What the Subprime Auto-Loan Fiasco Means.

Auto-loan defaults have reached the sky-high rates of the Financial Crisis but are transpiring in the strongest labor market in years. This raises some big issues. (9 minutes)

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  50 comments for “THE WOLF STREET REPORT

  1. Julie says:

    Problem is cars have become to expensive to own and maintain. Also, the subprime borrower has been given too much liquidity. The now have greater access to credit cards, personal loans and home loans given the excess liquidity in the market.

    If this is a real crisis, you should be able to see other loan categories deteriorate. Hard to get the data.

    • There is a moment when the cost of the product becomes less than the cost of operating or using the product. At that point they start giving the product away. Homes by example were being given away in 2008. The rise of the McMansion sent maintenance costs too high. Since then the trend in housing is toward condos (with HOAs) which is just a way to bundle. Loan categories will not deteriorate as long as they can bundle insurance costs into the mortgage. I am not at all sure why auto loan sellers are not bundling default insurance into the package, or at the accountant level buying derivatives written on consumer loan indexes. (maybe they are?)

      • Harrold says:

        I think Cadillac and Volvo tried that with their ‘cars as a service’ a few years ago.

        I think the in ability to discern insurance risk was an issue.

    • alex in san jose AKA digital Detroit says:

      When and where I grew up, it was rare to have a car in high school, and even a lot of teachers car-pooled or took the bus.

      When you got a car, it was old and cheap, and you knew or learned how to repair it.

      I myself didn’t have a car until I was turning 30.

      • sierra7 says:

        Alex in JS:
        One of my fav subjects…..It all changed in the early years after WW2. Old mags show the ads where (suddenly) more than the “Dad” was advert targeted to own a car (or a whole family); Old “Look” and “Colliers” mags then started to show the young high school grad getting the keys to a new car when graduating…..The business/advert world woke up to the idea that a family of two parents, two children, and a dog added up to 5 separate markets instead of 1 (whole family). And the rest is history.

  2. Alberta Davidson says:

    Good Reporting Wolf,

    Anecdotally, our neighbor (lumber mill, big machine operator) co-signed a $30,000 vehicle loan for his 19 yo, part-time barista, daughter.

    (To her credit, she had saved $5,000 for the down payment).

    Multiply this scenario many thousands times over, and this is your reporting real time.

    Not a lick of sense. If course, I drove a Ford Pinto when I was her age, but hey, I only paid $300 cash for it ;-)

    • Paulo says:

      Chuckled when I read that. When my son was 16 we went ‘halfers’ on an old beat up Nissan PU. One day the RCMP showed up at the house because he had done a ‘lawn job’ with it and was reported. The for sale sign went up the same day and the truck was gone the next. My daughter leaned to drive in my $700 Toyota and got the 15 year old Sprint when she was at Uni and working part-time. We drove that Toyota for years and I finally sold it for the same price I bought it for. My son and I even did a Yukon trip in it. :-)

      They both now own houses. The lessons stuck. Bling Wheels or get ahead….pick your choice. (Pintos were much much better than they were rated for. We had one for at least 10 years. It was a great little family wagon).

      • Off The Street says:

        Used Ford Ranger pickups are variations on that theme, with an added benefit. They don’t have a rear seat and so there are fewer passenger distractions for a teen driver. Combine that with cheap acquisition and operating costs. As young people said of whatever car they had in a prior era “It rolls, doesn’t it?”

        • Johnny Boatright says:

          This is 100% a cultural issue. A recent commercial speaking to the millenials states that, “your parents paid for their college waiting tables…” WTF?!?!

          No, we didnt. We still have loans for it even though we stretched it out over two to three times the 4 years it’s supposed to take. We struggled to pay bills. We ate beanie weenie. We drove busted cars that I wrenched on because the “stealership” cost too much money. Our first house was a “fixer-upper” that was good enough because it kept us dry and warm. We didn’t take frivolous classes in college because they cost money that we didn’t have. We entertained, but cast aside, road to nowhere degrees because we had to earn a living AND pay our college debt when we graduated. There had to be an acceptable return on our investment.

          To bring this back around, my first high school vehicle was a $50 1978 Monte Carlo. None of the dash indicators, or AC, worked and the power windows only worked when it was raining and then failed when it was hot and sunny. I sold it and bought a 1984 Ford Ranger that needed an engine. Dad and I swapped it out in his one car garage. His 1978 Pinto watched all of this from the driveway between 1992-1994. Today, my wife and I make a combined $150k+ and I drive a 2006 model vehicle that I maintain. I, like my parents, will only allow for one car to have a loan at a tim between me and my wife. She gets always gets the new one. Still, when we purchase one, we’re not buying one that would cause us stress if a kid opens a door into in a parking lot. F the Jones’s.

          Kids (PEOPLE) would rather look good and struggle through life than look bad and be able to enjoy it. Good and bad in this case is a social based construct of diminishing returns for the consumer.

          Long story short, many people aren’t living within their means because society has deemed that they deserve the same as those who have worked their entire lives for it. This is not just a millennial affliction.

      • Jason Cannon says:

        So what if u make to much for. Subprime loan?

    • Gandalf says:

      Ford Pintos had an exposed fuel tank (you could see them whenever a Pinto was in front of you) sandwiched between the rear bumper and transaxle that made them prone to rupturing and bursting into flames and incinerating whoever was inside if the car got rear ended. 117 lawsuits were filed against Ford for death/ injuries related to the fuel tank rupture. The lawsuits revealed that Ford had done a cost benefit analysis of the potential for a ruptured fuel tank to result in paying legal damages versus the cost of making the fuel tank safer in a Pintos, with Ford deciding not to fix the fuel tank

      • alex in san jose AKA digital Detroit says:

        Gandalf that’s the best write-up of that problem I’ve seen. Thanks.

    • Rowen says:

      Probably co-borrowed, not co-signed, which is how much of these loans can get made. (With co-borrowing, the bank looks at the combined financials, whereas with co-signing, each party has to qualify for the loan independently ). Minor detail, but partly responsible for blowing the bubble.

  3. SecuritizedSecured says:

    Sure investors are on the hook for those securities, but can we dig into those securities?

    Back in 2013, leverage ratios on paper of CLOs approached 13 to 1. Then you gotta figure that they got that stuff inside each other… then you gotta figure you got swaps/forwards/options on top of those… then you gotta figure what happens when people start pulling their money… and that’s only the collateralized stuff…

    Yup, definitely not financial crisis material…

    • Wolf Richter says:


      Auto loans actually performed reasonably well during the Financial Crisis, given the very tough circumstances. And they weren’t involved in triggering the financial crisis. They won’t trigger one this time either for the reasons specified:

      They’re not big enough (subprime auto loans are only about $280 billion in total); the collateral is easy to repossess and has good value; and the market for the collateral is very liquid even during a downturn and can be turned into cash quickly. And the losses (maybe $150 billion in a worst-case scenario) are not concentrated on the big banks (required for a financial crisis) but spread all over the world in small bits and pieces.

      To identify the potential sources of the next financial crisis, you have to look at the BIG stuff. On top of this list today is corporate debt. In the US, it’s about 13 TIMES as big as auto loans. The collateral – if any! – is not at all liquid and during a crisis cannot be sold, no matter how low the price. And big banks are heavily exposed to it. This is the fodder for a financial crisis, if that’s what you’re looking for, not auto loans.

      • HR01 says:


        Agreed. Deteriorating corporate credit much more likely to trigger the next credit crunch.

        $3T in BBB won’t even necessarily have to be downgraded to junk either. Just the threat would be enough to set in motion the actions that will lead to the crisis: stock buybacks get suspended (BA, T and IBM already there); dividends stop growing, get reduced or eliminated; company assets go up for sale and headcount gets cut (F announced 7K today).

        Compounding the magnitude of the problem is the fact that corporate “cash” piles are chock full of what else but corporate debt. So they all own each other’s paper. When prices drop and it starts trading like junk, the selling could get brisk. For those that don’t sell, they still have to account for the unrealized losses in quarterly reporting.

        The Fed won’t have an answer. Cutting rates won’t work if cash flows diminish materially. Solvency fears become the risk.

        • Bobber says:

          I wouldn’t agree that corporations use their excess cash to buy other corporations’ debt. Corporate treasury departments usually invest about 90% of excess capital in risk-free US treasuries. They may make some strategic investments in stocks and corporate bonds, but that would be a small part of the portfolio.

      • 2008 was the heyday of Zero APR? Who defaults on a zero interest loan? I don’t see how collateral is an issue, corporates are probably better than treasuries in the next crisis. Corporations actually have revenue and government does not. The problem for banks is treasuries in reserve, even China was smart enough to figure that out. While the dollar loses value its price goes higher, and there are limits to that.

  4. 2banana says:

    If no shady sub prime car loans…

    How badly would the major car manufacturers be in trouble?

    Another GM bankruptcy in a few years?

    • MC01 says:

      Jaguar-Land Rover (JLR) is in serious troubles. Right now.
      For FY2018 (reported just today) they posted a dizzying £3.6 billion loss, igniting rumors parent group TATA may sell off JLR in the near future or that a default or haircut on corporate bonds may be in the books.

      This wasn’t supposed to happen, as JLR is basically an SUV manufacturer also selling a few cars, but sales of their high-profit smaller SUV’s have been falling off a cliff lately, especially on the European market. Bigger cars, such as the full size V8-engined Range Rover (affectionately nicknamed the “Chelsea Tractor”), are doing as well as usual.

      JLR made a big bet on leasing and lost it: fashionistas leased those small SUVs à la mode (don’t ask why I am writing this; just trust me) and now that the leases have run out and that the cars are out of fashion they are returning them and moving to other brands, leaving JLR with thousands of used cars nobody wants and rows of brand new cars fashionistas now see as fashionable as spatterdashes.

      • Rowen says:

        it didn’t help that Jaguar picked the most awkward name for its SUV evah…

      • MB732 says:

        In USA have known few JLR owners of vehicles post-warranty. A very expensive and time-consuming mistake I believe very few people would make a second time.

  5. Woodie says:

    Interest rates have gotten way too high on the subprime market for the consumer to pay. Reduce the interest rate to 19% maximum and more loans will perform.

  6. David Hall says:

    Subprime auto loan interest rates averaged close to 12% in Q4 of 2018.

    Add in credit card debt, student loans and mortgages on overpriced homes and that equals delinquencies.

    Medical debts are a common cause of bankruptcy. I met a man who lost a ranch when a hospital debt collection department got a court order to seize his ranch and sell it to pay for outstanding open heart surgery debt.

  7. Brant Lee says:

    Talk about inflation, vehicles are scary expensive now and people have accepted it for need of keeping up with the Joneses.

    • 2banana says:

      CarMax, Carsense, etc. are booming.

    • Sonel Setoute says:

      Not that they accept it. More like they don’t have a choice. Maintaining an old car can cost just or almost as much as a new one. Part of the problem is trucks and SUV that are overpriced with no end in sight. When you have an oversupply at Wal-Mart you have a sale. When are the car manufacturers having a sale instead of raising prices every year. Better yet when will they stop producing more than they can sell.

    • alex in san jose AKA digital Detroit says:

      More like keeping from becoming homeless.

  8. Jay says:

    You really see the subprime market at its peak in Florida. Many new mega dealerships have sprung up in Florida, mostly import branded and doing very well. I started to look into what they are doing, most cars they sell are base models and they “sell to anyone” regardless of credit.

  9. Michael Wyco says:

    Yeah I think I let mine go back also roped off bad by Lewis Nissan of Beckley WV credit is a joke anyway just more means to control you.

  10. Bobber says:

    I think a lot of spending today relies on high stock prices and home values. A guy sees his 401k go up by $50,000 and he’s soon at the dealer trying to put $50,000 truck on credit.

    I observe that behavior first hand. Rarely do people think about income in retirement, medical expenses, rainy day fund, etc. The shiny new cars and trucks are too much to resist for many people. There’s some sort of void there.

    • qt says:

      Its the wealth effects from the FED :-)

    • JZ says:

      Thinking too much about retirement doesn’t get you laid.

      • JZ says:

        how is that for some kind of void?
        If you don’t swipe credit card to buy that car, that watch, that dress, that yoga class to enlarge your butt and breast, you do NOT get laid!
        Now let’s talk about void to fill.
        It is never about individual’s brain power or emotional power to resist stuff, it is about winning against your competitors. Winner takes all, you better try hard.

  11. HR01 says:

    Replying to Bobber,

    Up above, you stated:

    “Corporate treasury departments usually invest about 90% of excess capital in risk-free US treasuries. They may make some strategic investments in stocks and corporate bonds, but that would be a small part of the portfolio.”

    That used to be what prudent CFO’s did with company cash but times have changed. Take a look at Apple’s 10-Q. 47% of its “cash” is held in corporate debt securities. Just 21% is invested in U.S. Treasuries.

    • Bobber says:

      I didn’t know that, and it surprises me. I see Alphabet has about 30% in corporate debt (which is also higher than I would have expected), and Microsoft has near 0%.

      If the bonds held by corporations are A-rated, there probably is nothing to worry about. I don’t they’d invest in a lot of the BBB bonds.

      Any corporation that has a lot of poorly rates corporate debt is very poorly managed.

  12. Old Engineer says:

    Wolf, that was a very objective and honest assessment of the state of the economy, especially about the bifurcation. It was a very well done report and a pleasure to listen to. The only thing I have to add is that I think that when these subprime borrowers default the economy doesn’t just suffer from their requirement to buy cheaper cars. As their credit takes another hit from the repossession their borrowing ability for any purpose tanks. Also they get hit with higher costs such as when auto and home insurance companies charge them more just for having a low credit rating. So the economy loses a chunk of these people’s discretionary spending when this happens. And as it happens to more and more people that has to have an effect.

  13. ZeroBrain says:

    Tesla is down to ~$200! NO ONE COULD HAVE SEEN THIS COMING! How? The Model 3 is saving the world! Why didn’t anyone tell me it was a money-burning sham!?

    Jokes aside (or continued?), maybe I’ll start following Wolfstreet commentariat for sound investment advice :)

    • Bobber says:

      I’ve always been hard on the Tesla model three because its styling was inspired by the Saturn sedan as well as the bumper cars you see at amusement parks.

      That said, there is no accounting for taste, and I’ve seen tons of them around Seattle. The number of these things exploded on the road the past couple years. I’m somewhat surprised that sales figures are already poor.

      Perhaps they only sell well on the West Coast. Or, perhaps the concept and styling is love or hate, and all the lovers went out and bought them right away, and potential buyers are all gone.

      Perhaps others are worried about poor consumer reports and Tesla’s financial stability. If you plop down $50k for a Model 3, you’d want resale value and future service, but getting that from Tesla is a pretty dicey proposition.

      • ZeroBrain says:

        I agree on all counts. These things multiplied like rabbits in Seattle over the last however many years. Housing being down YOY in Seattle, concerns over Tesla’s viability, and Model 3 quality concerns would all weigh on my decision if I were a prospective buyer. Also I find the S visually appealing and the X and 3 ugly.

  14. mick says:

    “Strong Labor Market”

    Ford lays off 7000. Only the most recent mass layoffs at automakers, and only one sector laying off many thousands continually.

    The reason for auto loan defaults is not confusing, but it is if we buy the lie of a “Strong Labor Market and Economy.”

    Dispense with that BS, and everything makes perfect sense.

    • Harrold says:

      The 2018 Corporate Tax Cuts in action!

    • Wolf Richter says:


      OK, don’t get carried away by the headlines. Read the article! So let’s get this straight:

      – With this move, Ford is laying off mostly WHITE-COLLAR employees – NOT production employees.

      – These layoffs are on a global basis. Only about 1/3 of those layoffs are in the US.

      — The purpose is to make its management layers more efficient. Anyone who ever dealt with Ford will probably agree that its management layers are not the most efficient and could use some improvement.

      In other words, this has little to do with the US labor market per se but is a company-specific issue related to Ford’s problems that it has been trying to address for years, with one restructuring program after another. In addition, Ford is facing declining global auto sales, as I have been saying for a couple of years now, but they’re declining because the market is mature and because subprime customers have trouble getting loans.

      In addition, there are about 151 million private sector nonfarm jobs in the US currently. And Ford is going to eliminate about 2,300 of its white-collar jobs in the US. You do the math to see what percentage this is.

  15. WES says:

    My guess is with free money, buyers are able to buy a more expensive vehicle than they normally could.

    After buying, reality quickly sets in and defaults occur.

    However I also believe this must be an increasingly profitable business for the sellers because they get to sell the same car to multiple buyers.

    This may be skewing the statistics.

    As for statistics, that famous phylosopher, Mark Twain, comes to mind!

  16. Dave k. says:

    Interesting enough I went to the GMC dealer to have some service work on my 2011 GMC Sierra 1/2 ton. I use my truck to work for a living and have a separate daily driver car. Looking around the lot, there was only 1 other truck with a full size truck bed besides mine there. I was shocked. The cost of the trucks was staggering also. I’m not sure who is making a living driving a 60k pickup truck, but that’s what they are carrying! None even having a full size pickup bed. I was told a truck like mine (work truck no frills with full size bed) would essentially have to be ordered…specially. All I could think is WOW.

    • Erle says:

      I waited to buy a new truck until the predictable crash. My use is for hauling steel molds to the plater. I went out in 2008 to get one. The quite nice Chevy 2500 small cab was 23.500k and the small cab diesel with Allison was 30.3k.
      I had to go with the gasoline version because of our short trips.
      I had better take superior care of what I have as 50k pickup trucks do not excite me.

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