Car Loans Versus Subprime Mortgages – Are there any parallels?

derailedcapitalism's picture

Is there such a thing as a “subprime car loan bubble” brewing? Both Jamie Dimon (J.P Morgan boss) and comedian John Oliver seem to think so. While dedicating nearly 18 minutes of a recent episode of his show “Last Week Tonight” to auto loans, Oliver said:

“There is concern that this could be the subprime mortgage crisis, but with cars,”

The critique stems from what’s being perceived as the “fast and loose” credit
policies that many used car dealers are adopting – eerily similar (according to
Oliver) to what mortgage lenders did in the years and months leading up to the
subprime crisis.

Mr. Dimon too was very clear about what he thinks about what’s happening with auto loans:

"Auto is clearly a little stretched, in my opinion…Someone is going to get hurt. ... “

So what’s really going on here? Are we really standing at a precipitous auto loan cliff,
just waiting to fall over? Is there a bubble that’s about to explode in the car
loan world? Is there more happening underneath than meets the eye? Should we be
bracing ourselves for the other auto loan shoe to drop?

LESS THAN WHAT MEETS THE EYE

Not so says Melinda Zabritski, Experian’s director of Automotive Finance. According to Zabritski, while there are some concerning elements of subprime loans within the car loan industry:

"We're not seeing this big, undisciplined increase in subprime"

Mike Jackson, CEO of Auto Nation overwhelmingly agrees with Zabritski’s assessment. According to Jackson, the issue seems to have been overblown by the financial media, taking it out of context. To put things into perspective, Jackson noted that, of the over $12 trillion in consumer debt outstanding, only $900 billion relates to auto debt.

His argument against the idea of an “auto loan bubble” is based on the fact that auto loan defaults are significantly low (compared to home loans) because these loans are lower than mortgages, credit card debt and even student loans. Bottom line, according to Jackson:

“People Pay Their Auto Loans!"

And while many analysts sounding the “bubble alarm” warn institutions against extending subprime auto financing, Zabritski points out that for some borrowers, these loans are really a lifeline – enabling them the mobility needed to (travel to areas where better jobs exist and) seek improvement in their economic situations. The logic therefore is, once they stabilize their financial situations, the risk of defaulting on their subprime auto loan reduces.

DIFFERENCES BY THE NUMBERS

Late last year (2016), Fitch reported that annualized losses from subprime auto loans are ticking higher – over 27% higher in the month of August when measured on an annual basis. Fitch has predicted that we would see subprime auto loan losses surpass the 10% mark heading into 2017

However, the securitization of sub-prime auto loans also differs vastly from those of mortgages. While almost all mortgages are securitized, only a fraction, around 19% (roughly $23.3 billion), of the $125 billion in subprime auto loans are securitized.

Experts also point out that legal processes related to recovery of defunct auto loans is very different than that followed for subprime mortgages. Even after a rather protracted repossession process, once the lender goes get possession of the (often abandoned and neglected) home, it has lost most of its book value. With subprime auto loan delinquencies, that’s not the case – automobiles are almost immediately repossessed, and monetized, shortly after defaulting on repayment.

It may therefore be that there are no parallels – or at least not as many perfectly comparable ones – between the subprime mortgage crisis and the ongoing subprime auto loan situation. In any case, there may not be the type of underlying structural problems between the two types of sub-primes. In fact, while warning that there may be an issue here, Mr. Dimon admitted that he didn’t see “a systemic issue” in the subprime auto lending arena.

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Jtrillian's picture

When you take time to defend a bubble, you know the bubble is about to pop. 

Subprime auto is not the only bubble out there trying to pop.  This time around there will be multiple bubbles popping at once (including fiat currencies).  It's going to make everything else pale in comparison. 

Some of the other bubbles out there include:
Corporate Debt/ Stock Buybacks
Goverment Bonds/Treasuries
Student Loans
Margin Debt
Subprime Energy Loans
Credit Cards
Pensions
Housing (again)

Folks, THIS IS WHAT YOU GET WHEN YOU REWARD BAD BEHAVIOR.  

ToSoft4Truth's picture

I think India has a $3,000 (US) car - The Tata. 

 

We're stuck with Chevy Cruzes that cost 5X as much. 

 

Edit:

The Nano is a small car but no differnet than the shit FIAT 500's. The lowest end FIAT 500 starts at 15K. 

"... “Tata Nano,” a microcar that can seat four people at a cost of about $1,700... (2016)."

mary mary's picture

2008 already taught us this. 

In 2008, taxpayers had to bail out both the Wall Street "Liar-Loan Mortgage" Usurers and the Detroit "Nothing-Down Car Sales" Usurers.

And when you bail out an alcoholic, he goes right back to drinking heavily again.

gmak's picture

 

“People Pay Their Auto Loans!"

 

 

Remember this: "People pay their mortgages!".

besnook's picture

funny story. i was busting the chops of a black guy about how much black people liked cadillcs(back when they were land yachts) but lived in crappy housing.

he responded, "you can always sleep in your car but you can't drive a house".

percocet's picture

whole lot of dindu nuffins driving around in new escalades and fine german makes in the metro detroit area...and yes, they also have EBT cards.

Steeley's picture

It's not auto loans per se, it's all the student debt that is also owed by the borrower - both loans under water the moment you drive off the lot, and never do surface.

 

Pejorative Requiem's picture

"To put things into perspective, Jackson noted that, of the over $12 trillion in consumer debt outstanding, only $900 million relates to auto debt."

I find that really hard to believe. US new car sales are around 17 million vehicles a year, and used cars are around 40 million vehicles a year. So about 57 million vehicles are sold in the US each year. And only $900 million in total auto debt?

Omen IV's picture

He mispoke  it is billions - but the real issue at 57 million vehicles - is $17,500 per vehicle each  - approximately -  to include used - so a very big number given ongoing depreciation

Bam_Man's picture

I think he meant to say $900 BILLION.

These people are morons.

Steeley's picture

Like Hillary claiming 750,000 new ("family wage, union") jobs per $1 Billion in infrastructure investment. Math is hard for liberal arts majors, and decimals in particular are such tricky, elusive little things.

 

SmittyinLA's picture

automobiles are almost immediately repossessed, and monetized, shortly after defaulting on repayment*

 

*...unless the cars breakdown before they're paid off, in which case the lender is stuck with a pile o junk and 37,000.00 loan  balance and no borrowers assets to make up the  difference

Steeley's picture

It's deducted from the business tax offsetting taxible gains, meaning the unrealized tax income (loss) is diffused into the economy. Same destination used for for mortgages, just a different path.

Osmium's picture

"People pay their auto loans"

Really?  This article says they don't

http://www.zerohedge.com/news/2016-11-02/more-signs-strong-us-consumer-e...

Oldwood's picture

The question for me is who takes the losses if loans fail? Are they securitized? DO the lenders have deep enough pockets to handle the loss? Loan default is seldom a problem unless one default is directly lnked to another...and another...and another. But we have NEVER seen that before, and we KNOW that banks only care about their customers and shareholders, and would never do anything stupid or selfish. NEVER

Steeley's picture

The auto loans are repackaged and resold, just like student debt and, for an exquisite simile, mortgages. Eventually the risk finds its way into your wallet.

deer_flasher's picture

Something is off either way with auto financing in the US, it aint posible that we can get a 2014 jetta in mexico for 150k pesos (around 7200 USD with todays exchange), and that same car, hovers around 10k-14k in the US, I mean, off the lot BRAND NEW it costs around 240k pesos down here (about 11.5k USD), and you can't buy the damn thing for less than 20k plus financing?, that shouldn't be posible, US has lower interest rates and things are still more expensive, makes me wonder how inflated prices are

Bankers R Wankers's picture

Your assumptions are unrealistic. I have homes in Guadalajara/Cabos and looked in to it about 3 months ago. Ford explorer S in Mexico was ochocientos mil pesos con IVA 800k pesos for you Gringos. And I bought one in Denver (6% sales tax) for 39k. (780k pesos) 

PS: Dont judge it was for the wife and I paid cash

 

deer_flasher's picture

A vehicle the wife ''needs'' because of reasons lol,... Actually I ive and work in monterrey, and the jetta 2014 analogy is because I just bought one used april last year (2007 VW bora got a case of ''blown the f$#3 up engine''), and on one shopping trip to the US I happen to see one like mine for sale and was like ''Why is it so expensive in gringolandia???'', that's an anomaly on certain types of vehicles which caught my attention. On the explorer thing, those things are freaking expensive (I dont have the buying power to get one truth be told, wont lie), but I remember them being cheaper in the US than in mexico around 2000s, but the trend changed and some vehicles, and I mean some, are actually more expensive up there and doesnt add up in some cases, I'd probably bet that it has to do with locally produced vehicles vs imported (jetta's being built here and mostly with pesos)

peddling-fiction's picture

It used to be always more expensive to buy cars in Mexico, compared to the U.S. 15 to 30 years ago.

dot.dot's picture

Waste of time article.

Steeley's picture

Waste of time comment pointing out the obvious. Now you're even.

aliens is here's picture

I see a lot of people driving nice new cars even the ghetto type. I am driving my 8 year Toyota and have no plans to get a new one ever again. I like money and I intent to keep it.

bkboy's picture

Bingo.  The objective is to buy miles, not metal.  I can usually buy miles for less than a nickle each.  The "sweet spot" is to buy with cash at six years, 100k miles plus and hold for at least ten years and another 200k miles.  The money you save buying two cars this way over twenty years will buy the third car for free, just when you are downsizing for retirement.  Due to low gasoline prices, the best deal now in Cali is a 2010 Prius.  Has all the current bluetooth tech but gets 45 mpg.  Can buy "salvage title" for less than $5k, normal title for less than $10k.  That engine will last over 300k, so if you find one with 100k miles, and pay less than $10k, you are buying 200k miles for a nickle a mile when the average depreciation according to the IRS is 50 cents a mile, or ten times higher.  As vehicles are the second largest consumer expenditure, such disciplined buying is the key to saving middle class wealth from a working class wage.

lasvegaspersona's picture

Another sweet spot is the 25 year old vehicle. For a second vehicle and less than 5k miles per year you can own an 'antique', 'classic' with far lower insurance costs.

Not the best choice for daily commute but for some it can cut costs way down.

deer_flasher's picture

Agree, dad drove a 1994 cheyenne (a silverado 2500 type with different accesories) til the thing dropped dead in 2014 and got a used 2012 RAM and will probably drive it til one of them dies haha. Really makes no sense to buy cars every 2-4 years to keep up with the joneses