With interest rates rising and now clearly weighing on the housing recovery (and affordability, as we noted earlier [9]), many look at the extreme jumps in auto sales being pumped out today and worry that higher rates will impact that credit-fueled orgasm of optimism. While house price appreciation and belief in its linear extrapolation seemed to have prompted an inordinate amount of fed-funded credit-based car sales in the last month, the fact is that rates won't 'directly' affect car-buyers, since as CNBC's Rick Santelli exclaims, auto-loan rates are massively high already with millions paying high double-digit rates and terms are now as long at 97 months!!
[Real Disposable Personal Incomes Weighing On Spending...
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Simply put, with incomes stagnating, should we see any marginal impact on ability-to-pay or credit-availability (which will be affected by higher rates weighing on funding abilities - see below), then as Santelli concludes, watch out for these little words... "Auto Sub-prime loans."
Of course, this is not the first time we have discussed this... As we discussed here "Auto Loan Delinquency Balances Rise 24% YoY" [10]:
[11]
But as Bloomberg noted last week [12]:
Borrowing costs are rising for subprime auto lenders in the asset-backed bond market, squeezing profit margins and pressuring firms to make even riskier loans.
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American Credit Acceptance Corp., the Spartanburg, South Carolina-based buyer of “deep subprime” loans, paid 225 basis points over benchmarks to sell A rated debt on July 31, up from 165 in March.
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Subprime lenders lured into the market by low financing costs during the past three years now face being pushed out as rates reverse, according to Moody’s Investors Service. Funding costs are climbing as the Federal Reserve considers reducing $85 billion of monthly bond purchases that have steered investors to riskier, higher-yielding debt.
“The smaller guys are more dependent on lower financing costs than top-tier issuers,” said James Grady, a managing director at Deutsche Insurance Asset Management in New York. “They have less of a cushion.”
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Total sales of securities linked to subprime car loans have surged 24.4 percent to $14.7 billion in 2013 from a year earlier, according to Deutsche Bank AG. Issuance has climbed from $2.4 billion in 2009 and may approach the $20.9 billion sold in 2007
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Unintended Consequences are everywhere as rising rates squeeze margins but instead of slowing lending, merely lead to additional risk since the easy money won't stop flowing...
Rates “have come off of what we viewed as unsustainably low in the first place,” Choate said in an Aug. 19 interview. “We didn’t adjust our loan pricing or origination appetite to the positive, so we haven’t had to react to the negative.”
The average interest rate on a 72-month subprime loan has held at about 14 percent throughout 2013, he said. If funding costs continue to climb along with interest rates, the company will adjust its pricing, he said.
The rising funding costs also may push lenders to finance less creditworthy customers that will pay higher rates
And sadly, just as with the subprime home loans, the story of Fed-easy-money-driven demand is all too obvious:
“The space expanded very quickly,” she said. “People with money didn’t have anywhere else to put it so they were looking for yield” and buying the bonds, she said.
Is it any wonder Santelli and many others are seeing this exuberant car buying for the unsustainable credit-fueled bubble that it appears to be...