceedingly well under O’s economic policies. The wealth of Americans with money has grown faster and increased more in a shorter period of time, six years to exact, than at any time in America, albeit at the expense of the middle class and poor.

      Thank O’b*m* for that. I do! Every day! But then, I don’t have any debt; only MCI (money coming in).

      Giving the poor and declining middle class subprime loans instills in them a sense of well-being and a feeling of achievement and reward.

      So, I say, good on them for subprime!

      • 0 avatar
        bd2

        The groundwork for the hollowing of the middle, much less the working class, was laid out by Reagan and then reinforced by Bush Sr. (despite referring to “Reaganomics” as “Voodoo-economics”), Clinton and Bush Jr.

        Manufacturing has revived some in the US as cost of doing business in China has risen (tho Mexico has gained more and is now really reaping the benefits of NAFTA), but these days, most new manufacturing jobs pay low wages ($10-15/hr) with few, if any, benefits.

        It truly has become a race to the LOWEST cost producer.

        There was a recent article on how a housekeeper for one of those eponymous roadside motel chains could now afford diapers for her grandchild due to a measely 25 cent raise to $7.50 an hr in Arkansas.

        The owner of the motel bemoaned the “fact” (due to the 25 cent wage hike), that everyone wants something for nothing.

        As for the subprime/derivatives mess – a common myth is that it was the low-income/poor who caused the problem when it was really mortgages for $300k+ (which is why Miami, Los Angles, Vegas, Tuscon, etc. whee hotspots) granted on the basis of sloppy lending practices, it not outright fraud (this was due to the mortgage lenders making a quick and hefty profit selling their paper to Wall St. – which was bundling them and selling them as “safe” investments).

        Despite turning around and betting against them using derivatives.

        And yeah, let’s blame Obama for the fact that the middle class lost most of their wealth (tied up in real estate) when the RE bubble crashed and for keeping the tax cuts for wealthy.

        • 0 avatar
          highdesertcat

          Maybe if more people chose to go into business for themselves instead of relying on others to furnish them employment, maybe then there would be a greater appreciation for the wages that employers pay their employees.

          I really can’t blame O’b*m* for my life getting worse, because, overall, even in spite of some setbacks due to mandated health care, the people with money have been doing better, which in turn has made my life better because they can pay rent and pay for projects they want done to their homes.

          So, yeah, the middle-class is shrinking and doing worse during this administration. Yet OTOH we have the people who are not working, not employed, and the people with accumulated wealth, who have enjoyed a better living standard because of O’s policies.

          Hey, my oldest son was able to retire early at age 49 from international banking due largely to the unintended consequences bestowed upon Wall Street and his investments because of O’s economic policies.

          In the world of finance, things are truly wild right now and lots of people are cashing in, or in my son’s case, cashing out.

  • avatar
    Lie2me

    First AGW deniers and now the sub-prime bubble

    By Ronnie “who, me poke the bear?” Schreiber

    Golf clap

    • 0 avatar
      Mr. Orange

      Poking bears are awesome ways to test out Bear Proof suites. Just make sure when you want to end the test that you are fully supplied with your Bear Pepper Spray.

    • 0 avatar
      don1967

      Everyone’s a market sage in a post-2008 world.

      Believe it or not there is such a thing as prudent subprime lending. Always has been. Just because the big banks screwed it up so spectacularly in one salient period of human history doesn’t mean that every future attempt is another bubble.

      The smaller banks are indeed doing it right, assessing credit worthiness and taking only those risks which a prudent business owner would take. They know they are small enough to fail, and so do their shareholders.

    • 0 avatar
      JD-Shifty

      is this a car site, or zerohedge? it gets tiring.

      • 0 avatar

        The source was the Wall Street Journal and you come up with Zerohedge? Considering that I’ve called out Zerohedge here at TTAC for publishing car related BS, that’s a hoot.

        • 0 avatar
          JD-Shifty

          it’s the whole tone of the article “doomsday coming..another COLLAPSE…BUY GOLD…Buy Survival seeds…WE”RE DOOMED, THE WHOLE WORLD IS CRASHING”

          • 0 avatar
            BrunoT

            Go to YouTube. Search for a video. “Peter Schiff was right”. There you will find several guys such as yourself saying exactly what you are saying about things in the runup to 2008. You’re going to have a bad latter half of 2015/2016. Remember this post.

      • 0 avatar
        don1967

        The only zerohedge I see here is in some of the commentators, who seem obsessed with mocking those who haven’t bought into the hipster doomsday cult.

        I believe Ronnie did the opposite, by adding context to the subprime discussion.

    • 0 avatar
      mikey

      @ Lie2me…..I know squat, about AGW, and less about sub_prime. I do know that your comment concerning carbon foot prints and dinosaur flatulence, had laughing me out loud. I just cant wait to use it on somebody.

  • avatar
    thornmark

    A talk delivered a few days ago by Dr Christopher Essex – Chairman, Permanent Monitoring Panel on Climate, World Federation of Scientists, and Professor and Associate Chair, Department of Applied Mathematics, University of Western Ontario, Canada.

    Dr. Essex explains why the limitations of computers, in the context of a complex, chaotic system like the Earth’s climate, are inherent and can never be overcome, at least not until some fundamental scientific puzzles are solved, i.e., WHY CURRENT COMPUTER MODELS CAN’T PREDICT THE EARTH’S FUTURE CLIMATE:

    • 0 avatar
      thornmark

      link disappeared.

      search “youtube: Believing in Six Impossible Things Before Breakfast, and Climate Models”

    • 0 avatar
      don1967

      You’re wasting your breath. According to the Church of Climate Change (formerly known as the Church of Global Warming), all evidence which refutes a popular theory shall be dismissed as invalid by a panel of Believers, and all Deniers shall be mocked until they are dead.

      • 0 avatar
        highdesertcat

        don1967, I always got a kick out of the word-game strategy that if “global warming” doesn’t convince the sheep, rename it “climate change.”

        The whole concept is like religious faith, a person either believes, or they don’t.

        For the record, I don’t believe in global warming or climate change, but I am OK with the sheep who do as long as they don’t try to win me over to their climate religion.

        I’m a Catholic, but I don’t try to win others over to my religious faith. So those who believe in global warming and climate change should keep their faith to themselves, and not spread their gospel.

        • 0 avatar
          Astigmatism

          It’s called “climate change” because calling it “global warming” apparently confused people into thinking it meant “every day will be hot immediately forever,” when that’s not what happens when you increase the thermal energy in a large and complex system.

          As to your Catholic faith, you’re welcome to it, and you’re welcome to accept climate change or not. Luckily, the federal government has moved past that stage and is beginning to take steps to deal with the problem.

          • 0 avatar
            highdesertcat

            ” Luckily, the federal government has moved past that stage and is beginning to take Luckily, the federal government has moved past that stage and is beginning to take steps to deal with the problem.

            The key to a successful reduction of pollutants is to get the populace to support it.

            I grew up in Huntington Beach, CA, at a time when smog was ever-present. We, the people, got on that bandwagon voluntarily to reduce and ultimately eliminate smog. We were motivated to better our situation.

            I don’t see the same thing happening re global warming, climate change, green house gas emissions, oil-dependence, etc.

            IMO, the global warming message was garbled in presentation. Just like the message was garbled and ultimately dis-proven during the global cooling scare of the fifties and sixties.

            I remember studying that in elementary school only to later find out it was all a hoax, driven by scientists with an agenda all their own. Yeah, and the government back then had also taken “steps to deal with the problem.”

            Fool me once, shame on me.

          • 0 avatar
            don1967

            “Luckily, the federal government had moved past that stage”

            And this is precisely where global warming lost all credibility as a scientific matter; when people started cheering for an end to the discussion and the beginning of a new world order.

            Luckily all governments are temporary, and all mass delusions are eventually corrected.

          • 0 avatar
            BrunoT

            That’s a lie. Nobody thinks every day will be hotter, even it’s worst critics. Give it up, human influence is not enough to make a significant difference in climate. Meanwhile, your type sucks resources from REAL pollution and quality of life issues related to emissions and consumption of natural resources as the population expands and industrializes.

  • avatar
    dwford

    640 is an awfully high score to be considered subprime. Plenty of 640’s have perfect payment history, but have either light or limited credit history, or only have 1-2 credit cards but high balances. Where I work a 640 is gold.

    Everyone worries about subprime in cars, but a car is not a house, and your credit default on an auto loan has pretty much no effect on your neighbor, unlike a mortgage. Cars also have a much quicker turn back into the market after a repo – banks don’t sit on repo’d cars for years, they go right to the auction and get resold.

    • 0 avatar
      Mr. Orange

      Very true. Hasn’t the recent history been when there is a sizable increase in defaults in this market it is more of a canary in a coal mine situation. Large defaults here precedes a much larger downturn in the economy such was the case in 2007. These loans defaulting won’t create a massive crash but is a measure of the strength of the overall economy.

    • 0 avatar
      golden2husky

      I’m surprised as well that 640 is being classified as sub-prime. If that is the case, loans to these folks really has pretty low risk. and as pointed out, a car is easy for a lending institution to dispose of. And besides, I don’t see anybody manipulating car loans to line their pocket at the expense of the economy – which is what the fat cats did six years ago…

    • 0 avatar
      don1967

      Agreed. Digging below the “subprime” headline one sees a much higher level of credit quality than a few years ago. Many of these people getting credit today will undoubtedly be in the prime category tomorrow.

    • 0 avatar
      Prado

      I was thinking the same thing. Then again, the terminology prime/sub prime really don’t mean a lot. The only thing that really matters is the probability of default.

  • avatar
    87 Morgan

    here we go again debating sub prime auto loans.

    They are not a problem, they are a solution the likes of which should not be compared with mortgages. For example if you are sub prime you don’t need to buy a home, you can rent one or an apartment.

    You can not rent a car per se for 12 months and then decide if you want to re up the lease and move on. Merica is is large place and if you don’t live in of the, call it, seven major metros that have superb public transport, you need a car. Ensuring that almost everyone who needs one can get one is good for our economy and at this point just about everyone can get one in some fashion.

    Do some of these loans go bad? Yes. Pray tell what happens? Uh, the car gets hooked and sent to the auction which in many cases is online and purchased by some dealer who either goes and gets it or pays to have it shipped. The lender may lose a bit, but most true sub prime banks require and acquisition fee to buy the deal up front to cover these expected future expenses and the buyer has ineffect paid for this fee up front. Rinse and repeat.

    The only argument you can make is the buyer pays too high of an interest rate, but since we know by definition interest is rate is a measure of risk and the buyer has demonstrated they are a risk, how can you justify charging less up front? And the debate is it charging or assigning? When the buyer demonstrates the ability to make timely payments they trade out after a few years into an better product or refinance and assign themselves a better rate to lower their monthly obligation. Or, they pay poorly and get to keep the same state assignment until such time they make better financial decisions or perhaps their circumstances change for the better. I acknowledge that not all bad credit is due to poor financial decisions and yes bad things happen to good people everyday.

  • avatar

    Sub prime tends to run at about 14 – 15 % of total car loans outstanding, and that’s what it runs at today. It issue isn’t the number of sub prime loans but whether or not the are properly priced.

  • avatar
    Rich Fitzwell

    OK, so the “little guy” with bad credit is taking on too much debt, so what.

    What about Tesla at the other end of the spectrum? No matter if you are red state or blue state (I blame the Fed), Telsa is a welfare queen writ large and a Wall Street backed con job. The Nevada gigafactory is laughable yet nobody questions the Wall St promotional machine. Telsa is not Google.

    • 0 avatar
      highdesertcat

      Tesla has the Jewish Lobby in America behind it. Very influential and very well financed. Ditto for Space-X.

      • 0 avatar

        Geez, the Elders of Zion must have forgotten to send me my check this month for my part in running the world.

        Some folks have Jews on the brain.

        • 0 avatar
          highdesertcat

          Ronnie, my brother-in-law, married to my youngest sister in West Palm Beach, FL, is an American-born Jew, and remains very influential in the Jewish Lobby in New York City, even from his new home outside of Tel Aviv, Israel, where he moved in Jan 2015.

          As for your check? It was lost in the mail. That, or no one considers you influential enough to send you a check.

          • 0 avatar

            Some of my best friends are Jews.

          • 0 avatar
            highdesertcat

            I don’t know of a more caring, loving and gentle person than my brother-in-law, and his kids from his first marriage. His first wife died of cancer. My sister was her executive assistant.

            And as long as he treats my baby sister with love and respect, I will love him like family.

            My sister being Catholic has had no bearing on their marriage. She goes to church on Sunday, he goes to Synagogue when he worships.

            He maintains a second residence in Israel where his kids have also moved over the years and my sister lives in West Palm to run their real estate business.

        • 0 avatar
          kvndoom

          We got Tesla, global warming, Jews, Obama… all in just 20 comments.

          I’m bathing in sewage this morning. Gotta wash the smell off.

          • 0 avatar
            Astigmatism

            Somewhere in a Tokyo strip club, Bertel is hurling “I told you so’s” while laughing at the screen on his Galaxy S5.

        • 0 avatar
          jetcal1

          Space-X? Joooz in Space? May the Schwartz be with you?

          I had no idea Mel was running things for Elon.

  • avatar
    50merc

    Another good post, Ronnie. Don’t let the statists bug you.

    And I appreciate the reference to the Elders of Zion. That is indeed an automotive-related topic, via crazy old Henry the First. Odd that no one ever published a book titled Protocols of the Elders of Protestantism. (John D. Rockeller, ardent Baptist; Andrew Mellon and J. P. Morgan, Episcopalians; John Jacob Astor, Reformed Dutch; Sam Walton, Presbyterian.) And hey, there’s another suspicious bunch of influentials worth looking into. They call themselves Freemasons…


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