Could Auto Loans Cause Your Next Crash?

Auto industry insiders fear auto loans will become a time bomb like subprime mortgages in 2008-2009

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Annual car sales amid COVID recession bottomed It recovered from 8.9 million in April 2020 to just 18.7 million by April 2021, the fastest annual change on record.

Prices also rose, eating away at the average consumer’s disposable income.Current Mid-October, “The average number of weeks of income required to buy an average new car in September increased to 42.2 weeks”. This is a significant increase from the pre-pandemic average of about 34 weeks.

Many car buyers resorted to taking on debt.

a Investigation A survey conducted by automotive analytics firm The Zebra found that 50% of Americans financed their last car with a loan.The total composition of auto loans is almost doubling From a low of $40 billion in 2020, it will rise to almost $80 billion in March 2021.

The auto loan market is huge, with $1.5 trillion in outstanding US debt. This equates to his 9.1% of the national household debt. according to to the Federal Reserve Bank of New York.

Much of this debt is repackaged by banks and sold to investors looking for yield in today’s relatively low interest rate environment.

Lucky Lopez, a Las Vegas-based auto loan broker with more than 20 years of business experience, explains the process in interviews with investment research and online financial media companies. hedge eye: “they [lending banks] They hire brokers like me to take securities and sell them to other banks like Wells Fargo, Bank of America, some individuals, hedge funds, etc. ”

Responding to calls from yield-hungry lenders, post-pandemic borrowers also had incentives to take on more debt. A study by the Center for Microeconomic Data found that the loan forbearance program Artificially Boosted borrower credit scores throughout 2021.

Banks continued to lend in 2020 and 2021 as investors crave yield and borrowers get approval.

“They were just handing out money,” Lopez told The Epoch Times. “The biggest reason was that the bank had loosened his LTV. [loan-to-value]”

used car price exploded During the pandemic, car dealers were forced to overpay for their goods, which in turn overcharged the banks that provided car loans.

“Dealers started calling banks, saying, ‘Hey, we have to sell this for 150%, 160% LTV…can you do it?’” Lopez paraphrased the industry dynamics he had witnessed.

For reference, online loan broker LendingTree Quotation marks The average LTV ratio for auto loans in 2019 was 87%.

increase in delinquency

A loan that far exceeds the market value of the collateral poses serious risks to the lender. Especially since more and more borrowers are defaulting on their payments.

“Delinquency has occurred. rise Daniel DiMartino Booth, former adviser to the Federal Reserve Bank of Dallas, said in an interview on “Forward Guidance”: podcastsuggesting that rising unemployment may hasten delinquency.

Consumer Financial Protection Bureau Indicated Loans launched in 2021 and 2022 have higher delinquency rates than before.

As Stansbury Institute put it“Arrears lead to default, which in turn leads to bankruptcy.”

Both Booth and Lopez recognize the contagious potential of subprime auto loan defaults to force mass liquidations as banks try to recoup their losses.

Banks usually remediate delinquencies by seizing the car and putting it up for auction. However, many of his 2020 and 2021 loans are issued at over 150% of his LTV, so banks are reluctant to auction sales. difficult Get 100% of the car’s value.

As a result, banks have largely refused to sell and continue to slow the auction process. according to to Lopez.

The lack of sales is causing an oversupply.

“This massive overstock continues to grow every week because lenders don’t want to recognize losses on their loans,” Booth said.

She predicts that at some point regulators will intervene and question why lenders won’t liquidate the cars they get back.housing call crisis In 2008, she said, this is “what regulators did with the housing crisis.”

“They’re going to get those loans wiped off their books, so used car prices will go down,” Booth said.

Private money managers also appear to be interested in the auto loan market.

“Investors are shorting the auto industry,” Lopez said, referring to numerous calls from hedge funds and asset managers seeking insider details.

He believes a full-blown financial crisis, if it occurs as a result of a major auto liquidation, will occur in the first quarter of 2023.

Lopez is concerned about how the government will react.

“We’re probably looking at some kind of intervention where they’re going to start regulating the auto industry…that would completely kill the car market,” he said.


Liam Cosgrove is a freelance journalist covering business, markets and finance. He holds a BA in Mathematics from the University of California, Santa Barbara.

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