"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...

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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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caShOnlY's picture

Had a friend who bought a car, never made payments on it....drove it for many months......then has me call repo company and tell them where car is "hidden" in exchange for 1500.....paid cash in middle of street and told me I did the right thing....lol

I used to hate to hear stories like this since I figured I was the one paying for these scams through interest payments.  However these scams survive because of the nature of our monetary system - FIAT.  In a sound money system your friend would have been required to put down 20% his own money guaranteeing he had to make some attempt to pay for the vehicle or lose 20% immediately.  In the end we all paid nothing to watch GM get bailed out with more worthless FIAT.  We will never pay that debt back so I don't concern myself with it, I just accept it for the ponzi that it is and keep converting ponzified paper into PMs.

the0ther's picture

GPS should put an end to that 

Offthebeach's picture

Need another Cash4Clunkers program.. Get those still running cars out of the Sheeples hands. Maybe go full Japan and outlaw cars over 10 years old.
Get Home Land Security pulling serfs out of their 10 year old death trap, visually polluting, enemy of prosperity cars. Do it on the highway. Or.
SWAT roll through neighborhood at night and flash bang and dog shoot anyone with a "tenner".
Use those Iraq war MRAPS.

TalkToLind's picture

Any US citizen who drives a car older than 10 years is a terrorist and should be sent to Guantanamo!

</sarc tag for you dumb government MFer's who might read this and think it is a viable idea.>

yogibear's picture

The banksters are even hitting old people with reversre mortgages with high fees. 

It will be sweet to see the sub-prime loans blow up.

hooligan2009's picture

are those the ones that are called home equity withdrawals (not loans as they neverhave to be repaid) advertized by the Fonz (Henry Winkler)?

Colonel Klink's picture

Henry Winkler, just another celebrity shyster.

A shyster /??a?st?r/ is a slang word for someone who acts in a disreputable, unethical, or unscrupulous way, especially in the practice of law, politics or business.

caShOnlY's picture

advertized by the Fonz (Henry Winkler)?

yes, that's him.  we call him the "ponz" now.

Kirk2NCC1701's picture

My insider friends at car dealerships tell me that they can predict with 95% certainty, which demographic and ethnic groups will or won't default.

The ones who will NOT default are certain Asians (Chinese, East Indian, Japanese, Koreans,Vietnamese), Jews and certain European - Americans (Dutch, German, Nordic, Swiss) and upper - middle class people of all ethnic groups.

hooligan2009's picture

checks for irish, polish, italian, hispanic, african....compares to national demographic...hmmm...but aren't all minorities equal, perhaps thats just the upper-middle class...wtf..you mean the top 10%, 1%, after upper middle = upper = 0.1% by income or assets? why on earth would an upper middle class person want a car loan, oh...you mean any dumb upper middle class people.

Colonel Klink's picture

Where's Carl "shitty deal" Levin when you need him?

waterhorse's picture

assisting his buddy Lloyd in doing "God's work?"

AdvancingTime's picture

Many of the new cars hitting the road are really leases which show up as a sale, and many of them may be motivated because an automobile owner faced with a costly repair doesn't have money to put into their current vehicle. This allows someone in a weak financial position, such as those living on disability or student loans, to put themselves into an ego boosting vehicle that they cannot in reality afford, or need.

I contend that super low artificial interest rates are making much of this possible. If I'm correct, much of the idea of "so called pent up demand" is secondary. It should be noted even with surging sales US auto companies are "hyper boosting" the economy by producing more cars than are being sold causing inventories to build. More below on the subject of a shift in consumer spending that hints of problems ahead.


creeko's picture

Long subprime bicycle market!


The process of putting hamburger through the meat grinder and coming out with sirloin on the other end is amazing. Where can I buy a 'securitization machine' like the Wall Street banks have going? And how much do ratings agencies cost to grease for the triple AAA stamp? Does anyone know what kind of money S&P, Moodys, et cetera make?

hooligan2009's picture

haha...excellent...reminds me of the south park episode about taking in food via your ass and shitting out of your mouth somehow


sunkeye's picture

I know I'm in late but just gotta say ... B7 you magnificent bastard you've done it again. 

Saw the pic first made me lol then scrolling down read the words LOL!  T/y for a really good lol.

(A chuckle to end a really cruddy week - Johnny Winter & James Garner dying.)

Joe A's picture

History repeats itself and people are just plane stupid. Fool me once, shame on you; fool me twice, shame on me.

strangewalk's picture

Buying a new car is actually not necessarily a bad move. One, it helps the economy as even many foreign brands are mostly American made today. Then, the newer cars are generally much more fuel efficient and produce less pollution. Also, a new car can boost self esteem by telling the world you are maybe not a complete loser--sure it's phony and shallow but still works to impress the girls and make the neighbors jealous. Finally, many people will say the financial pressure of car payments is motivational, and besides, having a new car is fun. It really helps to know how to buy. Do your homework on dealer invoices and manufacturer's incentives and make your move on the dealership late in the evening toward the end of the month--for several reasons this is when they're under the greatest pressure to move inventory. Get everyone to like you, tell some jokes, set a relaxed tone and plead poverty, but behind the mask stay focused and mean as hell. I bought a new Toyota once, drove it for a year and sold it for exactly what I paid new. 

TalkToLind's picture

If you want to impress your neighbors, tell them you own your house free and clear.  Tell them you have no car note.  Tell them you have no credit card debt.  

kareninca's picture

Why would I want to impress my neighbors?

I want my neighbors to think that I'm poor, so they don't ask me for money or sue me.

Hmmmm, maybe I should tell them I have crushing credit card debt . . . .

Tall Tom's picture

Giving your neighbors an image that you are poor still leaves an impression.


It may, or may not, be "positive" or "negative". But it is still an impression.


I am just so impressed by your ability to write coherently.

waterhorse's picture

Fuck what the neighbors think.  If you must have that car though, have a hefty down and go get pre-approved by a credit union that oversees financial tactics of member dealerships.  CU preapproval is like garlic or holy water to the dealership vampires.

blue gkm's picture

i buy my cars from craigslist cash. U can find a good deal but they move fast

blue gkm's picture

i buy my cars from craigslist cash. U can find a good deal but they move fast. pussy is cheaper than a car payment... that is the funniest shit i herd all day


cbxer55's picture

I have three vehicles, all paid for. Two pickups and a motorcycle. 1998 Ford Ranger, 2004 Ford Lightning and a 2006 Suzuki M109R motorcycle. 

Not planning on changing that any time soon. Do my own maintenance, don't pay anyone to lay a hand on them. 

No credit cards, no store cards, no gas cards. 

Rent and utilities only. 

That's my story, and I'm sticking with it.

notadouche's picture

"I'm not sure how I got the loan"  Really.  I'm sorry but if you are too stupid to understand that you have to pay money back that you borrow and its more money than you know you can afford to pay back then perhaps you shouldn't take money "you don't know how you got".   On a positive note: "You Just May Have Won a Million Dollars"

Toolshed's picture

I guess unless you deal with the "blue collar" sector of the workforce regularly, as I do, it is difficult to appreciate the rampant ignorance present. The financial vultures are certainly aware of it. I have a co-worker who co-signed a refinance "deal" on his mother's home where he, his wife, and four kids lived along with his mom. This incident took place as the last housing bubble was in the process of bursting. He was very excited one afternoon, and when I asked why, he informed me he was picking up a big fat check after work. I questioned him further and he told me about the re-fi deal. It sounded like he and his loved ones were about to be royally screwed, so I advised him to read the docs carefully and make sure he got a good interest rate. He then informed me that he and his mom had already signed the papers and he didn't know what the interest rate was. All he knew was that the original mortgage only had a few years of payments of about $500.00/mo left, but the house needed a new roof and other repairs, which was the reason for the re-fi. The new payment was going to be around $1,100.00/mo, but he didn't know the duration of the loan. Needless to say, they got royally screwed.......by their own ignorance. No one lives in the house now. They stopped making payments and moved out over a year ago and the bank has not even begun the foreclosure process. The house has a new roof though! Unreal.

hibou-Owl's picture

So the GM dealer who stretched the truth to get the sale!!!!

Next liability issue for GM, or is it Teflon time. Bail out time for GM round 2.

Americans are DUMB, and Greedy.