Featured Post

Little Red CoreDEBT

Could we be looking at a subprime credit crisis for cars?

Few things capture this phenomenon like the partnership between Fiat Chrysler Automobiles NV and Banco Santander SA. Since 2013, as U.S. car sales soared, the two have built one of the industry’s most powerful subprime machines.

Details of that relationship, pieced together from court documents, regulatory filings and interviews with industry insiders, lay bare some of the excesses of today’s subprime auto boom. Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories. For instance, Santander recently vetted incomes on fewer than one out of every 10 loans packaged into $1 billion of bonds, according to Moody’s Investors Service. The largest portion were for Chrysler vehicles.

Some of their dealers, meantime, gamed the loan application process so low-income borrowers could drive off in new cars, state prosecutors said in court documents.

Image by yonkershonda

Some of these stories are pretty disturbing, and familiar. Especially the bundling and flipping part and the act of putting people in products they cannot afford.

For the housing crisis, I believed that there was a lot of blame to go around. From a criminal standpoint, the guts of it was the actual fraud, lying about incomes and then bundling and flipping the loans under unreasonably optimistic ratings. The primary victims were the investors who bought them, the taxpayers who ultimately had to bail them out, and homeowners who saw the value of their houses plummet. On the one hand, I do believe that if we were going to bail out anyone, more of that should have gone with the borrowers. On the other hand, there are limits to the extent that I consider most of the borrowers themselves to be victims.

The two points of hesitation I have with my moralism are that they existed within a particular culture, and that culture told them that buying a house was supposed to be a no-lose proposition. They believed that if they could just get into the house, everything would work itself out. They’d get a raise, they’d be able to refinance, they’d be able to sell the house. The second is that they were caught on the same treadmill as other homeowners. Even if they didn’t want an especially large or grandiose house, they were competing against other buyers and this was driving up prices where even more modest homes were immodestly priced.

In addition to likely having a lesser effect on the economy as a whole, I am less worried about an auto loan bubble because a lot of these dynamics don’t really apply. Anyone engaging in fraud ought to be prosecuted to the fullest extent of the law. If we have to bail out certain institutions or even borrowers to prevent a chain reaction, then I guess we should (though it seems less likely). Beyond that, though, there are some definite differences in the circumstances that leave me less sympathetic to the car buyers than I was towards the home buyers.

Most notably, the cost of a home is dependent largely (though not entirely) on the actions of others. How much you spend on a house has less to do with what kind of house you want and more to do with where you want to live. We do have some discretion over where we choose to live, but it’s certainly limited. So if your job offer was in California during the real estate run, what were you supposed to do? Move? Well, I have been known to advocate that very thing, but it’s not the solution for everybody.

With cars, if it comes to not being able to afford the car you want, the easiest thing to do is get a less expensive car. The price of a car is infinitely variable. You can spend as little as a few hundred dollars, or as much as several tens of thousands, or even more. The likelihood is therefore a lot higher that if you bought more car than you could afford, that’s a decision that you made. And unlike houses, it’s far less likely you were caught up in a substantial bidding war. The costs of used cars has been volatile in the past, but nowhere near the degree to which housing has.

The counterargument is that most housing performs is core function – a roof over our heads – competently whether upscale or downscale. The same can’t be said of cars. You can tell someone to get a smaller house or apartment and they will more likely just live in a place that’s smaller. I mean, there are other drawbacks like crime and schools, but the house is less likely to completely break down the way a car might. Telling someone to get a cheaper car literally means telling someone to get a car less likely to perform its core function, more likely to make them miss work or other important engagements, and so on. And while we have homeless shelters, we don’t do the same for transportation.

In that vein, I suppose I would need to know more about the loans being made. My bias is that I’ve known a lot more people being unwise in their purchase of automobiles than housing or virtually anything else besides technology or, occasionally, clothes. So I’m imagining people that ought to have purchased a car for a couple thousand instead getting a loan for eight thousand or even buying new. If it’s people who can’t pay the couple thousand dollars they need in the first place, then it is more difficult to blame them for not optimistically pouncing on any loan they can find.


Managing Editor
Home Page Twitter Google+ Pinterest 

Will Truman is a former professional gearhead who is presently a stay-at-home father in the Mountain East. He has moved around frequently, having lived in six places since 2003, ranging from rural outposts to major metropolitan areas. He also writes fiction, when he finds the time. ...more →

Please do be so kind as to share this post.
TwitterFacebookRedditEmailPrintFriendlyMore options

58 thoughts on “Little Red CoreDEBT

  1. Several things going on here…

    Affording a house: “and that culture told them that buying a house was supposed to be a no-lose proposition. They believed that if they could just get into the house, everything would work itself out. They’d get a raise, they’d be able to refinance, they’d be able to sell the house.” Yeah, part of the “everyone should have a house” social policy. Gee, now that same social policy is being applied to college. Yah, that’ll work out well. But moving on…..This is generally true IF you reasonably qualified or nearly there, ie, you actually have the income claimed on the app, and that you’re not using some convoluted ARM/balloon payment scheme to get into he house.

    “Anyone engaging in fraud ought to be prosecuted to the fullest extent of the law. ” This should have been applied to the mort. issue to. Wanna justify why it shouldn’t, because that’s what you seem to be suggesting.

    “The price of a car is infinitely variable.” Indeed, but it’s on an upward trend, what with the pushing down of luxury features and gov’t mandates. And the loan terms are increasing, from 4 years back in the day, now to 7 years. Cars that are underwater before the loan is satisfied. Gee, doesn’t this sound like the housing bubble?

    Report

    • Cars that are underwater before the loan is satisfied. Gee, doesn’t this sound like the housing bubble

      This is strange, because cars don’t appreciate in value, so there is no way to ever recover the value of the loan.

      Report

      • Oscar,
        What he means is rolling over the loans. Which people have done, and will do again, if they can afford it. So, you aren’t done paying off your 7-8 year loan, so you roll the difference into your new car.

        Report

        • Yeah. Dealin’ Doug here in town (the theory behind his wearing 8 rings is that he has knuckle tats) ends his commercials with “and I’ll pay off your car no matter *WHAT* you owe!”

          It doesn’t take doin’ that but so many times before you’ve got a $2X loan on a car that only cost $X.

          Report

      • What Kimmi said, but in addition, generally, you had folks putting down payments and having 4 year car loans “back in the day”. So the car was paid for in 4 years and would generally last another 6 years or more. Now, the loans are 7 years, making the value of the car much less, if any, by the time the car is paid off. We’re moving to a 10 year car loan. At least with a 4 year loan, on many cars, they still had value.

        Report

    • Damon,
      Yes, people haven’t the sense that god gave a horse, and thus they walk onto thin air and then SCREAM when they fall. Ya know, like a comic book.

      $300 backup cameras are an insignificant part of a $30,000 car (which is about the price you can get a Civic for — trying to find one without all the extras is an exercise in futility — and that used to be a cheap car).

      Worse than the housing bubble in some ways, as there’s more variability of supply.

      Report

      • $300 backup cameras are an insignificant part of a $30,000 car

        True. But it IS a factor. Also a factor is the CAFE standards and safety requirements. I can still remember going to work and guys pulling up in Chevy Sprints. My Honda Civic CRX got 40 MPG and neither it nor the Sprint could be made today.

        Report

          • I once saw a civic crx with a big wing, bigger tail pipe, and a “turbo” sticker. Never was sure there actually WAS a turbo 4 cylinder in that car but it did look tacky.

            Report

            • Damon,
              Anything‘s better than the “let’s strap a rocket” onto the tail of the car.
              (Yes, I do know blithering idiots. Creative, but still idiots).

              Report

            • When I was a teenager, one of the things where I lived was doing performance modifications to VW Beetles. Not just where I lived, I suppose, given that there was an entire small industry dedicated to making performance replacement parts. Knew one guy who had replaced most of the moving bits in the engine, and then added a supercharger. In hindsight, it seems kind of amazing that there was a time when you could buy a supercharger kit for your economy car.

              Report

      • But you can still find 20k new cars out there, such as a low end cruze for example. actually if you go very low end you can find a versa for about 15k. Note that coupled with this is the fact that cars tend to last longer with the average age of the US fleet being 11 years. (one sign is that the odometer now goes to 1 million miles whereas it used to just go to 100,000,) Of course the feature argument is how much is one kid killed by being run over by backing up worth?

        Of course one significant difference its far easier to reposess a car, just find a tow truck, compared to foreclosing on a house. The main problem as shown on Tv shows is just finding the vehicle to repo.

        Report

        • Lyle,
          Have you actually tried to get a 20k new car recently? It’s apparently pretty hard to pull off (these are the types of roadblocks that were put in front of people paying with a 20% downpayment back in the mortgage balloon crisis)…

          Report

          • Actually I checked a couple of dealer sites near me and they listed cars for 20599 in the Cruze LS model, 21599 for the LT model (even a hatchback). Found some Cruze ls models listed at 17k at a local dealer, as well as Malibu ls at 21.5k. Of course if you want an SUV the sky is the limit, but cars are a drag on the market right now.

            Report

  2. 2.5 Cars per Driving Age Adult in the American Fleet.
    Yes, we are at Peak Stupid Again.
    Wall Street wins, idiots lose.
    Bottom is falling out of the market (lotta new cars standing on lots these days).
    http://www.calculatedriskblog.com/2017/06/vehicle-sales-forecast-sixth.html

    If anyone wants to catch the falling knife, this is a good industry to bet on.

    And who’s the loser? Mostly car dealerships, as the used car market tanks due to the glut on the market. Car Dealerships don’t actually make much money on new cars, after all.
    What the Auto Bailout saved last time may come crashing down this time.

    Report

  3. The price of a car is infinitely variable. You can spend as little as a few hundred dollars…

    Is this true? It was twenty years ago, but I’m not so sure now. A couple of years ago my old car’s head gasket blew. This was an obvious situation of replace rather than repair, and I needed transportation fast. I looked into the idea of picking up a junker to tide me over so that I could buy the real replacement at leisure. I would have done this for up to, say, $500, but found that the price of a junker has gone up.

    Report

  4. I too have mixed feelings. A lot of those real estate subprime loans were unsophisticated first-time buyers. Even vastly more sophisticated home buyers don’t typically do this often enough to have gained any genuine expertise in real estate financing, and have to rely on experts who often have grave conflicts of interest. Moralistic clucking of the tongue at the unsophisticated buyer for believing what he was told by a professional in the field seems unproductive. Cars are different, partly for the reasons given in this piece and partly simply because buying a car is more familiar to the average person. I have little sympathy for the person who buys more car than he needs and then laments the cost. At the same time, at the low end of the “unsophisticated buyer” ladder many of the same issues as with home purchases can apply.

    Report

    • You buy a car, conservatively, once every four years. That’s not terribly often.
      I have ZERO charity for people who don’t even know enough to hire a lawyer (and, given that You Can Hire An Attorney, you DON’T need to rely on experts with grave conflicts of interest. My real estate lawyer certainly wasn’t shy about giving advice on the housing market.)
      A Business wouldn’t DARE do a $100,000+ transaction without having a lawyer present.

      Report

      • This is pretty explicitly blaming the unsophisticated person for not being sophisticated. If it is someone who no excuse for lack of sophistication, that is one thing: Dude, you went to medical school! But for someone with no family history of home ownership or contact with the legal profession? There comes a point where it is unproductive to blame someone for not knowing enough to not know what it is that they don’t know.

        Report

        • Richard,
          Most people in America own houses.
          Most of the 20somethings buying houses were helped by their parents for the downpayment.
          I’m not discussing the settled court cases on racial discrimination here.

          If you can’t smell a rat, you get burned. This happens, again and again and again. I do support Jinglemail (the concept that if you’ve made a bad bargain for a house, you simply give the collateral back, and no harm no foul). That encourages banks to not make unaffordable or unsustainable loans.

          Report

            • Then, by the statistics, pretty much all you’re describing is asian and hispanic people (or new immigrants), and you ought to be pretty straightforward about that.

              75% of white Americans own their own homes, and that rate was dropping through the 2000s.

              Report

  5. The two points of hesitation I have with my moralism are that they existed within a particular culture, and that culture told them that buying a house was supposed to be a no-lose proposition. They believed that if they could just get into the house, everything would work itself out.

    We need to stop talking about what “culture” or “society” tells people to do or promises people. There really is no such thing. And if we are going to personify society and talk about all the different ways it pushes people to take on too much debt for too much house (i.e. the canard that renting is throwing away money or the mortgage interest tax deduction or the idea that we all need granite counter tops and stainless steel appliances and the best school districts), then we should also mention all the commons sense, conventional wisdom and basic personal finance advice that society gives to people as well: don’t buy a house more than 20% of your income, don’t spend more than 25-30% of your take-home pay on principle, taxes and interest, don’t spend more than 10% of your take home pay on car payments, etc.

    We don’t need to scold people or lecture or look down at anyone. But we ought to tell the truth. The housing bubble didn’t happen because people were too unsophisticated to understand the concept of being house poor. Rather, it was a moment when a bunch of people collectively started thinking that the normal rules don’t apply anymore. It happens, tulips, tech stocks, houses… Manias happen and will keep happening, to smart and dumb people alike.

    That said. lots of people did manage to keep their wits through the housing bubble. Just like lots of people manage to get through college with no, little or manageable amounts of student loans. And just like lots of people buy much less car than they could if they took full advantage of all the financing being offered to them. I grew up in New York City and have lived in cities most of my life. I’ve only owned one car. And it was probably too much car for what I was making at the time. As unsophisticated as I was about car ownership when I bought it, I knew it was too much car. I just saw something I liked and got car fever. My saving grace was that I bought it after a deployment and was sitting on a stack of cash, so I only financed less than half of it. When I totaled it, I got an insurance payment for a couple grand more than what I put down on it, so the whole deal worked out as a moderately expensive lease. Even not knowing much, I understood that going underwater on a car doesn’t make much sense. It’s not a hard concept.

    tl;dr: Basic personal finance is pretty unsophisticated stuff. The conventional wisdom will take you far. To get in real trouble with debt, you generally have to decide to live well outside of your means and to start running your personal finances like a hedge fund and leverage up for the purposes of speculation.

    Report

    • “all the commons sense, conventional wisdom and basic personal finance advice that society gives to people as well: don’t buy a house more than 20% of your income, don’t spend more than 25-30% of your take-home pay on principle, taxes and interest, don’t spend more than 10% of your take home pay on car payments, etc.”

      What are the major avenues through which society gives this information to people? Like, can you link to anything? Can you point to a highly rated reality show that glamorizes responsible money management? Can you point to Super Bowl commercials advertising the virtues of long-term financial planning?

      We can debate how responsible people are for how they respond to the various messages they receive from the world (and people within it) around them. But I’d reckon to guess if we actually added up the messages touting responsibility and those touting irresponsibility and the intensity of those messages and all that jazz, it’d weigh pretty heavily towards one side and most people would conclude that that was what “society” “told” them they ought to do.

      Report

            • These used to. It was under “home econ” in my high school. But that was a “girls class” so none of the guys took it. Fortunately for me, my mom saw fit to teach me some life skills: sewing, ironing, using a dishwasher, laundry and dryer machine, etc.

              As Fred Reed said once, “there’s a lot of really stupid people in the world”.

              Report

      • What are the major avenues through which society gives this information to people?

        Can’t say about now, only what the situation was when my wife and I were looking for our first house. The real estate agent wouldn’t show you houses/condos that cost more than 2.5x your gross income (3x in California for known reasons). The S&L documented your income and down payment and wouldn’t loan you money if the payment was more than 25% of your gross income. Normal down payment was 20%; if you only had 10% down, the interest rate went up a full point; if you didn’t have 10% you couldn’t get a loan. Everyone got those same figures from their colleagues and parents. Short version, everyone told you 2.5x and 25%.

        Of course, under those rules there’s no place for a giant investment bank to take a large profit…

        Report

        • Michael,
          Man, with rules like that, I’d NEVER have gotten a house.
          We had a whole business plan worked out, down to the penny, but we were still paying something more like 50% of our net income (and we ain’t in cali, so lower fed taxes).

          … of course, not having a car at all helps. That’s a cool $7000 to put towards the mortgage or the taxes.

          Report

      • I’m not sure that I understand that first set of questions. Are you implying that if Kim Kardashian doesn’t tell us to do something or there isn’t a Super Bowl commercial about it, the average person has no way of finding out? You can find good financial advice from all sorts of sources. All of us over a certain age, has a parent or grandparent that did quaint things like pay for things in cash instead of running up balances on credit cards or who saved up for major purchases using things like a Christmas club account at the bank. And those too young to have experienced that are savvy enough to use the internet. Google “how do I save for a house” or “how much should I spend on a car” or “how much should i borrow for college” and you’re going to get thousands of results. And almost all of those results are going to be centered around some very simple common sense rules of thumb (25% on housing, 10% on a car payment, don’t come out of school owing more money than your likely to earn in your first year).

        Also, there are plenty of well-known figures in personal finance. Suze Orman was a regular guest on Oprah, had a show on MSNBC, and did/does regular specials on PBS. Evangelical Christians make up about a quarter of the population of America and most of them have probably heard of Dave Ramsey. Robert Kiyosaki sold about 26 million copies of Rich Dad Poor Dad. There are hundreds, probably thousands, of blogs and podcasts about personal finance.

        We can debate how responsible people are for how they respond to the various messages they receive from the world (and people within it) around them. But I’d reckon to guess if we actually added up the messages touting responsibility and those touting irresponsibility and the intensity of those messages and all that jazz, it’d weigh pretty heavily towards one side and most people would conclude that that was what “society” “told” them they ought to do.

        There is a word for blindly doing what you think “society” is “telling” you to do: stupid. The average person absorbs hundred, if not thousands, of messages every day pushing and pulling them in a bunch of different directions. So what?

        We need to stop doing this thing where we pretend that people are mindless automatons just being helplessly drawn to the shiniest thing in view. It’s not helpful. It’s not compassionate. And most importantly it’s not true. Human beings make choices. We sum the potential benefits of an action and the potential losses of an action, we make some kind of mental calculation about the likelihood of possible outcomes and we make a choice. Sometimes we do it explicit. Sometimes we do it sub-consciously. And we are always factoring in a bunch of biases that we’ve unconsciously absorbed throughout our lives. But we are still engaged in a decision-making process. That’s how human cognition works.

        Also, how you sum and weigh the number of influences pulling us in either direction depends entirely on how much you discount each of those influences. If I have a kid in a few years and walk into the office of a financial planner, because I want that kid to be able to go to college without taking out loans and without me and my wife having to suffer a major lifestyle contraction in 20 years, that financial planner is going to tell me to make a budget, figure out how much I can spare for a college plan, and make a suggestion about the best savings vehicle to use. I may then walk out of that office and see an ad for BMW and see that my neighbor just bought a new luxury car and see some guy on Instagram posing in from of his new car and then decide that my kid is less than a year old, so I’ll just buy a BMW and delay the college saving for a few years. And it’s true that I’ve seen more negative influences than positive ones, but why the heck would I treat TV ads and what I see on Instagram with the same weight that I treat the advice that I just got from the financial planner? Again, the word for that is stupid.

        Report

        • “There is a word for blindly doing what you think “society” is “telling” you to do: stupid.”

          You just made a fantastic case for destroying all social media platforms. Thank you!

          Report

        • jr,
          Yeah, and all of those are FUCKING STUPID. Because they’re all rules of thumb that center on 1970’s logic, where you inflate your way out of debt.

          Where the houses remain as cheap as they’re going to get.

          I bought when housing prices were at bottom. I bought big, with the “I’m never getting a new house again” mentality. 50% of my income for the house — but I knew what the hell I was doing when I did that (had it all budgeted out).

          If your financial planner can’t read the fucking market before he tells you advice, he’s a bloody idiot.

          My financial planner (he has a license and everything!) gives people gray hairs — he doesn’t do too much work as a financial planner, actually (more work for RAND).

          Report

        • I don’t disagree with any of that. But I do think there is a categorical difference between saying:

          “People are stupid if they just do what TV tells them to and don’t do the work to learn if it is actually right.”

          and

          “People ought to listen to ‘all the commons sense, conventional wisdom and basic personal finance advice that society gives to people as well: don’t buy a house more than 20% of your income, don’t spend more than 25-30% of your take-home pay on principle, taxes and interest, don’t spend more than 10% of your take home pay on car payments, etc.'”

          If someone has to actively look something up, then they aren’t being “messaged”. Now, choosing to be messaged to instead of taking agency and responsibility IS stupid. But those are different things. That is my point.

          The issue isn’t people choosing one set of messages over another and choosing wrong, which your first point seemed to be.

          The issue (which your second post seemed to articulate) is that people are choosing to passively active and follow messaging instead of doing the hard work to actually identify the proper path. Which I agree 100% with.

          Report

  6. There is a factor which I think lies underneath the pending crisis: late fees.

    In olden times, if you fell a few months behind on your car payments, the lender would simply repossess the vehicle. Of course, this was highly inconvenient for the owner whose car disappears from the driveway in the middle of the night, on top of the negative impact to one’s credit.

    Today, subprime lenders seem to frequently allow people to keep their vehicles while piling on the late fees. The problem is that the fees are added to the principal and accumulate interest. If the buyer lost her job, or was never really able to pay the loan in the first place (the scenario discussed in the blog), this practice results in the loan rapidly ballooning. I’ve had a family member and a close family friend get caught in this trap. The former wound up owing close to $20k on a car that was originally purchased for $11k and was worth substantially less when the late fees spiraled out of control. This was on a Santander loan.

    I assume that the underlying logicis that the subprime lender collects a lot more money if the buyer is able to keep the car until he catches up on the payments. The problem comes when he can’t pay the rapidly inflating monthly payment, or simply realizes that the loan principal has gotten out of hand in relation to the trade-in value of the vehicle, and he defaults.

    Both my friend and family member wound up defaulting (one after a friend wrecked the car, but I digress). Were they unwise to get the loans in the first place? Arguably so—but the late fees made the problem significantly worse, and presumably caused the lender to have to write down a much larger sum than if they had simply repo’d the car after 2 payments had been missed.

    I’d imagine that if similar defaults start happening on a very large scale, it could be catastrophic for the lenders, although I’ll admit that I don’t know enough about the inner workings of the auto finance industry to know how the lost late fees show on their balance sheets when such loans are written off.

    Report

  7. Another differences are the other costs associated with home and car ownership, with those for the former being much higher. If you don’t refinance, your car payments will stay as is. With a home, you have to pay taxes which will change — and almost assuredly rise — over time and with limited predictability. These can be in excess of 1/3 of the actual monthly payment due and many people do not even consider them when purchasing. Which they certainly SHOULD do but it can be hard to do. Websites like Zillow will give you an estimated mortgage on a home but only after clicking a few links will you learn that that is after a 20% down payment and not inclusive of taxes and they may or may not have accurate data on taxes. We can fault them for making purchases as big as home buying without clicking all the links but there system indeed incentivized/s less-than-responsible behavior.

    And to your point about a culture that encourages home ownership, I will go further and say that our culture — for a long time at least — not only said it was a responsible decision but that home ownership itself was a moral good.

    Report

  8. You can tell someone to get a smaller house or apartment and they will more likely just live in a place that’s smaller. I mean, there are other drawbacks like crime and schools, but the house is less likely to completely break down the way a car might.

    Bad schools means a bad life for you kids. That’s one heck of a “drawback”. Granted, there’s private schools, but that’s very expensive AND bad schools are normally in high tax districts to start.

    …while we have homeless shelters, we don’t do the same for transportation.

    I used to have a co-worker who (amazingly in this city) took the bus.

    The big picture problem is fiscal ignorance. No budget. No planning. Poor choices result in bad options at some point.

    My car needs are extreme. I’m huge (not fat). I find a car (typically “one”) that fits me one dealership out of three. I have four kids and we ski, have occasional trips, and even relatives.

    Those are the lifestyle issues which are “not my fault” however they’re dwarfed by the lifestyle choices which are, i.e. how money is spent outside of car purchasing.

    The big mistake most people make isn’t going outside their budget, it’s not having a budget at all for anything. And then having lived outside what should be their budget for all things fiscal, they don’t have any “money left over” for their car.

    Report

    • Dark,
      The big mistake people make is living in bumfuck Southern place.
      (erm, there you need cars without good gas mileage because Southern rural doesn’t pay for roads too good).
      Then you get suckered into an auto title loan, and start skimping on medicine to make your payments so they don’t take the car.

      Report

Comments are closed.