"All Is Fine In Sub-Prime Land," Says Someone With A Vested Interest In Its Success
The Detroit Free Press paints a pretty clear picture of the automotive lending landscape: auto loan terms are rising, with 1 in 5 loans now lasting longer than 6 years. At the same time, the average credit score for those taking out loans is dropping. Ominous signs for a car market that’s running on the hype of a perpetually increasing SAAR, right? Well, not according to some.
Despite more red flags than a Politburo meeting, the Freep manages to put a positive spin on things, trotting out Melinda Zabritski, Experian’s senior director of automotive credit, and Reid Bigland, head of U.S. sales for Chrysler.
Even though loan terms are up and even the crappiest of the credit worthy are qualifying for car loans (those with sub-700 credit scores accounted for 25 percent of car loans in Q1 2013, up from 17 percent in 2010), Zabritski is sunny in her disposition
I think most people agree it’s very healthy. The growth still seems to be rather well managed…From what I am hearing from the lenders, (there is) a very strong sense of optimism. I don’t think it’s anything to be worried about,” Zabritski said. The thing to watch is consumer behavior in the longer-term loans. I think it’s easy for people to have that reaction of wanting to say ‘the sky is falling, subprime is growing,’ but it is still growing very modestly.”
This kind of guarded optimism could only be trumped by Bigland’s “What, me worry?” attitude towards the whole thing. Cheering the easily available credit for auto loans, Bigland shrugged off any notion of Chrysler being dangerously exposed to downside risk on sub-prime loans
For automakers like Chrysler, which don’t own their own finance companies, the risk is minimal. “I don’t own the paper; it’s the banks that are taking the risk,” Bigland said.
Last time we checked, Chrysler does have a captive financing arm with Santander, one of the l argest sub-prime auto lenders in America. Chrysler may not have held the paper prior to the establishment of Chrysler Capital (their financing arm in conjunction with Santander) but sub-prime financing doesn’t look like it’s going to stop any time soon.
That’s because the QE-fueled credit bubble is great for auto financing.
“Credit availability, in my opinion, is the best it has ever been in the history of automotive financing,” Reid Bigland, Chrysler’s head of U.S. sales, said earlier this month. “Banks have money, they have clearly been burned on mortgage loans … and from what I have seen … banks have looked to autos as a segment that has held up extremely well.”
What the Freep doesn’t tell you is that banks are packaging auto loans into securities, just like they did with mortgages, and selling them to investors. The same quantitative easing that makes auto loans so cheap has also wiped out yields on safer investments like bonds. Auto-backed securities, especially risky ones like sub-prime car loans, are the only thing providing decent yields, and investors can’t get enough of them. That means cheap money and car loans for peope who wouldn’t normally qualify for them.
Of course, it’s also good for companies like Chrysler, who drive a lot of their sales from sub-prime buyers. They’re playing a good part in helping to drive the SAAR back to pre-recession levels amid an optimism-and-easy-credit fueled euphoria. What happens when the music stops, QE ends, the economy slows and buyers can’t make payments? The consequences of that (repossession, auctions, a hit to residual values) won’t be great, but they’re not as bad as what could happen if the auto makers buy into the credit-fueled recovery too much. Remember 2008 and the days of overcapacity, excess inventory, sputtering sales and bankrupt dealers? Don’t say I didn’t warn you.
More by Derek Kreindler
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A friend of mine just bought his first new car, a Fiesta. A recent college grad, with steady employment, an apartment, a good job, and student loans to pay down, there's no way his credit score was in "prime" territory. But he qualified anyway for a reasonable rate, because any finance officer with a pulse could see that he was a good risk. As another poster has already pointed out, a credit score is only one measurement of risk, and hardly the last word on whether or not you'll qualify for a loan. What this article is really trying to sell is the idea that evil, scary quantitative easing is driving the increase in subprime financing, and not a "genuine" improvement in the economy. So then it's much easier to backspin the economic recovery and the improvement in the new-car market as just so much temporary inflation before the next (Obama-caused) crash. When you can include a dig at an American automaker too, that's just icing on the cake. This is the meme that conservatives have picked up and ran with, as it becomes increasingly clear that their attempts to kneecap the economy through the sequester and the obstruction of Congress have failed. The truth about subprime financing is that a rising tide lifts all boats, and that economic growth and rising consumer confidence have much more to do with the boost in subprime than anything else. That the boost in subprime is benefiting Chrysler especially has got to really stick in the craw of certain authors who were shouting it's demise with glee from the rooftops not that long ago.
Ask your friends in the subprime lending business if they have stress tested their portfolios against the next recession. Maybe just a modest 12% unemployment rate in the USA and Canada.