By the Lending Lies Team
While the subprime mortgage bubble is simmering, the subprime auto loan meltdown has begun. Over the past decade, auto lenders have been willing to lend money to people who are poor credit risks, can’t provide proof of steady income, and purchase vehicles beyond their means. This strategy was profitable and worked in the beginning- but now the economic reality is setting in. Delinquency rates have doubled and major auto lenders are preparing for millions in losses.
Many auto loans, like mortgage loans, are securitized and the risk is passed down the road while the manufacturer services the loan. Over the past year the auto loan bubble exceeded one trillion dollars in debt on new and used vehicles. Both 30 and 60-day delinquency rates rose in the second quarter according to the nation’s credit bureau reports.
The total outstanding loan balance exceeded 1 trillion dollars between April 1st and June 30th, 2016 reports Experian Automotive, while the average auto loan is just under $30,000. This is a high number for a worker living right at the poverty line, with rent, food, fuel and healthcare costs escalating.
In order to help these borrowers afford these payments, lenders are now extending loans out for six or seven years. Even with extending the amount of years to pay, the average auto loan payment is around $499 a month. There is no way the average American can service both inflated mortgage and auto payments- and also credit card debt as well. Something is going to have to give.
The average payment just under $500 a month, comes to around $6,000 per year and does not include insurance, maintenance and fuel costs that can easily run another $3,000 a year. Only the wealthy can really afford an auto loan of this amount. The average middle class American clears around $3,500 per month before taxes. After Taxes they net around $2,700. Sound economic practices don’t support having an auto payment of this amount, but the auto industry is more than willing to give high risk borrowers an auto loan.
The lenders don’t care, and they know that people will default on their auto loan- but since the loan was securitized and passed down to an unknown investor- the auto manufacturer isn’t concerned about the borrower making the payment. There is something incredibly predatory about this strategy to both borrowers and investors.
Already, auto loan delinquencies are defaulting at high levels. In July, 60 day subprime loan delinquencies were up 13 percent on a month-over-month basis and were up 17 percent compared to the same month last year.
USA Today is reporting that auto lenders are setting aside cash stockpiles to cover any losses but since the majority of major auto loans are securitized and even sold to foreign investors- the major auto lenders can’t be too concerned.
In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.
General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.
The mainstream media is reporting that the economy is getting better, the jobs reports are up and the market is in full recovery, however, the average American consumer that exists on the lower levels of the economic scale is not doing better. Rent and housing costs are escalating at unprecedented levels, and the cost of living indexes show huge increases. In fact, almost half of the United States population receives some type of state or federal subsidy like food-stamps, energy assistance or free healthcare. The economic factors are not sustainable for the lower and middle classes.
Things look a lot like they did in 2008 including large corporations shutting down completely (ITT Technical Institute schools) or laying off massive numbers of workers (Caterpillar). The signs of a major economic crisis are becoming apparent and will likely exceed those of 2008. The national debt has doubled, corporate debt has skyrocketed, and total household debt is now over 12 trillion dollars. Student debt is now over a trillion dollars and shows no end in sight as the federal government provides grants and loans to practically any student naive enough to go into debt.
Fasten your seat belts.
Filed under: foreclosure