As gold prices increase the talking heads and pundits that inhabit all of the financial news publications and productions have all types of predictions and prognostications about what will happen in the next cycle and when the gold price run-up will turn into a run-down. Perhaps much more important than where the price of gold is today is what may be happening in the subprime auto loan market. I can tell you what is not happening in just one word; payments. Subprime auto loan defaults are on the rise.
If banking in general and auto loans, in particular, are not within your areas of expertise, then you have probably gathered that people are behind in their car payments and that maybe these people did not have great credit when they bought their cars, on what else, credit. This would be a correct assessment on your part, but the subject of subprime auto loan defaults is one of more complexity.
Are Subprime Auto Loan Defaults Similar To Subprime Mortgage Defaults? Sure.
Under a close inspection, one may surmise that the if the architects of the sub-prime mortgages are not the same the same architects of the sub-prime auto loans, then, at least, they were all in the same graduating class. Many of the same destructive financial practices that contributed to the real estate meltdown of 2008 and beyond are beginning to emerge and swirl once again, but on a smaller and quicker, scale.
People have been buying “more house” than they could afford ever since banks entered the business of approving loans for “too much house”. Likewise is the case for car loans. In fact, it is easier to get in over your head with a “too big” car loan than it is a mortgage. And, unfortunately, there are more unscrupulous lenders out there in the subprime auto loan markets than there are z’s in Mozilo. If the Mozilo joke was lost on you, just google Mozilo and you’ll get it. Subprime Auto loan defaults are on the rise, but that is not the scary part of the subprime auto default story. I’ll fill you in.
Very much like the way subprime mortgages were intended to be bundled together and sold as asset-backed securities to create profits, the current subprime auto loan defaults have been packaged into asset-backed securities and sold to investors. In these equations, the investors always seem to take the losses somehow.
The real estate meltdown taught us that individuals that did not even think they had exposure to financial calamity ended up victims through what ended up being convoluted and incestuous financial dealings. Some of these people worked at places like Lehman Brothers, and they all got to clean out their desks as an early retirement present, but that is another story altogether.
Asset-backed securities as they relate to subprime auto loan defaults are old beater cars that are soon to be repossessed by someone who missed a few $497 payments on a car that should come with $197 payments. There are so many ways to be taken advantage of in the subprime auto loan game such as annual interest rates up to and beyond 30%, huge origination and service fees, devices that disable your car if a payment is late, and all kind of things.
Then, of course, there is the car itself. When you end up with a subprime auto loan, you don’t generally get to pick out the car you want to buy. The car dealer and the bank get together and they decide which car you get. You get the car that makes the car dealer the most profit, as long as the bank thinks the car will run, for a while.
Banks don’t like to make subprime auto loans on cars that have a proven record of breaking down early and are expensive to repair because subprime auto loan consumers generally don’t have enough money to fix a car and make car payments. Banks also don’t like to make subprime auto loans on vehicles that have high mileage either, for similar reasons. When everything shakes out, the driver usually finds himself or herself in an entry level domestic model vehicle about 6 years old with 80,000 miles on it. There will be 72 payments probably in the $500 a month neighborhood. If you get a good deal.
Are Subprime Auto Loans The New Big Short?
If you get a bad deal, tack on another $120 a month and 12 more months of payments. Oh, and also add another 15,000 miles on the odometer, and make sure the vehicle is a year or two older as well. There used to be a reason banks would not lend money, especially $30,000 + on cars that were iffy at best; the car would not last as long as the loan and the loan would be at a greater chance of default.
When the whole point of lending good money on a good car went out the window in favor of making a quick buck by selling subprime auto loans as asset-backed securities and moving some mostly used up disposable cars off of the lot at the same time, the stage was set for subprime auto loan defaults.
Perhaps the factor in this equation that will be most interesting to watch play out is the speed at which subprime auto loan defaults happen. When the subprime mortgages started to go, moratoriums were put in place and government programs sprang into place to help the consumer. With subprime auto loan defaults, the span from first missed payment to final repossession of the vehicle may be 120 days or less.
The New Subprime Bubble: Car Loans
Gold prices will continue to rise and fall against paper currencies, that is just part of currency exchange, this is business as normal. What is not business as normal, however, is financing people into $8000.00 cars for $22,000.00, and then turning around and selling the sour loans as investments. Subprime auto loan defaults are getting back to record levels, time will only tell how deep these defaults will cut into investor’s pockets. Owning gold is a diversification out of paper investment products and into a hard currency.