
U.S. Subprime Auto Loan Losses Reach Highest Level Since the Financial Crisis - uptown
https://www.bloomberg.com/news/articles/2017-03-10/u-s-subprime-auto-loan-losses-reach-highest-level-since-crisis
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lefstathiou
Selfish plug here but this industry is our bread and butter (our company hosts
the data rooms and powers the marketing for the vast majority of subprime auto
backed securitizations in the US). Below is a link to issuance volume going
back to 2008. You'll see that big banks are not the leading originators in
this market and at peak (2016) we're talking $26bn in loans (versus hundreds
of billions in subprime mortgages). Additionally, unlike mortgages on second
and third homes, people are far less likely to default on a car rather than a
home because in suburban America, you need your car to keep your job,
regardless of where you live.

Finsight Subprime Auto issuance profile:
[https://finsight.com/sector/Auto/Subprime%20Loan](https://finsight.com/sector/Auto/Subprime%20Loan)

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wheelerwj
i think the point you are trying to make is that auto loans are safer but you
failed to express two massive considerations:

first, and foremost, mortgages are secured against a physical piece of
property that will almost always retain a significant portion of the original
value. in the recession, homes might have lost 60-80% of their value, but they
all bounced back reasonably over time. in contrast, a vehicle loses a huge
portion of its value immediately and by the time a car is 20 years old, its
not even worth repossessing.

second, homes can't move. you have a much better chance of repossessing a
house than you do of repoing a car.

finally, just for fun. your claim that people are less likely to default on a
car loan because they need to work is taken out of context at best, or
possibly is just plain incorrect considering the prevelance of ride sharing
tools and public transit. People only need to keep their cars for work.... if
they have jobs.

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ams6110
Nobody will finance a 20 year old car (outside of specialty collector
markets).

Even 72, 84 months is _insane_. If you need to finance a car for that long to
afford the payments, you need to buy a cheaper car.

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Spooky23
All of the safety and fuel regulations have sent the prices of cars into the
stratosphere.

Any kind of large car that you would want for a family is well north of $30. I
paid as much more for a 1 year old minivan recently than I paid for a year old
BMW 15 years ago.

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drfuchs
No, safety and fuel regulations did not send prices of cars into the
stratosphere. In the 1960's suburbs of Philadelphia, gas was 30 cents a
gallon, a nice new car was $3k, the house cost $30k, and Dad made $10k as a VP
of engineering at a small firm. Right now, all three are almost exactly 10x
what they were then; so cars have not gone up more than regular inflation.

And, to top it off, today's car reliability is way, way higher, as is the
quality (in the 60's, we were thrilled if a car lasted 6 years and got 80k
miles; nowadays, that's about half of what you'd expect. And the safety is
wildly improved (like, for instance, air bags, never mind seat belts!)

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Zachery
Don't forget maintenance! Old cars needed far more maintenance far more often.
This 6-7k miles every 6 months thing is just absurd.

Cars got oil changes every 1k miles, not 3k or 7k. Just for starters.

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pecord
I use to work on a CRM specific to dealerships and I cannot say I am
surprised.

There is so much data on cars and what their worth (KBB, truCar, etc) nowadays
it is tough to make much of a profit on the car itself.

Most make their money in the finance or service department. It was not
uncommon for a loan to be 5-6 years long or for a buy-here pay-here play to
charge up to 25-30% APR

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djb_hackernews
Indeed. Auto manufacturers don't sell vehicles, they sell debt. I've heard
this is a good reason to withhold that you are paying cash at a dealer until
the last moment and work the best deal you can as if you are going to use
their financing. They are much more interested in making a loan than making a
sale.

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js2
I just bought two new cars, a Chevy Volt and a Mazda CX-9. The dealers
couldn't care less how I was going to pay, nor whether I purchased or leased.
They barely even tried to sell me extended warranties.

In fact, Mazda gave me a $500 incentive to borrow at 0% for 5 years. My GM
loan was also 0% (but no incentive). So obviously they aren't making anything
loaning me money.

Further, I find it hard to believe there's no or slim profits in the sales. I
think I did a pretty good job negotiating. I don't even mind disclosing the
numbers.

The Volt had an MSRP of $40,325. I managed a $38,258.25 sales price + $1147.75
tax + $94 tag less $1000 rebate for $38,500 out the door. The invoice on this
car is supposedly $38,651.

The CX-9 was a similar situation, with an out the door price below invoice.

Both dealers I purchased from were in fact a bit out of town and had to secure
the vehicles from other area dealerships. They knew I wasn't likely to use
their service departments (each is almost an hour away), so I doubt they cared
about any more than making the sale. The sale alone has to have been profit
motivated.

Now, maybe individually they didn't make a lot of money on these sales. But it
has to be the case that they are making money on their total sales volume.
Maybe they'll take a loss on a sale or two if it puts them above a quota which
gets them a huge bonus.

These dealers are obviously costly to operate. They have a lot of real estate
and the show rooms are beautiful. They hold a ton of inventory for months at a
time. I just can't believe they could exist on the slim margins they claim
they make on each sale. I would be shocked if they aren't easily clearing 20%
or more on average on sales alone, even on deals like mine.

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r00fus
What'd you use to buy the vehicles? Did you use an internet purchase tool or a
blast fax [1]?

[1]
[http://credit.typepad.com/credit/2006/04/buying_a_car_wi.htm...](http://credit.typepad.com/credit/2006/04/buying_a_car_wi.html)

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js2
I started with Edmunds and True Car. This turned out to be a waste of time as
in the deals I got through those sites were just okay.

I also did some research on gm-volt.com and mazdas247.com to see what other
folks claimed to be getting in terms of pricing.

Eventually I contacted a bunch of dealers that I knew had the car I wanted
(Mazda and GM's web sites will show you all the inventory in an area) via
email and asked them what their best price was. The dealers near me which had
the cars on their lot didn't offer me the best prices though.

In the end, I got the best prices (and the most pleasant sales experience)
from two dealers each about an hour from home. They were happy to negotiate
via email. Even though they didn't have the specific car I wanted, both
claimed they could secure it from other dealers, which they did. Both of those
dealers had the most aggressive price up front and I was able to get them each
to come down a bit from there.

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frgtpsswrdlame
Why do we allow the securitization of these loans? Securitization is just a
way to move risk oversight and responsibility from the lender to the customer
of the security.

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darawk
Why wouldn't we? It's the customer of any financial product's job to do
sufficient due diligence. That's like saying "selling stock is just a way to
move risk oversight and responsibility from the company to the shareholder",
every time the market dips.

The only problem with the subprime _housing_ crisis was that its sheer scale
caused the government to have to step in, and almost caused the collapse of
the banking sector. However, correct me if i'm wrong, but there's no such risk
here. And as such, this is just some investors making a bad bet - which is
perfectly fine and to be expected in the course of capitalism.

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pstuart
Wasn't there a problem with the ratings agencies failing to do their job
properly?

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darawk
Yes, there was. But that's a problem that can arise in any market. It's
ultimately the buyer's job to do their DD. These car loan securities aren't
being sold to retail investors - they're being bought and sold by pension
firms and hedge funds. Sophisticated people that can and should do their own
DD. Whether or not they do it is on them. There's no need for the government
to step in here, because the only consequences are to the investors
themselves, not the general public.

The global financial crisis was a unique case, due to how widespread and
enormous the size of the problem was. If these mortgage backed securities
hadn't been so huge, it would have been a non-story about how some investors
lost money by making a bad bet (i.e. what happens every single day on wall
street).

~~~
vkou
Part of being able to do DD is expecting integrity from auditors, and ratings
agencies. One of the big problems of 2008 was that the rating agencies were,
essentially, conducting fraud on a massive scale.

Perhaps it is a bit naive of me to expect either from a financial firm... But
it really is in their best interests to maintain some semblance of law and
order in their dealings.

After all, if things get bad enough, there will not be a shortage of hemp and
lampposts.

~~~
darawk
In the financial crisis, maybe. But there is no indication that is going on
here.

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imgabe
I wish they would put numbers in context. They say the losses of 9.1% are "the
worst since January 2010" but they don't say what the worst losses were then.
If it's 9.1% now and it was 10% then, then yeah we're pretty close to the
worst ever. If it was 25% then or something it might be the worst _since then_
but it's still not nearly as bad as the worst.

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fixxer
While I'm not a fan of a looming crisis, I don't see enough critical mass to
this space to have a lot of concern for macro impact.

It is also worth realizing that while the great recession trained us to be
scared of news like this, defaults are a sign of risk taking and not
necessarily a bad thing.

Case in point, YC tries to make good bets, but they have a lot of losers in
their portfolio. And in that case, we're talking about unsecured debt.

~~~
guelo
It's a macro risk if large banks are so overexposed that they can fail.
Otherwise it can be contained.

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fixxer
Only bank I know of with really risky auto practice is perhaps Santander. The
world will keep turning.

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X86BSD
I'm shocked! Shocked I say! I've seen this coming for a decade. Dealers are
practically giving the cars away with near 0% financing. Everything in the
financial world has been a race to the bottom for a long time. You can say it
started with the severing of the link to gold backed currency. The dollar has
lost 97% of value since then, the fed pumps up one bubble after another,
telecom, housing, auto, student loan, etc. The bubbles barely pop before they
are inflated into a much bigger one in another sector. And they keep moving
around the globe. The currency is the problem and the central banking. All
currencies are circling the drain requiring more and more intervention and
bubble inflating to stay alive. I'm quite certain I'll see all paper crash in
my lifetime.

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hellogoodbyeeee
A broken clock is correct twice a day. I can't debunk your economic conspiracy
theories in one comment, but I will make two points. 1) This article is
talking about subprime loans. No one gives sub prime borrowers a zero percent
interest rate because they are the riskiest borrowers. So by you using that as
proof of a subprime auto loan crisis shows that you don't understand what is
actually happening here. 2) You can't claim to be seeing a bubble occuring for
ten years. I mean, I guess you can and you will be guaranteed to be correct on
a long enough time line, but the point is it doesn't mean anything. There is
an established business cycle. No one cares about an economic prediction
without a timeline.

