Cars and Homes are the reasons most Americans have little or no net worth.-Lou
From: Zero Hedge
“Buying The Car Was The Worst Decision I Ever Made” – The Subprime Auto Loan Bubble Bursts
It has been over six months since we first highlighted the growing deterioration in the quality of auto loans and mentioned the ‘s’ word (subprime) as indicative that we learned nothing from the financial crisis. Since then, auto loans (and especially subprime in the last few months) have surged to record highs; and most concerning, recently has seen delinquencies and late payments spike. The reason we provide this background is that, thanks to The NY Times, this story is now hitting the mainstream media as subprime-quality car buyers (new and used) realize the burden they have placed on themselves thanks toexorbitantly high interest rates (and a rapidly depreciating ‘asset’). As one car ‘owner’ exclaimed, “buying the car was the worst decision I have ever made.”
As The NY Times reports, Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640.
Deja vu all over again…
And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.
Exorbitant interest rates… (but still demand?)
The New York Times examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders and hundreds of loan documents and found that subprime auto loans can come with interest rates that can exceed 23 percent.
The loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers. Such loans can thrust already vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records, as well as interviews with borrowers and lawyers in 19 states.
Will we never learn…?
In another echo of the mortgage boom, The Times investigation alsofound dozens of loans that included incorrect information about borrowers’ income and employment, leading people who had lost their jobs, were in bankruptcy or were living on Social Security to qualify for loans that they could never afford.
“It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds,” said Mark T. Williams, a former bank examiner with the Federal Reserve.
One painful example…
Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.
“I am not sure how I got the loan,” Mr. Durham, age 60, said.
Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.