The subprime auto-loan boom that has pushed the entire auto industry – manufacturers, dealers, and finance – to all-time record highs is elegantly unraveling with skyrocketing delinquencies and defaults that have reached levels not seen since the Financial Crisis.
Here is my 8-minute interview on the “The Financial Exchange,” at WRKO Boston with hosts Barry Armstrong and Chuck Zodda. (BTW, the good-looking dude below is Barry, and not yours truly.)
The interview was based on my article, It Starts: Subprime Auto Loans Implode (in Your Bond Fund).
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Wolf – Back on the topic of San Francisco, is it not true that there are examples of cities and suburbs all over the country where residential real estate offerings are now clearly marked “for the rich only?” Prosperity, even if limited to a small segment of society, always brings with it growing demand for conveniently located, luxury housing. Even here on the staid East coast, far from the Silicon Valley madness, waterfront areas in Boston and New York which only recently were little more than industrial slums are experiencing runaway growth. As in China, old buildings (and some not so old) are coming down, to be replaced by high rise condos and office towers. As for former residents of the area, they have no choice; they move out and sometimes simply disappear.
Its a global phenomenon. It may not be “fair”, but it is the very essence of what we like to call progress. The alternative is illustrated by Mumbai, India where ridiculous laws forbid the destruction of most old buildings. The upshot: the world’s biggest slum.
My point is that I’m not sure the implications that you draw from calculations of median incomes and home prices in SF are valid. Wealthy new residents appear out of the woodwork to bid against each other as the old neighborhoods disappear. Affordability is no problem for them. And when the flood of flight capital is added to the mix – what price political safety?
It will be interesting to see if and when there is a real, as distinct from the current merely verbal, political response to this financial situation. Free markets are rare these days but this is one survivor. Is it unjustified or unfair as some might say or perhaps a hopeful sign for an economy that could use some hopeful signs?
The problem is that the rich don’t like to buy a median home. A median apartment in SF for $1.1 million is nothing fancy. Small, usually no view, sometimes no parking or only tandem parking which is a royal pain in the butt. The buildings can be smelly and neglected. So it’s not the sort of pad a rich person would want to live in.
I rent from a big corporate renter in Florida. I can see rent control coming a mile away. The rent is up 6% and they plan on raising it every year. Incomes are down including ours.
Where do the immigrants live?
“It may not be “fair”, but it is the very essence of what we like to call progress. The alternative is illustrated by Mumbai, India where ridiculous laws forbid the destruction of most old buildings. The upshot: the world’s biggest slum.”
Progress means change for the better. How does making housing ever less affordable qualify as “better”? And taking your example of Mumbai, if those “ridiculous laws” were revoked, what would happen to those slum dwellers? Something other than homelessness?
OK. But if the median apartment in SF is “smelly and neglected” isn’t it likely to be coming down? That’s what happened to the fish market in NYC a while back…..
Good luck trying to tear down a building in an established older neighborhood in San Francisco. Nearly all the new construction is taking place in a few specific areas.
If you want to redo a typical older building, you have to keep the shell intact and tear out the inside, even the structural parts, and build it from the inside out. They’re doing that. It keeps the character of the neighborhood intact and creates some very nice units. They did a couple of those buildings just a block from where I live so I could watch them on a daily basis as they were doing it. It’s a slow, long, expensive process….
OK – final comment. I think we’re quibbling. I assume the price on the newly renovated house will have the effect of raising, however slightly, the median price of houses in your neighborhood.
I live in a relatively modest 8 room house on 1 1/2 acres in a suburb west of Boston where other houses like mine are routinely bulldozed when they come on the market to make way for 6000 to 12,000 sq ft monstrosities priced in the $4 to $10 mil range. My neighbor, in one such edifice, has asked me to let him know if I ever decide to sell. I think he is concerned about the prospect of having an even bigger McMansion next door.
So the craziness is not just confined to San Francisco.
My property taxes keep increasing and my fixed income keeps dropping, property is confiscated via taxing the owner out of the market. and prudent savers are being repressed, punished while the hot money CDS gamblers are being rewarded.
How are those venture capitalist funded “me too” firms actually profitable?
20% of all car loans are subprime, its not huge. So a car loan goes into NPL status, what is the effect on the market or the lenders? A car is not like a house. 99% of all cars are devaluating the moment they’re purchased. New ones are constantly being built in huge Numbers. Fall out? Some bonds crash, auto stocks go down a little and subprime car buyers have to ride the welfare wagon….bus.
According to Equifax, by the middle of last year, 23.5% of all auto loans being issued at the time were subprime, new and used vehicles. So as I said, it’s not big enough to take down the meagabanks. But when default rates rise, as they’re now, lenders specialized in this might topple, and it will shut down the money pipeline. That will spill over into other auto loans, and the whole auto lending industry will tighten up. That’s the “credit crunch” part of the “credit cycle.”
Suddenly, you’re looking at 1 or 2 million new vehicles a year that cannot be financed, and therefore cannot be sold. And that has a HUGE impact on auto manufacturing, auto sales, auto finance, consumer spending, insurance, state tax revenues, layoffs, write-offs…. It has a nasty negative impact on GDP!
Great explanation of how problems in a focused area — subprime auto loans — cascade into a big problem for the broader auto industry, Wolf.
Auto loan balances reached $1.008 trillion in the third quarter, 2015, according to TransUnion. This means the car loan market is 47% larger than all U.S. credit card debt combined. According to the Federal Reserve Bank of New York, lenders have approved 96.7% of car loan applicants in 2015. In 2013, they only approved 89.7% of loan applicants.
Of the 15 biggest U.S. auto-lending banks, Santander had the largest percentage of delinquent auto loans in the third quarter, according to SNL Financial. Santander’s delinquency rate of 16.7% was followed by Capital One at 6.6%, according to SNL.
I seem to recall that when the automakers have a reduction in sales it has a negative downstream multiplier of about 7x to the ancillary segments of that industry.
I can’t remember the number, and it probably has changed over time, but if this number is anywhere near 7, and even if it’s smaller, it shows just how crucial the US auto industry is to the overall economy.
We live in a society where 80% of the population can not put $500 cash on the table tomorrow morning, if the Internet, credit cards and ATM stop working tonight. But, they can hitch a ride on the Freeway tomorrow to a car dealer and drive away with a brand new car purchased with 100% financing.
The problem is this: If everyone can get auto financing, the auto manufacturers and dealers will demand sticker price for the vehicles. No cash discounts – crappy trade-in values. Why should they cut their prices when every Tom, Dick and Harry can get 100% credit.
The same situation holds for used cars. If anyone can get 100% financing to purchase a used car, based on “asking price”, then the values of used cars are artificially maintained too high.
There are millions of cars and trucks on the highways insured with replace values that will fall, when easy credit stops flowing. How many new and used cars would have never been sold if the buyer had to self-finance a mere 10% of the purchase price with cash.
The Government has created synthetic car consumers, who are not and were never creditworthy. Why not give every person on welfare a brand new car on 100% credit with payments of $50 per month for 50 years without interest. And with a bumper-to-bumper all-bad things-covered 50 year warranty. Is this not socialism. We can do the same thing with toilet paper, food, housing, furniture, healthcare, beer, etc. All consumption ultimately financed by Government with zero down and zero interest in perpetuity. And warrantied forever by Government insurance.
Simply stated, if credit is withdrawn, prices collapse. Collateral values collapse. Consumption collapses. Is this not the definition of deflation. When 100 people line up at a Chevy dealer to buy a new car; and 99 are denied credit and have to walk or hitch-hike home; how many employees will the dealer fire the next day. Where will the dealers put the inventory of unsold cars. One can apply this scenario to the condo and home markets; the yacht markets; etc.
Long ago, a friend of mine – a very high earning medical doctor with a new and two ex-wives to support – drove up to meeting in a brand new BMW 7-Series rig. I said to him – Tom, nice car. He said: “Leased. I always rent what I can never afford to own.”
“if credit is withdrawn, prices collapse”
Study history & this cycle is repeated over & over. The banks open the spigots & extend credit & a boom occurs— banks withdraw credit causing economic contraction “prices collapse”. Then they scoop up said assets for pennies on the dollar & eventually begin a new cycle. Thievery promulgated by their creation of a debt instrument (commonly called money) out of thin air.
Automobiles 99% of the time are not an asset, they are a rapidly depreciating, liability.
Hence they do not get scooped up for pennies, on their true net worth, by banks.
Real banks hate auto loan’s, as stationary autos, are rapidly deteriorating and depreciating, financial cost creating, black holes.
The only reason this subprime auto event has occurred in the US.
Is the stupid law’s that allow rapid securetiseation and sale of new loans in America.
The same people who have made money out of this subprime bubble made money in all the others as well. They are not bank’s..
“The same people who have made money out of this subprime bubble made money in all the others as well. They are not bank’s.”
d – Please clue me in as to whom is making all the money on subprime bubbles & why it isn’t the banks. I’d love to hear your theories.
It believe (hope?) it’s common knowledge that as soon as that shiny new car clears the dealer parking lot it’s imputed value depreciates rapidly losing at a minimum at least 10%. After that, the depreciation rate is dependent on age, condition, & what vehicle it is.
Automobiles are an asset, period. Asset = pretty much anything with an economic value that has a cash equivalent. If they weren’t an asset, an auto manufacturer would have little value. Just because an automobile (equipment/machinery/etc.) depreciates & loses value does not mean they are not an asset. I had many vehicles & pieces of equipment when I was in business. They all were assets & they all had a depreciation rate. I have 2 newer vehicles & 2 old vehicles. The old vehicles (23 & 27 years old) still have value (albeit, not much) but they are still an asset and can still be converted to a cash equivalent.
It’s my opinion that the “subprime auto event” has taken place because the marketplace had run out of people who could qualify for a standard loan (same as the subprime real estate market). To keep the credit creation machine going (aka-banking), standards are dropped & durations are lengthened. It’s just like when they wrote mortgages with 2% rates that ballooned to 6% or 7% in a few years. Mortgagee could barely qualify at the teaser rate (along with falsified incomes) & when the balloon comes, loan goes bad. – Again- no banks involved in the subprime mortgage bubble or all the other bubbles??
Can you tell me where the money came from to finance these autos (or any item)? I think it’s really crucial that people understand fractional reserve banking, the history of money, & how our monetary system works (or doesn’t). Once armed with that knowledge, a person can then understand the game & what has been done & is being done to us & how you can mitigate your personal situation (don’t feed the beast). I was ignorant of these things as a young man, although I instinctively felt something was not right. Eventually I educated myself & now I have a fairly decent grasp of what we call banking & our FRN system. I’d be happy to supply you with some educational links if you desire.
Ally Bank, the former financial arm of GM, now on it’s own, is a bank that finances a lot of vehicles
NMAC-Nissan Motor Acceptance Corp is a bank that finances cars.
Toyota Financial Services- is a bank with $600 million in auto loans on their books.
Santander- a major player in the subprime auto sector is a bank.
I could go on & on with this list. What about NBFC’s (non bank financial companies)? Although they do not take deposits like a traditional bank they are governed by regulations typical of a regular bank. Do you know where they get their funding from?
Yeah, I get that the whole show is being securitized & the bond market is essentially financing this bubble. Who’s underwriting the bonds?
Wells Fargo had almost $30 billion in auto loan originations in 2014. I read somewhere that they are a bank. I’ll check my sources.
I’m sorry d, but at the end of the day, all the evidence I see tells me that the NBFC’s funding/bond issuance-underwriting/& loans stem directly from the big banks.
Americans may foolishly call these places “Banks”.
” Ally Bank, the former financial arm of GM, now on it’s own, is a bank that finances a lot of vehicles
NMAC-Nissan Motor Acceptance Corp is a bank that finances cars.
Toyota Financial Services- is a bank with $600 million in auto loans on their books.”
They are not Bank’s. They are Auto finance company’s.
“It believe (hope?) it’s common knowledge that as soon as that shiny new car clears the dealer parking lot it’s imputed value depreciates rapidly losing at a minimum at least 10%. After that, the depreciation rate is dependent on age, condition, & what vehicle it is. ”
Its called “tarmac devaluation”, and its a least 20%.
Test this any time, buy a brand new car, drive of then lot, then drive back in and see what they will pay for it.
Same as a new build house, is not worth anywhere near its initial sale price. Unless you are in a growing bubble market.
From an accounting point of view, a car, is a depreciating asset.
The reality is that it is a depreciating liability, Annual taxes and fees add up to way more than its value in its normal economic life, then there is storage Etc Etc. Car’s are liability’s, ask anybody in Manhattan. (Apart from a taxi driver)
You are to deeply committed to blaming banks. And the finance entity’s you call banks, to figure out that it was not Banks, that made the money from sub prime, House or Auto.
You dont see cars as anything but assets.
You dont think laterally enough to have the conversation.
The American way is the only way.
When Americans were told, stop doing this (this being what became sub prime) they told us very rudely, to go away, as they knew what they were doing. So we had to sit back and watch the sub prime train-wreck blow up and Implode over 12 years from 96 when we first blew the whistle on it.
We also said, if they elect Baby bush, they are going to war, (before he even got the nomination). After O bummer stole (Had brought for him) the nomination. We said, the Main-street American economy will go sideways, until he is gone.
You are to close to the wall, to see what is written on it. In letters 10 feet tall.
Unless you are an Accountant, or a Tax gatherer, a car is depreciating liability.
Think about it.
You have decided that banks aren’t really banks so nothing I can help you with there. You might want to check the list of FDIC banking institutions though. Also, not all the BANKS I mentioned are American banks.
I acknowledged that vehicles are depreciating assets. Of course there are liabilities associated with them. I have owned & driven vehicles for 45 years so I’m quite familiar with all aspects of ownership. I have a secret to tell you, though you must promise not to tell anybody. You can actually derive income on a long term basis from a vehicle. I did (for 2 decades), & no it wasn’t a taxi.
Do you own a home? Regardless of the answer, is a home an asset? If it is an asset (I’m a bit close to the wall but I think there is some sort of industry built around this housing thing) are there costs/liabilities associated with a home ?
Not sure why you chose to put words in my mouth (actually I think I know why). American way is the only way?? Where was that mentioned ? Don’t see cars as ANYTHING but assets ?? Never said that. I’m too committed to blaming banks & I can’t think laterally. I am too close to the wall to see what is written on it in 10 foot letters. Gotta make it personal instead of answering any questions.This is a public forum so out of respect for that & Wolf I’m using every ounce of restraint I can muster. Please reread my post & give tour cognitive abilities a little workout.
Perhaps you do not own or need to own a vehicle. If that’s the case, bravo for you. I’m not that fortunate (never have been). If I could ride a bike or walk everywhere that would be sweet. However, I don’t live in the city & hopefully never will so I will most likely need a vehicle for the duration. A price to pay for the lifestyle I’ve chosen.
In the next few years I am planning another vehicle purchase. I know you can’t understand this, but this vehicle will pay for itself & all liabilities associated with it MANY,MANY,MANY times over. Try to wrap your head around the concept.
If you can give me a clear concise answer to the following questions we might be able to have a conversation. So far you have failed to answer my questions! If you can’t, I won’t waste another second responding.
1. Who is making the money off the auto loans? Please give a detailed list
2. Where do the ‘auto finance companies’ get their money from? Details
3. How does money come into existence?
4. Who is underwriting the bonds for the securitization of subprime auto loans?
I’ll leave you a link to one of my favorite AMERICAN comedians, Ron White.
I’ll try to answer a few of your questions:
— Who makes money on auto loan subprime:
1. The dealer gets paid on the spread between their buy rate and the interest rate they get the customer to agree to. For for example, if a subprime lender has a buy rate of 6%, and if the dealer gets the customer to agree to a 11% loan on a $20,000 vehicle, the dealer gets a lump-sum payment representing his cut of the 5% spread between those two rates. When the customer pays off the loan early of defaults, the dealer gets charged back a pro-rated portion of it.
2. Subprime lender is making money on the loan, earning 6% interest. The lender can also sell the loan at a discount and thus make a smaller amount of income but in a lump-sum. This sale is usually a securitization. ===>This also answers your question #2.
3. The underwriter (such as Citibank) of these asset backed securities makes money in fees. ===>This also answers your question #4.
4. The ultimate owner of those ABS securities (which are like bonds) makes money by getting coupon payments and perhaps being able to sell the securities at a higher price.
When the loans get paid off early, or when they default, numbers 1,2, and 4 have to take the losses. Number 3 got paid a fee and gets to keep it.
Wolf, thanks for a very nice explanation of the process.
IMO, the answer to question #3, is they key to understanding the system we are forced to operate under as everything else grows from that root & is fertilized by the general greed of man. I’ll leave it go at that because it is almost a separate topic, but I would encourage readers that don’t know the answer to take the time to seek the answer for themselves.
Deny and blame the “Banks” all you ever do.
An institution that makes it majority income, from financing purchase’s, is not a Common Bank, it is a finance Company/House.
Or if you are English, a “Merchant Bank”.
Even if it is listed as a “Bank” by the fraud promoting, heads finance company’s win, tail taxpayer looses, FDIC.
You cant figure out whom it was that made the money with no risk from Housing and Auto sub prime.
Then you just keep blaming “Bank’s’ and continue being part of the American financial problem.
That is correct your 1 the dealer, and 3 the broker, always make money. no matte if it defaults
The Real Estate Salesperson, also always makes money, and when a loan falls, over still keep all of their commission.
The finance broker to the House buyer, has similar deal to the car dealer on commission.
The builder of new over priced houses, Just like the auto company keeps all his profit.
When the Subprime finance deal, his Real Estate Salesperson and finance broker buddies, put together, Defaults. Frequently (regularly in many cases) the three of them Knew the deal would later default, before it was signed.
And TAXES, Local, State, and Federal TAXES, every step of the way. The government TAXES a piece.
The above is where the money is made, not by the banks.
The originator banks simply facilitate this process, as in America they have an out. A legal risk transfer mechanism.
They can Securitise the loans, take a smaller profit cut, and transfer all the risk to somebody’s pension fund.
In America, all of this is legal, and facilitated by the Securitisation process.
Country’s that dont have this loan securitisation system, dont have these huge bubbles, and problems caused by it.
Every time American sub prime sneezes, the world catches a big cold.
In a globalised financial system. It is way past time. America changed the way it reliquidititiseses, banks and financial institutions, against their long term finance agreements. So that 100% of the risk, stays with the loan originating institution.
This will eliminate players in the Barney Frank, Keynesian gravy train, so will probably not happen. until there is a really big American financial implosion.
Compared to everybody else in this flawed system, the amount made by banks, is infantisimle yet “Bank’s” and “Wall Street”, always get the blame.
Instead of the stupid law’s, and regulations, that allow it to keep on Happening. Again, and again, and again.
Paul Warburg was brilliant.
As were the goldsmiths in the 1600’s. :)
Ill-gotten gains, bait and switch schemes…. Yeah, this isn’t a problem.