Summary: Let’s look at the small and large implications of the auto loan boom. It’s an example of our inability to learn, resulting in our credit-driven business cycles. Corporations profit from more sales and interest charges. People suffer from excessive debt burdens, and bankruptcies. Governments run deficits from the eventual busts. So it goes cycle after cycle since the New Deal era regulations were removed. Perhaps eventually we’ll learn, and a new era will begin.
- Auto lending
- Larger lessons
- For More Information
(1) Auto Lending
Madness is the failure of bankers and regulators to learn from the bankers’ imprudent greed that caused the housing bubble — and bust. With results we see today in auto lending.
… average automotive loan term reached an all-time high of 66 months … loans with terms 73-84 months grew to 25% of all loans originated during the quarter. …
The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.
… Market share for nonprime, subprime and deep subprime new vehicle loans in Q1 2014 rose to 34%.
— Experian Automotive, 2 June 2014
A seven year car loan! Long-life loans to subprime borrowers is a recipe for defaults. Fortunately lenders have another line of defense: the equity of the collateral — because the Loan to Value (LTV) ratio of the car is well below 100%. That’s just common sense. Except in mad 21st century America, as seen in this data from the Semiannual Risk Perspective, Office of the Comptroller of the Currency, Spring 2014 (red emphasis added):
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. … Average LTV rates for both new and used vehicles are above 100% for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing.
Long new car loans to subprime borrowers, made with loan/value ratios over 1. The car is deeply under water as it rolls off the lot, and for many years following. At least subprime mortgage bankers expected home prices to rise; these lenders cannot even hope for that. So what happens when these loans go bad?
The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure.
(2) Larger lessons
(a) It’s late in the business cycle
When vendors exhaust their market, they often extend credit to uncreditworthy borrowers to maintain their sales. It’s a valuable “tell”, because it so often happens at the end of business cycles. Tech vendors did this in the last stage of the tech bubble. Subprime home mortgage lending dominated the last stage of the housing bubble — eventually providing “liar loans” with “no docs” required, and no downpayments (some even allowing capitalizing the 15% closing costs). And now we see subprime auto loans on crazy-easy terms.
(b) Regulators are still owned by the banks
The same mistakes, time after time. Lending, bubble, burst, bailout. It’s a feature, not a bug, for modern banks. But this dance requires partners. In the tech and real estate bubbles entire sectors became partners in the easy credit game (often to their regret). But bank regulators are essential partners.
This does not surprise anyone paying attention. Bank regulators exist to support bank profits, and facilitate the inevitable bailouts from their imprudent lending (as has happened every decade, on an ever-larger as the banks slowly slipped the leashes put on them during the New Deal. Free markets! Freedom! Ayn Rand!
(c) It’s evolution in action
Money flows from stupid to smart. Bankers have built siphons to fill their pockets with America’s wealth. Their political power defeats all attempts to contain them. Both Left and Right agree on this. The Tea Party was born in opposition to bank bailouts — but worked to elect bank-friendly representatives to Congress. The Occupy Wall Street movement was the biggest mobilization of the Left since the Vietnam War; it left less behind than last winter’s snow.
“In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”
– Spencer Bachus (R-AL), Chairman of the House Banking Committee, The Birmingham News, 9 December 2010
(3) For More Information
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- Please read this. For the sake of yourself, your children, and their children, 25 June 2009 — About Goldman Sachs
- FDR explains one dimension of our problem: bankers own the government, 23 November 2011
- Rising consumer debt driving the recovery: boon or bane?, 10 November 2013
- Auto loans are a driver of the expansion, but might be running out of gas, 1 April 2014