"Buying The Car Was The Worst Decision I Ever Made" - The Subprime Auto Loan Bubble Bursts

Tyler Durden's picture

It has been over six months since we first highlighted the growing deterioration in the quality of auto loans and mentioned the 's' word (subprime) as indicative that we learned nothing from the financial crisis. Since then, auto loans (and especially subprime in the last few months) have surged to record highs; and most concerning, recently has seen delinquencies and late payments spike. The reason we provide this background is that, thanks to The NY Times, this story is now hitting the mainstream media as subprime-quality car buyers (new and used) realize the burden they have placed on themselves thanks to exorbitantly high interest rates (and a rapidly depreciating 'asset'). As one car 'owner' exclaimed, "buying the car was the worst decision I have ever made."


As The NY Times reports, Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.


Deja vu all over again...

And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.

Exorbitant interest rates... (but still demand?)

The New York Times examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders and hundreds of loan documents and found that subprime auto loans can come with interest rates that can exceed 23 percent.


The loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers. Such loans can thrust already vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records, as well as interviews with borrowers and lawyers in 19 states.

Will we never learn...?

In another echo of the mortgage boom, The Times investigation also found dozens of loans that included incorrect information about borrowers’ income and employment, leading people who had lost their jobs, were in bankruptcy or were living on Social Security to qualify for loans that they could never afford.


“It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds,” said Mark T. Williams, a former bank examiner with the Federal Reserve.

One painful example...

Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.


“I am not sure how I got the loan,” Mr. Durham, age 60, said.


Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.

It's different this time...(worse)

Autos, of course, are very different than houses. While a foreclosure of a home can wend its way through the courts for years, a car can be quickly repossessed. And a growing number of lenders are using new technologies that can remotely disable the ignition of a car within minutes of the borrower missing a payment. Such technologies allow lenders to seize collateral and minimize losses without the cost of chasing down delinquent borrowers.


That ability to contain risk while charging fees and high interest rates has generated rich profits for the lenders and those who buy the debt. But it often comes at the expense of low-income Americans who are still trying to dig out from the depths of the recession, according to the interviews with legal aid lawyers and officials from the Federal Trade Commission

Who is to blame? Nefarious dealers?

The dealers have an incentive to increase both the size and the interest rate of the loans.


The arithmetic is simple. The bigger size and rate of the loan, the bigger the dealers’ profit, or so-called markup — the difference between the rate charged by the lenders and the one ultimately offered to the borrowers. Under federal law, dealers do not have to disclose the size of the markup.

Or The Fed's financial repression money printing forcing demand into these risky securities?

Investors, seeking a higher return when interest rates are low, recently flocked to buy a bond issue from Prestige Financial Services of Utah. Orders to invest in the $390 million debt deal were four times greater than the amount of available securities.


What is backing many of these securities? Auto loans made to people who have been in bankruptcy.


The average interest rate on loans bundled into Prestige’s latest offering, for example, is 18.6 percent, up slightly from a similar offering rolled out a year earlier. Since 2009, total auto loan securitizations have surged 150 percent, to $17.6 billion last year, though some estimates have put the total volume even higher.

The end-result...

In another sign of trouble ahead, repossessions, while still relatively low, increased nearly 78 percent to an estimated 388,000 cars in the first three months of the year from the same period a year earlier, according to the latest data provided by Experian.


The number of borrowers who are more than 60 days late on their car payments also jumped in 22 states during that period.


As a result, some rating agencies, even those that had blessed auto loan securitizations with high ratings, are starting to question the quality of the loans backing those securities, and warn of losses that investors could suffer if the bonds start to sour. Describing the potential trouble ahead, Kevin Cole, an analyst with Standard & Poor’s, said, “We believe these trends could lead to higher losses and weakened profitability in a few years.”

Read the full disaster here...

*  *  *

One quick question... (rhetorical of course) - Why did the Federal Reserve stop reporting auto-loan LTVs in February 2011? After 40 years of doing so!!

Bloomberg has reported the average loan to value (LTV) for subprime auto loans has increased to 114.5% this year and the average loan-to-value on new cars rose to 110.6% (which would be the highest ever according the Fed's data... way beyond the 100.4% previous peak in Sep 2006)

*  *  *

As we concluded previously, it is so bad that even Morgan Stanley now gets it:

Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, a New York-based analyst with Morgan Stanley, wrote in a note to investors last month. The rise of subprime lending back to record levels, the lengthening of loan terms and increasing credit losses are some of factors that lead Jonas to say there are “serious warning signs” for automaker’s ability to maintain pricing discipline.

And who gets to eat the losses? Well, as we have previously explained, the bulk of consumer credit issuance in the past year, a massive 99%, has been sourced by the government to go straight into auto and student loans.

Which means you, dear US taxpayer, will once again be on the hook when the music ends.

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Yen Cross's picture

    I'm Joe Isuzu, and I approve that advertisment.

Buck Johnson's picture

It looks like we are about to go into another credit implosion real soon and that will take out the market.  Also Zero Hedge they don't have enough room on those airfields and car courts to repossess any cars for storage.

COSMOS's picture

Most useful class I ever had was high school autoshop.  Learned how to do a tune up and brakes on a car.  Then we also did CV joints, swap fuel pump, swap alternator, swap starter, and basic sensors like MAF and O2 sensors etc.  All my cars have been used and paid in cash, I have no monthly payments and can do most of the maintenance myself.  Can say that have saved thousands of dollars and time not having to wait around for my car to be serviced.  Dont get me wrong though, if its a big job like a clutch job or timing belt I'll take it in, but I always get three estimates and have an idea whats involved so I dont get ripped off.

I still fail to see how people that rely so much on cars know so little about them.  Oh well.  At my old high school they dropped auto shop to use that semester to give the kids an extra year of math ie algebra or geometry.  What a freaking waste of time.  Those kids would be better served by a shop class.

You get yourself a set of craftsman hand wrenches from 7mm to 20mm when they have a sale for like 30 bucks, then a craftsman 200 piece socket set with 3 ratchets for like 99 bucks (watch for the sales) and you have pretty much every tool you will ever need. The sockets and hand wrenches are guaranteed for life, never had any of them go bad on me.

Those tools come in handy if you ever build anything like a kids playset etc.  Or you want to make your own bunk bed set and bolt the pieces together solid.  The uses are endless, plus they sure are pretty to look at (I clean mine after every use lol)

Youtube is great for advice on stuff, great channels like Scotty Kilmer or Eric the car guy, pretty much cover everything you need to know.  You can get your engine error codes read for free at AutoZone etc...

I also agree that most of the Japanese cars from the 80s to current are rock solid and gorgeous cars.  We can thank the Japanese for forcing the entire car world to step up their game in reliability and styling.


Haus-Targaryen's picture

Yeup.  I have an 11 year old BMW, and I do all the maintenance to it on my own.  Super reliable little car, and having something to tinker on is fun as well.  

Also, trolololololol -- no longer a US tax payer .  

Arius's picture

yes, those low-income americans ... as greedy as the rich, just not as lucky to work the system...

the guy has not worked for 3 years at the hospital, yet he signs 35 thousands income ... yeah, the dealer told me we can #$%^ the bankers ... guess who the suckers is ... yeah go cry to the government.

Taking responsibility for your own actions has become a foreign word in American vocabulary

PT's picture

So, you can't afford to buy a house because some idiot bid the price up to unaffordable levels, and you can't afford to buy a car because some idiot bid the price up to unaffordable levels ...

The idiot's house and car get repossessed because he can't keep up with repayments, then the idiot loses his pension because it was dependent on him paying off his house and his car ...

... It's 8pm.  Do you know where your "retirement money" is?
... maybe it has already been "retired" ...

IANAE's picture

"FUND 'EM..."


Reported mantra of Angelo Mozillo & Co...will not cease until conduit funding mechanism is reformed - or eliminated - preventing the incremental misrepresentation of - and accountability for - risk accumulated from underwriting through to securitization.

If fees/commissions were paid as earned over the life of the loans it might slow things down a bit...


debtor of last resort's picture

No collateral shortage for this repo man bitchez.

economics9698's picture

The 138 IQ MF's getting some payback from the 85 IQ MF's.  Don't you just love it?

Sam Clemons's picture

The 138 IQ MFs never lose.  They change the rules when they begin slipping.

pelican's picture

The 150 IQ's and over realize that 138 IQ's financial games have destroyed a Republic.

HardAssets's picture

If you thInk that, you don't have a 138 IQ.
The dumb always pay. Who do you think pays for bail-outs & those 'too big to fail' ?

Berspankme's picture

Yeah yeah yeah. You guys dont understand. GM is alive and Bin Laden is dead

Rentier88's picture

If you can't pay cash for it, you can't AFFORD IT!

HardAssets's picture

One thing you learn, no matter how nice & shiny when new, - after a few months it becomes 'just a car'.

johnconnor's picture

one of the best you have done... double round of applause for you sir

Smegley Wanxalot's picture

196,000 miles on my 12 year old truck that runs like new (knock on wood) and looks like it only has 40k miles on it, and I have no intention of buying anything unless it gives up the ghost. 

Pussy is cheaper than a car payment, people.  And if you need a car to impress people, you have bigger problems than just credit.

economics9698's picture

I try to keep a new car and a old car, both paid off, both working well.

CrazyCooter's picture

I was going to buy from this dealer ...


... but i scored a hell of a deal on a used truck (very low miles), but I still watch the site and may spring for a crew cab high boy one day.



Manthong's picture

My 2000 Jeep looks like it has 40,000 miles on it.

Come to think of it, that’s because it only has 40,000 miles on it.

kchrisc's picture

Auto "max-age" laws in 3..2..

"Dear tax-victim of ours,

In order to support the FedRes ponzi further and to expand our coffers to enable us to make payments to the same, you must scrap your current vehicle and purchase another one. Please see the enclosed list of connected "salvagers" that will give you way below value it and then later give us our share of the proceeds as a "contribution."

Further, if we determine that you paid cash for your newer vehicle instead of financing it, we will be forced to audit you and of course find you guilty of "laundering" and then take all of your assets, including the aforementioned auto.

Thank you,

Your blood sucking leeches at the state house on behalf of our Ashkenazi financial masters."

OldPhart's picture

Don't know the exact mileage, the odometer clicked over a couple times, but my 48 F-3 Stakebed stills runs pretty well.

Jack4952's picture

The last time I purchased a NEW car was in 1979 and I paid CASH. That was also the last time I bought an American-built car; and it was a "dog".

Since then, I have purchased only foreign USED CARS (after inspections by trusted car mechanics) and always paid by CASH - and they were all wonderful cars.

robertocarlos's picture

Did you buy any used cars manufactured in Russia?

NoDebt's picture

Shocking!  Banks extend expensive loans to vulnerable poor people, poor people accept them.  News at 11.

kchrisc's picture

And like the "printed" money scam on homes, they will run up the "loan" with tons of "collection" fees, then take the collateral, sell it for less than it's worth and then forever hound the poor debtor until they die or wise up and put the banksters to the guillotine.


"Debt is in the head of the beholder. A guillotine reduces debt."

hugovanderbubble's picture



yellowsub's picture

At least with a car, you can recoup some of the cost.  I don't think you can get a refund for college...

bunzbunzbunz's picture

If you get a degree that is even slightly technical or business related, it pays for itself within 5 years considering increased starting pay and promotion potential.  This is of course relative and differs widely based on your personality and work ethic. But holy shit - are there really people that think an English major is going to get them anything but a public school teaching job?

TBT or not TBT's picture

Can't do much with my BSEE around here, or not directly.    OTH there are lots of H1Bs and green cards out here, and ethnic hiring preferences amongst that set.   Indians preferring Indians.  Chinese preferring Chinese.  Guys in their 40's considered past their prime.  Maybe it makes sense as a lot of the actual work is done in India and China.  

tickhound's picture

Plus, ya know, we still let them crash, insurance costs $, registration fees, personal property taxes, the tires still go bald, and formerly easy shit to repair is now so complicated only the dealer has access to the "codes" ....

Other than that I can't complain. I'll have 9 whole months before marketeeeeers make me feel like I'm driving a hoopty again.

CheapBastard's picture

Insurance? WTF is that? ~ 25% of Texas drivers have NO car insurance. I was hit by a girl in her 20's and when I asked for her car insurance and driver's license the ONLY ID she had was her frigg'n parole card from New Jersey. 

No driver's license from any state, no car insurance [goes without saying] and no other ID and no job. My insurance covered the entire damage but that pretty much is par for the course these days from what I see around me and what my insurance lady told me.

Just one more sign of deterioration.

robertocarlos's picture

It has to be better than taking the bus.

Racer's picture

That's what you get when crime is handsomely rewarded, not just more of the same but even worse!

Elvis the Pelvis's picture

 I just finished paying for my car.  I plan on driving it until I die.  I'm a broke dead dick.  Bitchez.

Blano's picture

TYLERS!!! Please ban this guy again please.

PT's picture

Pretty soon there will be no new aliases left.  He will have used them all.

potato's picture

Use synthetic oil (not synthetic blend), high quality oil and air filters (like K&N). Change oil and oil filter every 15 000 miles, clean cotton air filter every 50 000 miles. Use summer or winter tires (not all-season). Change spark plugs, coolant , transmission fluid (if automatic), and fuel filter every 100k miles. Change belts and alternator every 150k miles . Even your American car will run forever if you do that.

Citxmech's picture

It should be pretty obvious that performing basic maintenance as opposed to just letting it all go is going to make any machine last longer.  

Getting something that's not a complete piece of shit to begin with helps also.

TheMeatTrapper's picture

Brutha's don't change no oil in dey Chrysler 300  - they be puttin' rims on dat bitch. What da fuck is oil anyway? Shit I thought you had to put gas in the muthafucka to make it go!

Falling Down's picture

I worked in auto parts as side gig some years ago.

Brutha walks in, it's early on a Sunday morning. "Axes" for an oil change for its '89 Escort (this is '02, in Rochester, NY).

I had to explain to this dimbulb that, no, an oil change does not mean you "just add oil". I had to break it down stupid style to this kid that a person needs a filter and the correct oil.

A friend managed a parts dept at a local Toyota dealer for a few years, before moving up and on and becoming independently wealthy.

Black guy brings in an SUV (not sure which model, had a SOHC V6). Motor is seized and it's still under warranty @ around 32K or so miles. Manager tells a young tech to start some checks on it.

Motor won't turn, no matter how much brute force they try to use. Manager tells the tech to pull the valve covers.Sure enough, both cams had snapped. 

Manager calls customer, and proceeds to ask about the service history of the vehicle (there were no indications the vehicle had ever been back to the dealer after purchase). Owner proceeds to tell the manager he didn't think the oil ever had to be changed.

Dealer decided to eat the cost of a new motor, and sent the customer on his way.












Urban Redneck's picture

If you have a backup vehicle, or only put obscenely low mileage on your car, then use both synthetic oil and synthetic filter media (since it doesn't breakdown over time like paper filters, even the high end ones). I change the oil may be every other year on my US vehicles, since I'm rarely there, and they still run great.

Semi-employed White Guy's picture

A 110% LTV subprime auto loan is the stupidest banker move I've ever heard.   And they are actually bundling these too???  Who in their right mind would buy paper "backed" by these loans???  Bath salt financing indeed!

buzzsaw99's picture

if it weren't for upside down car "owners" half the cars on the road wouldn't exist.

813kml's picture

I had the unfortunate pleasure of helping my mother with her yard sale this weekend.  She had pretty good traffic over the three days and I would hazard a guess that 75% of patrons rolled up in vehicles that were less than three years old.  The contents definitely didn't match the wrappers, most of those people looked and acted like they didn't have two nickels to rub together.

Subprime specials living paycheck (or EBT) to paycheck (and EBT).

TBT or not TBT's picture

 Detroit is dead, Al Queada is flush, and the UAW is still holding America hostage, but at least we have plenty of late model cars in the hands of EBT dependents.