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WP: Are auto loans the next subprime market to worry about?


HOF44

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What could possibly go wrong here?? ;)

I bet you could come up with some cool derivatives with these!

WP: Are auto loans the next subprime market to worry about?

But there’s another, less-noticed factor: Investors and private-equity firms are rushing to buy securities made up of bundles of car loans, seeing these assets as both safe and lucrative. In the first six months of this year, the nation’s largest auto lenders, such as GM Financial and Santander Consumer USA, have pawned off $10 billion of their subprime auto loans on investors, a 20 percent increase over the same period last year. That gives these lenders more capacity to loan to consumers with questionable credit histories and, in turn, helps drive auto sales even higher.

It may seem surprising that private-equity firms and other investors are willing to pour billions into auto-backed securities after getting burned by similar mortgage-backed securities when the housing bubble burst. But, analysts say, the auto market is different than housing in several key respects.

For one, Americans appear to be less willing to default on their car payments than to walk away from their houses — even in the depths of the recession, auto loans performed better than most. And, in the event of a default, it’s easier for a lender to repossess a car and sell it off, especially right now, when prices for used cars are so high.

Yet the fact that the subprime auto market is expanding so rapidly — with some buyers paying interest rates in excess of 10 percent — has led to some concern.

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That's odd to me, that people would be more willing to pay their car than their house. Public transportation in this area is pretty good, you can do without a car if necessary. Give me a roof over my head.

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Public transportation while in some areas (DC, Boston, Chicago, NY, etc) may be great, but that is just a handful of areas in the country. If you are say... living in Olney and working in DC...It's not quite as simple.

Lots more people are willing to give up their home and rent. I understand, and don't at the same time, why people would go that route.

And you can always trade in your car...not so easy with a house.

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That's odd to me, that people would be more willing to pay their car than their house. Public transportation in this area is pretty good, you can do without a car if necessary. Give me a roof over my head.

Not amazed at all, a car represents a status symbol seen by more people overall. I realized this when ever I drive by apartment complexes and see cars way nicer than mine sitting in the lots. These BMW's, Lexus and Benz are being paid on while living in an apartment complex, just to satisfy a feeling of success among peers.

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I think the article pretty much explains why this wont be like the housing market. When houses default it carries a significant impact and risk. When people default on car loans, the cost is easily recovered and the risk isnt so great..

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The danger isn't the buying or selling of the loans. It's if derivatives are created to bet on. Those derivatives carry no link to the actual asset. The problem with the housing bubble wasn't that the loans defaulted and the banks had to foreclose. It's that the financial institutions had created vehicles to bet on those mortgages over and over and over to the point that if they failed it would cause a run on the banks. They had leveraged themselves to the hilt.

So the key to this is not the selling of the loans, but keeping them from being bundled, rebundled, and bet on. As log as it's one investment vehicle tied to one loan it will be fine.

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. When people default on car loans, the cost is easily recovered and the risk isnt so great..

Coulda swore they said that about housing :

But the shorter terms and higher payouts balance out the risks better....besides if the economy crashes it won't matter anyway

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The danger isn't the buying or selling of the loans. It's if derivatives are created to bet on. Those derivatives carry no link to the actual asset. The problem with the housing bubble wasn't that the loans defaulted and the banks had to foreclose. It's that the financial institutions had created vehicles to bet on those mortgages over and over and over to the point that if they failed it would cause a run on the banks. They had leveraged themselves to the hilt.

So the key to this is not the selling of the loans, but keeping them from being bundled, rebundled, and bet on. As log as it's one investment vehicle tied to one loan it will be fine.

At the core of that is if the bundled risk, doesnt equal actual risk and as mentioned, there is less overall risk involved.

---------- Post added July-10th-2012 at 12:03 PM ----------

Coulda swore they said that about housing :

But the shorter terms and higher payouts balance out the risks better....besides if the economy crashes it won't matter anyway

nope, they assumed that bundling 'good' and 'bad' loans together, the risk will avg out. Worse case scenario is they're all bad loans and the bundled derivative is garbage.

For car loans, even if they're all bad loans, the vehicles can still be repossessed and sold off at a fairly decent value. Pretend we're talking about bundled loans for people to buy gold,silver, etc. the risks would be absolutely minimal. Unless you can make a case for the value of used vehicles tanking, this shouldnt be a problem

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ahh, it's just good for guys like me waiting for the glut of car inventory to come around at rock bottom prices.

But a key point is that there's no adjustable rate car loans—so they are predictable for the buyer unlike the ARMs. So unless there are massive layoff, maybe this bet won't come home to roost.

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