The Masters of the Universe — those energetic guys and gals who brought the world’s economies gasping to their knees six years ago — are at it again. Having successfully avoided punishment (for the most part) and staved off any meaningful interference by regulators, they have gone back to their favorite modus operandi: predatory subprime lending to finance big-ticket purchases followed by bundling and securitization of the shaky loans. Not houses, this time. Cars.
The auto industry, saved by the skin of its teeth by government intervention after the crash of ‘08, has been one of the few bright spots of the anemic recovery that has ensued. Annual auto sales have marched steadily upward, for the past few years as if on steroids, and this year are poised to blow through the 16-million mark, the highest in (you guessed it) eight years. Now we know how they did it:
Longer terms. Remember when auto loans were for two years, period? Forget it. The average term for an auto loan has reached 66 months, and terms of seven years are not uncommon.
Bigger loans. Remember when you had to make a substantial down payment to buy a car? Forget it. Lenders (which are often wholly owned subsidiaries of the car manufacturers or dealers) are happy to lend you now only the entire price of the car, but more. Just sign here. Total loans outstanding have been increasing by ten per cent a year for four years, and are now over $900 billion dollars.
Lower credit scores. Remember when you had to have good credit to get a loan? Forget it. Subprime lending, defined as lending to people with credit scores below 620, now accounts for 25 per cent of all auto loans.
For the sub-subprime, a lease. If you can’t afford a 120% loan at 0% interest for seven years, then a lease is the thing for you. By increasing the balloon payment at the end, we can get that payment down to the price of a dry martini. One quarter of all new-auto sales are now leases, which means that half of all cars sold are going to either leases or subprime lenders.
As we learned in the housing-bubble implosion, those who have no responsibility for collecting loans are happy to make them to just about anybody, and the happy days of no-doc, liar, and ninja (no income, no job, no assets) loans are here again. The minute the loan is made, it is sold to a bundler (on the well-tested theory that a whole bunch of bad loans are a better investment than just one), the bundle is securitized and the securities sold, and everybody goes forth to kill again.
Setting aside for a moment those who will not be able to make their payments (this rage is new, so defaults are still relatively low) just about every car “owner” in this scenario is under water from the start, and especially at the end. Most people trying to buy a different car at the end of three or four or seven years will find that in addition to the cost of the new vehicle they will finance a hefty balance on their old one. That’s gonna hurt.
Especially when you consider that the days of zero interest rates, brought to you by your friendly national reserve bank, cannot last forever, and a return to normal market interest rates will have a cascading effect on underwater motorists: it will be harder to get the next car because loan interest rates, thus payments, will be higher and also because investors will have lots of options to earn good returns and reduced motivation to go with subprime stuff.
In the words of one of the country’s leading analysts of the auto business, Adam Jonas of Morgan Stanley, there is “little doubt we’re in bubble territory.” He thinks the downside will take a few years to kick in, but then we’ll be looking at “peak auto.”
Just another indication that the Masters of the Universe will not be diverted from their endless efforts to sate their insatiable greed, not by experience, example, history or ethics. Sending some of them to jail would work, but their wholly-owned and -operated governments have learned not to interfere with greed. (Except for the US Department of Justice, the one part of government that seems not to have received the memo that laws are for little guys. It has opened an investigation into subprime auto lending.)
Apparently, this barn can’t be cleaned out until it falls down.