By on February 11, 2015

Subpime Lending MS Powerpoint Style

Though subprime auto lending is growing, lenders believe a new credit bubble isn’t on the horizon as it was in the runup to the Great Recession.

Bloomberg reports 20 percent of all auto-loan originations are in the subprime category, compared to the peak of 30 percent prior to the financial collapse seven years ago. Originations climbed to $97.2 billion in 2014, compared to $86.7 billion in 2013 and $41.3 billion in 2008. Of those, $30 billion to $40 billion subprime loans were packaged into asset-backed securities; $203 billion of those loans are outstanding.

That said, Wells Fargo securities managing director Chris Pink claims those figures aren’t a sign that “the ABS market is driving a resurgence of subprime.” Ford director of long-term funding and securitization Sam Smith adds those securities differ from the ones in the mortgage industry, stating that auto lenders aren’t “originating contracts just so [they] can securitize them.”

The move to temper those concerns comes as the U.S. Justice Department began investigating the market for subprime securities, with a focus on preventing a repeat of the housing bubble that led to the Great Recession.

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33 Comments on “Lenders: Subprime Auto Lending Increase Not A New Bubble...”

  • avatar

    Lenders: “Let’s lend money to deadbeats it looks good on paper”



    Justice Dept: “We’ll bail you out just don’t do it again”

    Lenders: “Ok, we won’t”

    Lenders: “Let’s lend money to deadbeats it looks good on paper”


  • avatar

    So….subprime auto loans can’t go bad, if the loans aren’t made for the purpose of securitizing them, even though auto manufacturers ARE securitizing them?

    Sam Smith has saved the world. Just don’t think about securitizing the uncollectible receivable and it won’t be uncollectible! Pure unfettered American corporate genius! These aren’t the droids we’re looking for. Move along.

  • avatar

    The percentage of subprime loans is not the sole determining factor of “bubbleness.”

    A healthy economy will contain some number of subprime loans. The economy may even be able to adequately support a large number of them–if other factors permit subprime borrowers to pay. Obviously, the economy is cyclical, and so the percentage number of such loans that is safe will change. If long term indicators are all rising, then more subprime loans may not be that bad. However, when those indicators plateau or drop, and there is not a corresponding drop in such loans, then I’d be much more worried about a collapse.

    Obviously, you can’t take the lenders’ word for it. And without knowing the other factors that go into determining a healthy rate, it’s not possible to make good judgment. But if lenders start chasing profits again instead of operating sound, sustainable practices, yes, things are definitely bound to get out of control.

    • 0 avatar

      “The economy may even be able to adequately support a large number of them–if other factors permit subprime borrowers to pay”

      Like a job?

      • 0 avatar

        Perhaps. US job growth in 2014 was around 3 million, apparently the highest number since 1999.

      • 0 avatar

        “Like a job?”

        The assurance of keeping a job, the likelihood of pay increases, low increase in competing expenses/obligations, etc.

        Approving a loan is a decision at a single point in time. Repayment of a (car) loan is a process covering several years. The risk of the loan is associated with the probability of future events based on present & past data. Not all subprime borrowers stay subprime. Not all prime borrowers stay prime.

        If economic indicators are pointing to an upward trend, more subprime loans is not as risky as if economic indicators are pointing down or staying flat.

    • 0 avatar

      Sub-prime auto loans themselves could only become a bubble like mortgages did if the purchase price of the car inflated in the same way that home prices did, and this is highly unlikely. People are not going to start speculating on cars by holding multiple NINJA loans in an effort to flip for profit.

      What COULD cause a bubble is if the Wall St greedheads again create exotic derivatives on the pools of auto loans like they did with mortgage pools. Opaque synthetic collateralized debt obligations and credit default swaps were the real cause of the 2008 financial meltdown, not the bad mortgages themselves. It was possible to see how a given mortgage pool would perform, and you could know who held bad assets, but you couldn’t know who had derivative bets on those assets. As a result, no one was willing to invest capital and the markets froze up. Wall St is currently getting Congress to gut Dodd-Frank in an effort to make sure they can still make insane bets that taxpayers will have to back up.

      • 0 avatar

        Agreed on the impact of derivatives. However, I refuse to pin down the 2008 collapse on any one factor. I firmly believe to **** up that badly, all parties involved need to **** up their responsibilities.

  • avatar

    Hey, we wrecked the world economy with property financin,g and got away with it.
    Vehicle financing is, like, 10% of house financing, so maybe we’ll only wreck 10% of the world’s economy. Unless we sell ten times as many cars. Hmmm, get me marketing on the phone!

    All hail unregulated capitalism, as long as we have a healthy head start…

  • avatar

    “…the ABS market is driving a resurgence of subprime.” Please write out unclear acronyms the first time they are seen. All this means to me is “the anti-lock braking systems market is driving a resurgence of subprime” and that doesn’t make any sense.

    “A healthy economy will contain some number of subprime loans. The economy may even be able to adequately support a large number of them–if other factors permit subprime borrowers to pay…”

    Would that be a fair description of the current economy, where wages in all classes except the very top have been stagnant or decreased in real dollars for at least a decade, where savers are forced to accept 0.1% interest rates, where the stock market is in the midst of a bubble that is clearly recognized as such by all reputable authorities – the only question being when it will pop, where housing is in a bubble rapidly approaching 2006 proportions, and the whole mess is propped up by deficit spending on an unprecedented scale?

    • 0 avatar

      And big employers are playing their games too, like Staples and other employers limiting their employees to part-time schedules. Home Depot will be hiring ~80,000 new employees, but my guess would be most of them will be part-time.

      Now O’b*m* is upset because many employers are circumventing his signature health care mandates by limiting employee work hours and hiring fewer full-time employees.

      Businesses have to look out for themselves, their owners and shareholders first. There will always be worker bees. And judging from America’s labor participation rate, more than 4 out of 10 worker bees are choosing not to work.

      • 0 avatar
        S2k Chris

        “Now O’b*m* is upset because many employers are circumventing his signature health care mandates by limiting employee work hours and hiring fewer full-time employees.”

        No matter your thoughts on the issues at hand, it always gives me great joy when the smarty pants politicals are circumvented with basic maneuvering that anyone with a passing knowledge of second order effects can see coming a mile off. It happens so often that I almost wonder if they intentionally turn a blind eye towards that type of thing. IMO, the greatest one of all time was the “fine, you’re going to hike up the CAFE requirements on cars? I’m going to make my trucks more car like and just shuffle people into those!” Gets me every time.

      • 0 avatar


        The company I work for would rather make full time non-salaried employees work 45 or 50 hours, and pay them OT, than work part timers over 30 hours. When I started in a part time poistion 10-15 years ago, I was always excited to work a few extra days to get more cash. Now that doesn’t happen, or part timers are working 4-5 hours a day.

  • avatar

    Well, unlike sub-prime mortgages, in which the reduced likelihood of payment was combined with over-inflated asset prices, these loans appear to be fairly risk-priced.

    Even a brand-new Sub-prime-mobile (i.e. the Avenger) which depreciates rather quickly is still worth plenty, once you take the high sub-prime interest rates into account. There won’t be any waking up and discovering the collateral is worth half as much as planned, as with the housing bust.

    • 0 avatar

      The only question is, what if a large number of people default on their subprime auto loans, thus flooding the market with a bunch of not-very-well maintained, not-very-desirable cars? It seems as if there should be a floor to the value of a running usable car, but in the end it’s only worth what someone will pay for it. If there are a lot of “sub-prime-mobiles” out there, and very few people who want to buy them, the selling price will go down till someone does buy.

      I agree that the overall risk and probable severity is lower than that of the (now resurgent) housing bubble.

  • avatar

    I don’t think this could crash the economy, no matter what happens.

    Compared to houses, cars have mobility, should be easier/cheaper to restore to sellable condition, are easier to sell second-, third-, or fourth-hand, and of course have a much lower price of entry.

    People find ways to survive. They can rent a room or apartment, move in with relatives, whatever. But it is DAMN HARD to depend on somebody else for transportation full time. I think a car will always be more of a necessary evil than a mortgage, so the market will adjust and survive.

  • avatar

    It’s definitely an interesting question whether lending should increase for cars. one hand, our economy could benefit from selling more cars. but on the other hand, americans do seem to have a problem with moderation in their lending habits, which has caused disasters in the past.

  • avatar

    The last financial crisis was not caused by subprime loans. The next one won’t be, either.

    It might help to remember that this subprime meme was started by the banking industry (and was unfortunately reiterated by the Fed) before the crash to provide an explanation for why there would be no financial crisis. (It was just the Negroes, you see…) But of course, that proved to be wrong — the entire financial system was overleveraged and the subprimes were just the canary in the coal mine.

    Car loans alone won’t cause a financial crisis of any depth because they are a smaller part of the economy than housing. The entire banking system is built on mortgages and it is dangerous when bankers start indirectly betting on real estate appreciation by loaning more money against unrealized gains.

    Fortunately, even the most aggressive banker knows better than to bet on your Dodge Avenger gaining in value, which puts a cap on the damage. But the ABS thing does show that the dynamics that caused the last financial crisis — a volatile debt market that can turn on a dime at the first signs of trouble — are still here.

  • avatar
    S2k Chris

    IMO, the people who are really going to get screwed if the used car market tanks are those like BMW that are sitting on a massive population of leased cars that could see their residuals drop and the bottom fall out of their whole business plan. If you lease a $50k car for a $30k car price betting at the end you’ll have a $35k car to make $2k on, and suddenly you have a whole lot of $28k cars you’re $33k into…well…fck.

  • avatar

    Poor Chrysler. Still bottom feeder fodder.

    “We need a picture to put on our ad for these no-credit suckers!”

    “Get a Galant/Sebring/Cirrus/Neon/Spirit/Intrepid!”

    “No they don’t make that any more.”

    “Oh well a Dart then, that’s new, right.”

  • avatar

    As others have said multiple times previous, subprime auto loans are fundamentally different from subprime mortgages.

    • 0 avatar

      Auto loans may be different than mortgages, but subprime is subprime. A low risk loan is based upon both the collateral and the ability of the buyer to repay, and someone with years of good credit history mightly wants to maintain that high FICO score. For subprime auto lenders, there is no longterm credit worthiness, so it
      leaves only the auto, a depreciating asset. It can only be “fixed up and resold” if it is makes economic sense. The flood of recent truck/big SUV sales is partly based upon the gas mileage. When the price of gas “normalizes” (my guess is later this year, due to either oil production or refinery bottlenecks) the value of low mpg vehicles will fall. This will lower the value of these Asset Based Securities. Also the impending rise in interest rates will lower the values of auto ABS. Congrats to auto dealers and Wall Street for passing all the risks of these loans off on sucker retirees. When these loans begin to sour, the sources of new money will decline, raise the interest rates and cut off the funding for subprime auto sales. Enoy the party now. “Pent up demand” notwithstanding, finance $$ determines auto sales volume.

  • avatar

    …Subprime Auto Lending Increase Not A New Bubble…

    And oil is going to go to $100 a barrel by June – just wait and see!


  • avatar
    el scotto

    The simple reality is that some working poor have to take a sub-prime loan because that’s all the financing they can get. Public transportation isn’t feasible for them (below pizza delivery guy and construction laborers who worked where the bus doesn’t go yet) and they tote the note for a usually overpriced ride that they bought so they can get to their job. The crux is will they be able to pay their sub-prime loan on time and eventually pay it off and be smarter when it comes (probably sooner than later) to buy their next hooptie? The pizza delivery guy I was following into my complex last night was driving an Avalon that was so old the paint was faded and peeling. He was delivering damn good pizza. I just think many people like pizza delivery drivers, construction workers, and store clerks are”invisible” to many of the B&B. But still very necessary.

  • avatar

    I’ve dug myself out of the subprime loan hole, it’s not the most fun thing to do in the world to go through all the black marks on your credit report, call them one by one, and stop buying video games, seeing movies, or going to nice restaurants for two years in order to fund debt repayment. But I also don’t have kids so it was easier for me than most.

  • avatar

    So many commentators are focused on avoiding another 2008, oblivious to the fact that history never repeats itself in 7-year cycles.

    Wanna know the future? It’s whatever the greatest number of people are not predicting.

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