Subprime Car Loans Are The New "Cash For Clunkers" - Auto Production Soars Most Since July 2009

Tyler Durden's picture


The subprime auto-lending credit bubble, whose reappearance has been duly noted here in previous articles, which even the mainstream media is now following closely (with Bloomberg recently observing a "sudden jump in late payments"), which last week saw the a DOJ appearance after the justice department subpoeaned GM over subprime auto loans, and which even the NY Fed is keeping a close eye on with yesterday's "Looking under the Hood of the Subprime Auto Lending Market", is not all bad. In fact, as the Fed reported moments ago, the latest manifestation of a subprime bubble is actually quite good, because of the 0.4% increase in Industrial Production in July, and 1.0% surge in Manufacutring in July, the vast majority of that was due to Auto Production.

To wit, from the just released Industrial Production report:

  • The production of motor vehicles and parts jumped 10.1 percent, while output in the rest of the manufacturing sector rose 0.4 percent.

The punchline:

  • In July, the gain in durables was led by an increase of 10.1 percent in the index for motor vehicles and parts, which was the largest since the index jumped 26.9 percent in July 2009.

As a reminder, July 2009 is the month when Obama's disastrous CARS program, aka "Cash for Clunkers" went into effect.

In other words, when it comes to the US economy, subrpime is the new "cash for clunkers" as can be seen on the chart below.

Wait, really?

Yes. Here is the chart from the NY Fed showing the surge in subprime loans issued by auto finance companies, if not banks and credit unions which this time around appear to have some sense in their heads.


Quote the NY Fed:

So, subprime auto lending is definitely on the rise in absolute terms, although the increase in prime auto lending over the same period makes the relative increase in the subprime share less pronounced. This resurgence in subprime loans is stronger among auto finance loans, where subprime lending is—and always has been—more prevalent than bank loans. We will continue to monitor this ongoing change in the consumer lending market.

Monitor yes, do anything about it? No. Because without the manufacturing "benefit" of this latest subprime bubble, the US economy would be far weaker than it is already.

As to the logical question of just how far is economic growth sustainable on the backs of subprime borrowers... well, just look at what happened in 2008.

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Fri, 08/15/2014 - 10:10 | 5097195 junction
junction's picture

Two more years and my car is paid for, zero per cent auto loans are great.  Buy Mazda, not Toyota!

Fri, 08/15/2014 - 10:14 | 5097247 jbvtme
jbvtme's picture

my next rig is an electric trike.  50mph 80 mile between charges 1.5 hrs to charge.  only unknown is whether i can have a side car for the dog...

Fri, 08/15/2014 - 10:34 | 5097384 Stackers
Stackers's picture

Those new Vets sure are looking sharp

Fri, 08/15/2014 - 10:38 | 5097405 Overleveraged_a...
Overleveraged_and_Impatient's picture

Pepole with excellent credit are buying them too!

Fri, 08/15/2014 - 17:25 | 5099802 inhibi
inhibi's picture

Go Mazda! Love my rx-8!

On another note, I like how we've moved from taking money out of your house to out of your car (because no one can afford a house anymore).

Whats next? Taking a loan out of your PS4 (You get to keep ot too!)?

Fri, 08/15/2014 - 10:11 | 5097216 Took Red Pill
Took Red Pill's picture

I love how the MSM portrays this as the economy is doing great and auto sales are way up!

Fri, 08/15/2014 - 10:24 | 5097317 kliguy38
kliguy38's picture

They think they are doing the "right thing"....after all most MSM anchors/reporters are high six figure salaries to high 7 figs and maintain lifestyles requiring that kind of wage they will "do what it takes" as opposed to "do the right thing".....after all what is morality and ethics when you make 7 figs from the puppetmasters

Fri, 08/15/2014 - 10:36 | 5097398 Overleveraged_a...
Overleveraged_and_Impatient's picture

Overall the economy is not doing great, but the store that I work at is booming. The 60% of Americans with good jobs and good credit are buying GMs and guys like me are making a great living. Some dealerships are struggling, but the one I work at has a huge reputation and has been number one in the state of CT for a while.

I'm selling plenty of cars to plenty of qualifed customers and am doing great.

Fri, 08/15/2014 - 12:06 | 5098052 Rukeysers Ghost
Rukeysers Ghost's picture

todays cars are designed to be just one pot hole away from the junkyard.



Guess you never drove a 70's Vega or Corolla back in the day. Junky, poorly built cars are nothing new.

Fri, 08/15/2014 - 10:44 | 5097451 boattrash
boattrash's picture

Hell yes sales are up, peeps have to buy something to drive while their last piece of shit gets its Recall Repairs.

Fri, 08/15/2014 - 13:04 | 5098369 TheEndIsNear
TheEndIsNear's picture

More people are living in their cars because they can't afford homes.

Fri, 08/15/2014 - 10:15 | 5097254 Wait What
Wait What's picture

Fed's policies are doing just what they intended.

Fri, 08/15/2014 - 10:16 | 5097255 BlindMonkey
BlindMonkey's picture

Guess I will head into the dealer today and see if I can drive out with a new 'vette for 0 down, 0% and say...7-8 years.  


Life is GOOD!  Thanks GM!




Fri, 08/15/2014 - 10:21 | 5097280 NidStyles
NidStyles's picture

Might as well make it a Z06. At least then it might appreciate when GM gets broken up in it's next bankruptcy. 

Fri, 08/15/2014 - 11:12 | 5097419 Oldwood
Oldwood's picture

Checked out the new z28 on the showroom floor. $77k!!! A new vette convertible was $80k. I bought a new vette convertible in 1975 for $8k. I wish I made ten times as much now as then.

Fri, 08/15/2014 - 10:27 | 5097323 Overleveraged_a...
Overleveraged_and_Impatient's picture

6 years or 72 months you can with excellent credit with nothing down, but there is no 0% available on Corvettes. 7 years you might need a little something down.. 8 years financing for a vehicle doesn't exist through traditional means.

Fri, 08/15/2014 - 10:17 | 5097263 813kml
813kml's picture

I think the numbers can be explained by new Toyota trucks for ISIS, US blows them up, Toyota sells replacements.

A very sustainable business model.

Fri, 08/15/2014 - 10:23 | 5097305 _ConanTheLibert...
_ConanTheLibertarian_'s picture

"Broken Toyotas fallacy."

Fri, 08/15/2014 - 10:27 | 5097340 spiral galaxy
spiral galaxy's picture

Ditto for the 4 zillion billion Chevy recalls.  Another factor may be a pending strike by Auto Unions so need to pump out the vehicles, build inventories before hand.  And perhaps another factor is an Obama directive to Government motors to ramp production & keep the minions employed to bolster 3rd quarter GDP --- and bolster elections.  What it is not is more jobs and higher wages.  But I could be wrong :-)

Fri, 08/15/2014 - 10:29 | 5097358 Overleveraged_a...
Overleveraged_and_Impatient's picture

I have been employed by a GM dealership since 2010 and am now making 6 figures at 27 years old. I believe this would mean a job and higher wages....

Fri, 08/15/2014 - 10:48 | 5097490 3.7.77
3.7.77's picture

Yea, and I work 15 hrs a week at home and make $15,000.


Fri, 08/15/2014 - 10:48 | 5097491 AdvancingTime
AdvancingTime's picture

Whenever I hear about an exciting new product my mind sometimes drifts back to thoughts of the Volt. Below is an article about GM halting the manufacture of its infamous Chevrolet Volt for at least four weeks. At the time few were shocked. The Volt was awarded the 2010 "car of the year" title. Later it received negative attention when it made the news as a "hot little item" when problems arose with the car catching on fire.

Fri, 08/15/2014 - 10:19 | 5097277 TrustbutVerify
TrustbutVerify's picture

How do these subprime loans priginate?  What entity is pushing them?  Are they really expected to be repaid or is it simply a welfare program? 

If its government that's pushing it, shouldn't cars with maximum US content be favored?  This doesn't necessarily mean a name brand considered "U.S."  Doesn't the Camry has the highest US content for a passenger car?  

Fri, 08/15/2014 - 10:22 | 5097301 KidHorn
Fri, 08/15/2014 - 10:34 | 5097375 IANAE
IANAE's picture



1. customer/credit walks into dealership to purchase vehicle.

2. if customer doesn't have their own financing (typically bank/CU loan) dealer writes up 'retail installment sales contract' or finance contract after running customer details past several banks and finance co.s to get bids

3. dealer typically selects 'best' deal - combination of best for customer, manufacturer, and most $$ for dealer (like sausage being made) - and offers to customer. 

4. when deal is concluded dealer 'sells' finance contract to one of bank/finco bids from step 2.

5. Bank and/or finance co will typically securitize these deals refreshing the cash for more deals and leaving them with servicing ops and revenue.


Conduit financing via securitization enables scale in this activity - just like subprime mortgage - since after being securitized the credit risk is substantially OBS and cash is ready to originate more...and MOAR.

Fri, 08/15/2014 - 10:21 | 5097285 KidHorn
KidHorn's picture

What's the problem? GM makes cars that last about 2 years. Around the time the subprime borrower stops making payments. Seems like a win-win to me.

Fri, 08/15/2014 - 10:23 | 5097307 Hohum
Hohum's picture

Borrow to buy rapidly depreciating assets.  Sounds good. /s

Fri, 08/15/2014 - 10:23 | 5097312 Overleveraged_a...
Overleveraged_and_Impatient's picture

It's true people. Car sales are booming. I work at a Chevy Cadillac store in New England and am making more money as a car salesman than any of my friends with masters degrees.  MOST of my customers (80%) or more actually have excellent credit of 700 or above.

Fri, 08/15/2014 - 10:42 | 5097431 AdvancingTime
AdvancingTime's picture

The poorest of the poor are not buying Cadillacs but lower end models. Also the New England area is doing better than much of America. If you have been in the business since 2010 I can understand this being your best year ever.

Fri, 08/15/2014 - 10:54 | 5097536 Comte d'herblay
Comte d'herblay's picture

I believe you.  Went shopping for one during the last two months and I cannot believe that people are paying in the $40,000 plus range for pickup trucks!  The CUVs prices are outrageous, and yet the dealers seem to have no trouble unloading them.  There has to be a 30-50% profit margin in some of these vehicles. 

The Camrys with some bells and whistles are in the $36,000  range.

The used market for 2-4 yr old cars is also strong.  

It's just a total mystery to me how the jobs market can be as poor ------as this blog site and others who attempt to reveal the true extent of it----as purported to be.

We are living in dual universe with parallel pair-o-dimes. 


Fri, 08/15/2014 - 11:03 | 5097624 Oldwood
Oldwood's picture

If you want to see the true strength of any economy, see how much can be sold with no credit. This is what crushed the economy, the shut down of credit. Would we have had a collapse if there had been little or no debt? The bigger question would be, would we have an economy to crash if there was no debt?

Fri, 08/15/2014 - 10:59 | 5097590 starman
starman's picture

"Car sales are booming" hey do me a favor and google total domestic sales by GM in 2007 and 2013. If you to busy selling cars though, here is what you'll find.

GM total domestic sales 8 million in 07 vs 3975 million in 2013!!!!

Now back to your "car sales are booming" comment....................................??


Fri, 08/15/2014 - 11:06 | 5097634 Oldwood
Oldwood's picture

As we know...everything is relative to the "new normal".

Fri, 08/15/2014 - 15:48 | 5099265 IANAE
IANAE's picture

# units per store may be close or the need to adjust for the lower # of dealers now vs '07 ... MANY were rinsed with the recession and GM (and Chrysler) BK.

Fri, 08/15/2014 - 11:23 | 5097773 KidHorn
KidHorn's picture

I know a Mercedes saleman and he just had his best sales month ever.

Fri, 08/15/2014 - 11:53 | 5097972 Rikky
Rikky's picture

So said the RE broker who prior was a lifeguard at the senior citizens home down the street right before 2007.

Fri, 08/15/2014 - 10:25 | 5097320 madbraz
madbraz's picture

Like anyone believes any of this BS data and surveys by the FED - the only purpose of this cronies is pump the risk in their masters portfolios higher.

End the Fed. At the very least end the NY FED and it's cartel relation with bank owners - no more "i need $5 billion in treasury collateral for nothing, the NY Fed gives it to me".

Fri, 08/15/2014 - 10:26 | 5097327 orangegeek
orangegeek's picture

Repo business is ready to boom in 3-6 months.



Fri, 08/15/2014 - 10:28 | 5097348 Overleveraged_a...
Overleveraged_and_Impatient's picture

Eh, not so much. I've been in the business since 2010 and most of my customers always have excellent credit. We do have a department that guarantees everybody a loan with a job, but I don't sell as many of those types of customers.

Fri, 08/15/2014 - 10:59 | 5097587 Oldwood
Oldwood's picture

What is the typical interest rate most are paying, or are they mostly leases.

Fri, 08/15/2014 - 10:28 | 5097346 Gringo Viejo
Gringo Viejo's picture

Just noted we're getting a taste of the "new transparancy" in the Silver market today. Dollar down .14. Silver down 36 cents as I write. Criminal.

Fri, 08/15/2014 - 10:29 | 5097354 Gringo Viejo
Gringo Viejo's picture

Everybody be "subprime" by now.

Fri, 08/15/2014 - 10:35 | 5097391 AdvancingTime
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.

Fri, 08/15/2014 - 10:41 | 5097425 q99x2
q99x2's picture

Unfortunately I bought a 1992 Toyota Corolla in 1993 and it never seems to quit running. I may never get to buy a new car.

Fri, 08/15/2014 - 13:00 | 5098345 edifice
edifice's picture

My parents bought an '86 Corolla, and the thing lasted over 20 years. My sister drove it until 2008. The original engine had over 300k miles, when it finally started having issues.

Fri, 08/15/2014 - 10:46 | 5097463 Eyeroller
Eyeroller's picture

Lizard Lick Franchise Boom!

Fri, 08/15/2014 - 11:32 | 5097832 nightshiftsucks
nightshiftsucks's picture

I work in mfg and our biggest customers are for auto's and we haven't been that busy.

Fri, 08/15/2014 - 11:41 | 5097900 edifice
edifice's picture

Just rolled over 220k miles on my 2003 Civic, today. Gonna keep driving the thing until the wheels fall off. Which, may not be too long from now. :)

Fri, 08/15/2014 - 11:52 | 5097963 SantaClaws
SantaClaws's picture

Are there reports showing what it costs GM to build its cars and trucks?  I've heard that for some GMC pickups, the build cost is one-third to one-half of what buyers pay.  If so, that might explain many of the seemingly crazy sales practices that some have observed -- i.e., the risk to GM from subprime loans may be less than it appears.


To those who say GM vehicles last 2 years, aren't GM warranties longer, like 5 years subject to some mileage amount (e.g., 100,000 miles).  Unless the warranties have lots of exceptions, I would think the warranties would act like a brake of sorts (no pun intended) on turnover.

Fri, 08/15/2014 - 12:02 | 5098036 ihatebarkingdogs
ihatebarkingdogs's picture

I am noticing a current proliferation of new Hyundai's and Kia's in SoCal. My take is that even in sub-prime or a lease, people are shopping the monthly payment.

And of course the abundence of X5's, ML320's, and Escalade's being drivin by 20-something individuals that don't appear to have the wherewithall to affoard such vehichles never ceases to make me shake my head.

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