Americans currently owe more than $800 billion against their cars and trucks ? 34% of this debt is owed by people with subprime credit. Another 10% is owed by "deep subprime" ? folks with credit scores below
550. Businessweek quotes Morgan Stanley analyst Adam Jonas pointing out the obvious: "Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery."No knowledgeable banker would hold onto this kind of toilet paper. Thus, more of these loans are being securitized and sold ? $17.2 billion worth last year. That's the most since the go-go credit year of 2005. These securitizations move credit risk away from the car companies and finance companies and onto investors ? the same thing that happened in the housing bubble. This separates the underwriter of the loan from the consequences of a default.
We all know how this will eventually end?
If you lived through the subprime-mortgage debacle, you must know what will happen next. Defaults will suddenly rise. Credit losses will follow. Used car prices will fall as more and more cars are auctioned off. More and more car buyers will find credit suddenly unavailable. They will be unable to roll over their loans or get into a new lease, as credit becomes tighter. More and more vehicles will pile up on dealer lots.
Color us surprised that folks that stretched to buy cars are struggling to pay that money back.
"We're starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time," Melinda Zabritski, senior director of automotive finance for automotive-data provider Experian Automotive, said in a company report.
Automobile repossessions jumped 70% in the second quarter versus the same quarter a year ago, according to Experian. And delinquencies more than 60 days were up by 7% over the same time frame.
Meanwhile, the volume of auto loans keeps rising? Total outstanding auto loans hit $839 billion in the second quarter, a 12% increase from the same quarter a year ago.
The Federal Reserve Bank of New York estimates that 23% of auto loans went to borrowers with credit scores lower than 620? Another 10% went to "deep subprime," those with scores lower than 550.
And the government is already looking into the lax lending? Federal prosecutors began a civil investigation into subprime auto lending. They're specifically looking into General Motors' practices? Regulators are concerned lenders are ignoring lending standards.