Subprime auto lending coming back to cost economy

It was noted in the 2006-09 credit bust that people would pay their car loan ahead of everything else, because the car allowed them mobility, and if necessary, a place to sleep even if they lost their home or apartment.  The fact that millions of Americans are already defaulting on their car loans today while the economy is reportedly still at ‘full employment’ and in recovery, not recession, raises huge red flags and should challenge the ‘economy is getting better’ mantra.  See: As auto lending rises, so do delinquences

Regulators are airing “significant concern” about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace.

On Wednesday, the Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter.

In the third quarter, 2 percent of subprime auto loan balances became at least 90 days delinquent, up from 1.6 percent in the third quarter of 2014.

This chart of motor vehicle loans owned and securitized (packaged and sold to investors) since 1945, shows that this credit has exploded higher since the 2008 credit bubble.  No deleveraging here folks.  Next to shelter costs, auto loans are the largest outlay for families.

auto debt

This video report gives more context to the perverse incentives that have been driving these practices.  They have allowed some companies and salespeople to extract commissions and fees up front, by ‘selling’ vehicles, making the loans and then packaging them into subprime bonds and selling them to desperate for yield investors.  But it leaves borrowers worse off in the end, and the social and financial costs for taxpayers, that much greater.  Predatory, financially suicidal practices are counterproductive:  not net progress.  The charade must end.

Banks and private equity firms searching for high-yield investments have fueled a boom in subprime auto loans to buyers who can’t afford them, including those who recently filed for bankruptcy. Here is a direct video link.

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