What’s Causing the Subprime Auto-Loan Fiasco?
Serious auto-loan delinquencies are now on par with Q2 2009 when millions of people had lost their jobs and when the economy was in free-fall. But today unemployment is low and the economy appears to be humming. What gives? (13 minutes)
But then there’s the “average transaction price.” Read… Reverse Sticker Shock? No Inflation for New Vehicles for 22 Years, Says Consumer Price Index, as Taurus Prices Soared 55%
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
These weekly reports are very much appreciated. One certainly does not get the real scoop on MSNBC ! I believe this “recovery” was contrived by insane monetary policy. Many seem to be convinced that risk is out of style for good. But, the real problems of 2008-09 have simply been covered up by said monetary policy. This is all one big Potemkin Village…a Hollywood movie set. So, when the powers that be can no longer hold off the next economic down cycle, we start at the following levels:
1. Ever increasing and insane Federal debt levels – non to mention unfunded liabilities.
2. Record state debt, sinking pension funds, etc. (much of the pension problems brought on by prolonged low interest rate environment).
3. Record student loan debt (many now in default- during “good time”).
4. Record auto debt (many in default – in again, the “good times”).
5. Very high – even if not record high consumer/credit card debt (don’t know the delinquency rate here).
6. Very low interest rates (therefore rate cutting ability by FED in future).
7. The rush to automation (more and more workers will be displaced).
…but what could possibly go wrong ??? Or, am I just being “negative” ???
Take care all !!!
What percentage of the ABS derivatives are composed of subprime auto loans? No one knows. The derivative sphere is to opaque. Hidden from view, even from financial regulators.
Anybody but me remember when school kids walked to school , and only drove if they had to go to a job? Remember when a kids car was a rusty junker? Drive by a high school today, ask yourself where is the money coming from/?
I remember. The best rusty junker my friends and I rode around in was a 15 year old 1953 Ford, 3 on the column. Inline six that ran on only 5 cylinders. Of course we didn’t attract many women riding in his car.
Mine was a 1936 Chevrolet “Standard Model”, in 1949.
3 on the floor and a backup hand crank for starting.
Tires were natural rubber and not very durable. I traded for wheels with tires mounted at the local junkyard.
I remember when a friend of mine managed to crash his rust bucket BMW so badly it was totalled but the engine did survive.
Then a wild bunch ( me and some friends ) scraped together the needed money and we did buy another rust bucket, an old Moskvitch. The thing was that the engine in that particular model was a copy of BMW’s four cylinder, thus all bolts, axles etc did fit as such and we threw that BMW engine into it.
We did drive ( read abuse ) it for one summer, terrible car, but fun indeed to show your taillights on the Moskvitch to Mercedeces etc :) The thing was that a Moskvitch was about the last car you would expect to accelerate like a greased flash …
Come first snow, we sold the car for scrap, about anything that was supposed to move was busted due to the powerful engine which was far too hot for the rest of the car, but boy, did things happen when you floored the pedal :) Gearbox, brakes, you name it, everything was busted after that summer.
One of my favorite stories….That all changed after WW2. I remember the ads in “Look”, “Sat. Eve Post”, etc….coming out with auto ads that showed the “father” of the typical family…handing the keys to a new car (pent up demand added) to the “eldest son” dressed in his hi-school grad tux……representing the idea that not only do the mom and dad have a car but now it’s time that others in the family have one also….using then the vehicle of graduating from hi-school. The business community as a whole realized that it wasn’t really enough to target “whole families” as a unit but each individual of that family, including the family dog. Of course then we get into the destruction of the public transportation system by the major auto/energy corporations thru their political hacks and we have a slam dunk for them. I too, when passing any hi-school react in revulsion at all that “iron” sitting there uselessly. We are in a different world now. We have pretty much capitulated to the “business world” and are succoring off all the propaganda in advertising that is shoveled each minute, hour, day….etc. We will pay dearly for not opposing such crippling of our physical and mental beings. We have sold our society for less than “…thirty pieces of silver”! Too many are now “feudal debt slaves”….another kind of slavery ruled by enormous greedy oligarchs.
93 KB, bench, no tailgate. Remember doing 90 down the highway during a storm, the speed created a vacuum behind the cab so the rest of the crew in the box stayed dry.
The solution is obvious:
The Fed should stop buying so many stocks and use some of that money to also buy auto loans.
If you think the Fed is not buying stocks, show me the Fed audit that supports your opinion.
If the Fed is buying stocks they are going to jail, for violating a congressional directive. Of course if its really Treasury doing the buying, that’s another story. The line outside the courtroom waiting for a preliminary hearing is around the building. We process asylum seekers faster.
@timbers-
>The Fed should stop buying so many stocks and use some
>of that money to also buy auto loans.
The automobile industry is incredibly vast when you account for all of the parts suppliers, tires, financing, oil companies, etc., which collectively are too big to fail.
When I was shopping at Carmax, the sticker shows three different monthly payments: excellent credit (~ 3% APR), good credit (~ 10%), and poor credit (~25%). The sales rep said that the biggest PITA customers were the excellent credit that wanted a much lower rate “offered at their credit union.” Apparently, the people who have to pay 25% generally don’t say a word, because they’re afraid the sales contract would get rescinded…
With an interest rate of 25%, the loan is guaranteed to default, unless the customer can quickly (within days) refinance it at a reasonable rate.
25% is insane!
25k over 60 most
3% = $450/mo
25% = $750/mo
Have to admit I’ve seen payments that high on those loan balances
Wolf:
I have sold cars also. The high default rate in a good economy does not seem to be a mystery to me. Consider that autos have tended to become much less of a status symbol and much more of just a “ride” for those who are challenged by the financing. At the same time, the quality or the relative value of the “ride” that a credit challenged person can buy for cash has increased at a rate much greater than the rate of increase of the “average transaction price”.
When I was young, there were no mobile phones to spend money on. There were hardly any young or old men suffering from Low T. Most wanted a convertible or a El Camio with wide tires and a 454 under the hood and saved their money to command the status afforded by same. Now when faced with a choice between having a smart phone disconnected OR their high interest rate car loan hauled away, they will keep the phone and the save the cash from three payments and go get a car without any interest payment. It is amazing how well an older car will get you there.
What does this mean? Just look at the top lines for the companies that try to manufacture the same quantity of machines (each year) that continue to improve in quality and go farther and farther and farther. Even if they quit going farther, when they stop, now there are soo many of them that the economical aftermarket parts make them go and go again. If you do not hear what I am saying, just look at the top lines (last 10 years) for companies such as CAT, DEERE, CASE-IH, PACCAR + NAVISTAR, (Paccar gained from Navistar, but the sum did not increase over time) GM, Ford, FIAT, and on and on.
The dark side of “supply side economics” is that supply drives down selling price. I.E. Excess supply of money creates excess supply of industrial credit, leading to excess supply of productive capacity, (watch the trucking recession coming) which creates excess supply of product, which gives consumers a choice between a ride for cash or a ride held with an excess supply of sub-prime credit.
A 3% annual growth rate has been accomplished by “pushing forward” demand. What is the encore?? Can they lower short term interest or mortgage rates by 2 or 3$ again?? Is there another tax cut going into effect any time soon? Is there a greater stimulus expected in the next federal budget? With an unemployment rate now around 4% or less, is there room for organic job growth??? How is this going to get better??
The subprime auto delinquency rate is the sign that the canaries in the coal mine are getting light headed.
I always have a credit union loan set up before I go car shopping. Negotiate on price and then when financing comes up, no way. The finance office is where the dealership makes the money. Since I have all the credit agencies locked down they can even pull a decent report on me.
That most likely explains why you are reading and commenting on WS, Lance. Imagine, critical thinking and a reasoned stepped plan for making one of life’s most expensive purchases.
I know a couple who drove down Island for some outing or other, saw a truck on a dealer’s lot, traded in for it….buying the new F 150 on the spot. Had to stay over night for the paper to clear. All done/financed on time of course.
Polar opposites.
On the Carmax website, you can search cars by monthly payment!
Just checked my credit union in Portland, OR and for new cars with top credit they offer a rate of 2.09%. When credit is poor, rates go up dramatically. Also, let’s not forget that the more expensive the car, the higher the insurance (goes up dramatically) and the higher the maintenance/repairs. So, the car payment is just the beginning.
yeah, we were told at when we purchased our new Honda that it now costs a minimum of $80 to change the oil. That was in Medford Oregon.. Could be even higher in the big cities.. $80 is a lot if you are not making a lot of money.
The Fed/Gov has screwed everyone but big money & Wall Street.
Pensions hosed by low rates.
Retirees hosed by low rates.
Bond investors seeking safety screwed by low rates.
Workers screwed by lack of wage pricing pressure.
Inflation figures a continual lie.
Banks and banksters “too big to jail”.
And on and on…
So the Fed thinks they’re going to wash-rinse-repeat for another cycle?
I don’t think they’ll get away with it, personally.
=>I don’t think they’ll get away with it, personally.
Bravely spoken. What else ya got?
Your overlords (and overladies) control the global economy and the world’s governments. Unless you have a handy way of deprogramming several billion brainwashed dupes, most of whom have learned to love their chains, I’m afraid you’re going to find yourself hopelessly outclassed and are just going to have to accept the world’s descent into a terminally unpleasant corporate dystopia.
That’s the bad news. The good news is that it won’t be permanent, because, you see, the other bad news is that in their pursuit of global political and financial domination your overlords (and overladies) have also guaranteed the world will become uninhabitable in short order. And that, as they say, will be that.
I may have mentioned this in passing in earlier comments.
@ Dano,
“Workers screwed by lack of wage pricing pressure.”
Much of this pressure pushing down wages is the federal income tax on wages, salaries, and tips. This tax is collected on line 7 of the IRS 1040 form.
If we want to be free, we must delete line 7 from the IRS 1040 income tax form.
thanks for this easy to understand summary of the ‘sub-prime’ auto loans situation. I’ve been hearing alarms about it for over 2 years, so it was good to hear a sober analysis of it…and in layman’s terms.
Everyone is piling on the Fed/Gov but try looking at the real culprits and that’s the biggest banks who have a revolving door in picking who runs the Fed. and who have captured the regulators. Credit card rates are, on average, 19% for new card holder and 14% for those with an established card and this off of nearly free money that the Fed lent to the banks which are in effect running the Fed as their own personal piggy bank. We are now Rentier Nation where financial instruments are worth more that the things we actually make. The Federal Reserve didn’t create this in a vacuum when Government Goldman got to bully a willing Congress into bailing out banks and their bond holders while the real economy was left to wither. Money was cheap, for those with connections, because those with connections were running the printing presses. I don’t know when this will collapse, if I did I’d be rich and I’m not, but clearly this whole charade is falling apart. Trinacria is absolutely right and probably worse than he/she listed. 11% of Student debt is in arrears. Subprime auto loans are tanking. The PIIGS of Europe are close to not being able to pay their debts and no slight-of-hand bookkeeping will gloss that over. Ireland, Latvia, Greece have lost about 10% of their people to immigration to escape a debt burden that can’t be paid. Others are immigrating too but I don’t have their numbers. All of this and we are not in a recession. Clinton screwed us. Bush screwed us. Obama screwed us. Trump is finishing us off.. We can argue left/right or Dem/GOP but this is systemic and build into the system and we had nothing to say about it. We tried in 2008 when the people demanded the banks take the hit for their corruption but Pelosi, Schumer, Paulsen, etc etc painted a picture of the coming depression and the collapse of capitalism itself and then doubled down on the very things that created the fiasco in the first place.
“We are now Rentier Nation where financial instruments are worth more that the things we actually make.”
This is the essence of it. The debt is the actual product, to be created and even resold for further profit. Tangible goods are just a collateral necessary for catalysing the debt creation, which then grows under its own power.
The problem is that the debt growth has an exponential character, far outpacing the linear (and flattening) supply of able borrowers. We are at a point of saturation.
“…worth more…”
No, fiat money priced higher; “worth” is increasingly undiscoverable as traditional markets are compromised.
“Rentier Nation”- yes one can access the volume of paper trades for products produced and the paper is many multiplies higher than the products and the trade involved with them.
There is an obvious solution to all this: raising wages to where they should be, making up for lost gains to labour over the last three-four decades. That’s why people can’t afford the stuff they are producing. Wages need to go up something like 30% and benefits too. It would have to come out of corporate profits on the short term, but the spending power would plow right back into the economy and also generate some profits.
You’re right which the reason for the “fight for $15” but as soon as wages start to rise in any meaningful way the Fed raises rates because rising wages are inflationary but they had no problem slowing down the recent rise in rates when Wall Street howled. Rising profits are to be celebrated but rising wages are not.
You say “solution” as if this were a problem that is to be solved. When will people understand that perpetual unpayable debt is now the norm, and it is the agenda of the ruling class. They never abolished slavery, they just perfected it and made it all inclusive.
When in doubt, start a fight with someone to distract the plebs enough, and make correlating the cause of the economic misery with anything an impossibility.
So many people want to own stuff they can’t afford, and the dealer is of course ready to provide.
This is only the tip of the world auto industry’s self-created woes, with the massive malinvestments and overproduction not far under the surface.
=>What gives?
Millions of people have been suckered into believing that crushing debt will make them happy. It’s one of several myths which maintains the subjugation of the general population.
I blame marketing. Bernays may have been evil but he certainly knew what he was doing.
Loan sharking should never have been legalised, but the loan sharks insisted because they wanted to rule a world populated by debt peons.
Seems like all these factors world wide are just sitting, waiting for the first domino to fall…
Thanks Wolfe for another great report.
The recession never ended for the average Joe, and that includes most of the middle class this time round.
Job security continues to decline for everyone, which is a huge factor for major purchases like homes and autos.
A second major problem is the much more expensive unreliability associated with autos in the last 10 years. There are many more problems with modern used autos which can’t be fixed cheaply by the average mechanic; whole expensive modules need replacement. This means many more buyers decide to go for a new car with a warranty.
The real driver however is the big banks using loans to sub-prime lenders to dodge apparent accountability for the exact same bad practices that caused the last financial crisis. No way have they done due diligence on those loans; they know very well that bad practices are being perpetrated by the sub-prime lenders they are lending to. This is a direct consequence of them not being subject to any moral hazard last time around.
We always want to blame “others” for our problems, and to some degree this is true. What what about personal responsibility though? – The citizen has responsibility to not purchase things they cannot afford. Not to accept unreasonable debt levels. To work hard and save. Sadly, these qualities are rare today
The problem, Morty, is many people simply aren’t earning enough to qualify for a decent loan rate but must have a car to get them to that job that doesn’t pay enough. They are working hard, I doubt if any modern nation has a workforce that out works the average American. It’s clearly impossible to save if a meager paycheck can barely cover the usurious rates being charged so they can get a car to get them to crappy job. It’s not just car loans because once you’re identified as the underclass your loan rates for everything are raised to a usurious levels. Think 19% for a new credit card holder is bad then try 25% for those with a good credit history but considered a low earner. It is a treadmill that is difficult to get off and we are not in a recession, yet.
Makes me wonder if this isn’t the real story in the Amazon NYC blowup. Those jobs were “supposed” to have six figure average salary, which would have provided benefits in excess of the subsidies. However once the building is up, corporate can do anything they want. Working for $15 an hour in Queens?
Amazon does pay it’s talent in 6 figures, it’s all the periphery jobs that gets the shaft like Amazon paying below average for warehouse jobs in the Seattle area. Seattle isn’t NYC so Amazon’s impact is greater here than it would be in NYC.. 750,000 people vs 8 million but for a number of years now Seattle has led the nation in the numbers of high-risers by a wide margin and almost all of it aimed at those high paying wage earners. Try $54,000 a year, $4500 per month, for a luxury one bedroom. Thousands of people have been forced to move out of the city. They found little relief because the new light rail/subway has been pushed out of the city into the suburbs and following in it’s wake are the very same expensive high-risers that the working class fled because they couldn’t pay the rent. It looks like a classic case of overbuilding and maybe very excessive overbuilding. Wolf has covered Seattle in more detail than I ever could..
I have spent most of the last 20 years in Thailand. In the last election, a populist platform won which included a promise of a 60% increase in the minimum wage. Sure enough, the minimum wage, which most people make here, increased 60%!
Within 6 months, the price of most foods had doubled, and most everything else risen dramatically.
Nobody says they are better off today than before.
Nobody!
“People don’t turn down money! It’s what separates us from the animals.”
– Seinfeld
It’s not just about “personal responsibility”, because in a competitive society you’re competing against others who will borrow to the gills. I’d like to be able to buy an average house without extreme debt, but prices are bid into the stratosphere by the many people who are eager to borrow to the maximum their bank will give them. Other peoples’ borrowing pushes everyone else into the same behavior.
It maybe prudent to be keeping an eye on CACC credit acceptance Corp. It’s the canary . When it ‘s chart starts to look like it’s being distributed…..like now …it’s in the process of making the long term doubl top on negative divergences. The saying goes. First top smart money. Second top dumb money. Looks like the dumb money is the FOMO now
Break out the popcorn in a few weeks or months
Around that time Christmas bottom was reached ex-girlfriend called asking how to buy call options.
Ditto to what Morty said, but I would like to add on a question. Why are so many people unhappy? Okay, marketing has convinced them if they only bought this or that ________then they would be complete human beings, but why do people carry around such a void to begin with? The people buying new cars aren’t really wanting anything of substance, so why for them is a bloody car more than a ride? Are they just that gullible or are they just full of need? Or both?
With this question I am excluding those, who for them cars are a passion; rebuilders, buffs, collectors, etc. Many of those folks are artists, technically brilliant using cars as a medium.
I submit this lack, or void people carry around with them is the foundation of our collective indebtedness and the drive to rape and pillage the World of all resources in mindless growth at the expense (‘scuse the pun) of everything. Speed up the treadmill for an additional 7 years (of your life) to buy a depreciating asset you have to pay to keep operating! Nuts.
I actually read an automotive dealership mag the other day. It was a little old, but very well written and interesting. They explained some surveys and compared them to the crunched numbers done by auto professionals. Question: What is the biggest expense of owning and operating a new vehicle? The answer, which only 2% of the surveyed population ‘got’, was depreciation. Apparently, after 1 year the average depreciation of a Canadian purchased car was 35%!!!! Finance, gas, insurance, maintenance, were all backseat to depreciation.
Carfax cited 20% after 1 year on a $40,000 car, but the dealership mag, (the people who take trade-ins), say 35%. Hel, it’s not like people pay finance charges on a sliding downward scale. If you add in depreciation the finance rate seems to jump up in an inverse relationship. At least to me it does.
My house and land, on the other hand, has always appreciated even taking into account inflation. That is why we drive used vehicles, and have done so for the last 40 years.
My comment did not include the purchasing group who absoutely need a car to get to work. However, they don’t need a new car or an expensive one, do they?
There is a repossession impound yard near me that is stuffed with clunkers that poor people bought with subprime money only have it break down and they are too poor to make the repairs and too poor to make they payments on something that is now useless. I stopped one day when I saw a tow truck driver dropping off another rolling disaster and chatted him up on where are these wrecks coming from. The basic gist was from poor working folks strapped with high rates on cars that should have sold for much less but those folks couldn’t qualify. Few of these cars will be scrapped because the dealers will repair what’s needed and sell them to the next victim a car that is, in essence, nothing more than a payday loaner.
To spin these numbers; cash has gained investment value, stocks return 10%YOY, (always) and low(er) interest car loan is the smart financial decision. Consumers may also be putting money aside, lose the car, but pay the rent, and buy the groceries. Taking out a subprime car loan is like doubling down for the rent money. There is also a ripple effect from the shutdown, contractors are still without pay. (When the state of emergency fails it may be back tot he shutdown) As Wolf says the numbers are good, while consumer sentiment is not, and you don’t want to buy a used car if you can’t handle unexpected repair bills. Better to ding your credit score a bit and take the bus to work.
Where are these mythological vehicles to be found? I refer to the myth of the low cost, low mileage, high quality used car. Do they exist outside of an oldster’s imagination? Throughout my adult life I’ve listened to (and given rides to) people crying the blues about their unreliable used cars needing expensive repairs. Me, I bought a cheap new car (Kia Rio) that came with a warranty and roadside assistance. That car never let me down and lasted 10 years. I consider buying a used car to be false economy.
I get low cost, medium quality, high mileage used vehicles from a local small time garage and dealer. The vehicles last 4-5 years (maritime climate) and work reliably for that time. He only sells things he can fix and don’t break down much. He has a small, very loyal clientele. Cost of vehicle ownership is $2,000 pa, about $1,500 depreciation and $500 repairs. The big bonus is that all failures have still allowed me to drive the vehicle to him, I’ve never needed a tow. I’m on my fourth vehicle from him.
This is the business model the government is trying to destroy with ever more complex regulatory requirements.
I buy them all the time for myself, friends, and family. Before you can determine what a “high quality” used car is, you must have a fundamental knowledge of cars most people do not possess. Then you have to be willing to drive something that is probably not close to what you would really like to be seen driving. The majority of the money most people spend on cars is not to have reliable transportation, it is to have something that reinforces their ego. The most expensive thing you will ever support is your own ego.
I am a new and used car salesman in Michigan. I am in my 15th year and sell about 285-295 cars per year so I figured I would chime in.
I would say we don’t do a ton of business with the subprime lenders directly, but we have piles of subprime credit. Garbage credit is increasing in my theoretically “safe” consumer’s (middle class, two working parents, two kids, full time employment,etc etc).
Basically people just are maxing themselves out on bull%*”+ that they can’t afford. The car loans typically are not the problem area, but when you’re a 580 FICO you’re going to feel the pain in your next car deal.
The subprime lender CAC that we use rarely, they have actually very strict underwriting. It’s very difficult to get a deal done with them. But they clean up profit wise when the customer can actually come up with the money down and get the approval for the right car. The dealer doesn’t make what you would think on the deals because of the bank fees, which I think are illegal, shocker.
I would say my captive financing arm has the crappiest underwriting skills. I’ve seen them turn down a 700 FICO and then auto approval on a 580 the same day.
Credit unions usually are my bread and butter for getting a loan approval because we get a lot of relationship buys from the analyst.
I’m not sure where we stand on the scheme of things because we are so large, so it’s possible I’m not seeing the subprime dumpster fires like some of these banks.
I will say this though, I feel that the big 3 and probably the foreign ones as well, are just not hiring the quality workers they used to. I’ve dealt with more recalls and shoddy workmanship in two years than my whole career. It’s terrible.
So that is where the pain will come from on the supposedly “safe” side of the credit spectrum.
Maxed out keeping up with the Joneses, slow down in sales from recalls and just plain stupidity on the corporate side, which leads to more turmoil, job losses and more garbage credit, which then continues ad infinitum.
@ACO-
>I will say this though, I feel that the big 3 and probably the
>foreign ones as well, are just not hiring the quality workers
>they used to. I’ve dealt with more recalls and shoddy
>workmanship in two years than my whole career. It’s terrible.
Thanks for the insight!
Mexico among others. Just ask VW, GM etc. Rush to market due to high cost to bring the car to market to begin with. Cheap labor allows for that as a hedge. They will factor in the recalls over time as cost of doing business.
Or the horrors of Money Morning or Agora. I don’t understand how David Stockman and Harry Dent and Jim Rickards can use Agora.
What about WordPress or Disqus? I have no idea how the econmic proposition is there, but for me it would be nice to get email notifications of replies so that I know if Wolf or anyone noticed that I exist.
With all that’s going on all the time I don’t go back and look for replies. Steve Keen uses Patreon, but I saw a title indicating that Patreon ain’t goin’ so good. Maybe the people I mentioned above aren’t happy with or out of Agora, and maybe some brainmeldstorming can be useful?
I fear the subprime auto loan mess is precursor to a much larger debacle – mortgage loans.
Anyone who buys a car they can’t afford surely likely buy a house they can’t afford. Are the loan writing standards for housing any stricter than for autos? Last I checked, they don’t allow 3% down on auto loans. Also, the auto loans are not subsidized by a government guarantee.
Are the people delinquent on car loans also staring at a mortgage they can’t afford? I guess we’ll find out.