The New York Times is running a series on subprime auto lending, called “Driven to Debt.” The most recent instalment , “Miss a Payment? Good Luck Moving That Car,” introduces readers to the scary world of borrowers who can literally have their cars turnedoff if they get into financial trouble.
The technology exists and can be operated from laptops, desktops, and mobile devices. Michael Corkery and Jessica Silver-Greenberg’s DealBook report on cars that won’t start at the most alarming times: a child has a high fever, a driver is stuck in a rough neighbourhood, somebody is pumping gas and the vehicle goes dead.
The tech can also enable lenders to track a borrower’s movements, undermining the whole concept of a car as an icon of freedom and unfettered mobility.
The U.S. auto market completely cratered in the aftermath of the financial crisis, but it has recovered dramatically. Numerous observers have pointed to subprime lending — which the New York Times defined as lending to borrowers with credit scores under 640 — as a crucial factor, pushing new car sales to heights not seen since before the Great Recession.
The media has been swift to connect the current upsurge in subprime lending with the subprime mortgage crisis, due mainly to superficial similarities in the way that subprime auto loans are packaged into securities that investors can buy to obtain a substantial return. The risk that’s juicing the yields, of course, is that subprime borrowers are more likely to fall behind on payments or default.
A recurrent feature of these stories, however, is a cast of borrowers who are probably what’s referred to in the business as “deep” subprime. Last year, Reuters reported on a borrower who put up a shotgun as a down payment for a car loan. These borrowers are also financing used cars — in many cases, cars that are more than five years old. The shotgun guy bought a 2007 Suzuki. A borrower in the Times’ story financed a 2001 Dodge pickup.
Are these really accurate portrayals of the subprime auto lending market? There’s some potential for disagreement. This week, Wells Fargo released an analysis of the auto lending market with a particular focus on subprime borrowing. The bank’s economists concluded that it’s not time to panic:
Although the impressive performance of the automobile sector has increased the chatter regarding its sustainability going forward, an analysis of the financing of automobile purchases does not show causes of concern, at least not for now. While it is true that the increase in new automobile sales, at an annualized rate of 17.45 million in August 2014, has raised eyebrows across the market, the fact is that automobile financing, while deteriorating from a point of view of the type of loans that have been made over the last several years, is still far away from the pre- Great Recession days.
DEBATE OR DISCONNECT?
At this point, it’s getting difficult to figure out whether this is a debate about the growth in subprime auto lending — with financial analysts on one side and journalists on the other — or a disconnect. I’ve been following the expansion of subprime lending since 2010 and have consistently heard the finance side maintain that even though more and more new and used cars are being sold, the system isn’t on the verge of imploding.
It’s also worth noting that although auto loans and mortgages can both be securitized, the loan amounts and durations are completely different: tens of thousands versus hundreds, 5-to-7 years versus 30.
None of this means that there won’t be major problems with subprime auto lending at some point. The finance side wants to make more loans and isn’t necessarily going to be inclined to raise a lot of red flags — yet. And the media doesn’t want to miss another financial catastrophe and as a result is on the lookout for lending abuses.
Everyone has observed that low-interest rates and Federal Reserve policy is making it easier to get a car loan. But weak growth in the economy has some critics asking whether the boom in auto sales — which is also a boom in auto loans — is supported by the reality of household budgets.
The weird thing is how far apart the two sides currently seem to be.