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As Auto Lending Rises, So Do Delinquencies

Old 12-01-2016, 07:43 AM
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Default As Auto Lending Rises, So Do Delinquencies

Regulators are airing "significant concern" about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace.

On Wednesday, the Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter.

In the third quarter, 2 percent of subprime auto loan balances became at least 90 days delinquent, up from 1.6 percent in the third quarter of 2014.

In the depths of the recession, in the second quarter of 2009, that rate peaked at 2.4 percent.

"The increased level of distress associated with subprime loan delinquencies is of significant concern," researchers for the New York Fed wrote in a blog post on Wednesday.

The report is the most strident warning yet from the New York Fed about stresses in subprime auto lending. The New York Fed analyzes trends in borrowing by American households each quarter.

The swelling delinquencies come at a time when unemployment is low and borrowers typically should be able to make their payments.

That such serious trouble is emerging in a relatively good economy suggests that lenders have been loosening their standards and letting borrowers take on more debt than they can afford.

Violette Morin, of Pulaski, N.Y., a 74-year-old grandmother, said she did not need or particularly want to buy a car. But after receiving a mailing from a local dealership promising a prize of a pearl necklace and a fishing rod, she visited the used car lot in May 2015.

The dealer qualified her for a $20,350 loan, according to her lawyer, to purchase a 2011 Ford Fusion. Earlier this year, she stopped making the payments. "I eventually had them come and get the car because I couldn't pay for it," said Ms. Morin, who lives on Social Security, receives food stamps and lives in subsidized housing.

Economists fear that if the economy dips into another recession, the already large number of Americans on the verge of losing their cars to repossession — about six million — will swell to record levels.

Although the subprime delinquency rate may be lower today than it was in the immediate aftermath of the financial crisis, economists are concerned about the sheer number of Americans who are behind on their car payments because so many more have subprime auto loans than in 2009.

But industry experts have dismissed comparisons between subprime auto loans and the mortgage bubble that led to the global financial crisis. Back in 2008, trillions of dollars of investments were correlated to the American housing market. The auto loan market is huge — with $1.1 trillion in outstanding loans — but defaults are not very likely to have the cascading effects on the banking system that home foreclosures did.

If anything, the New York Fed report notes that delinquencies on auto loans originated by banks remained low, while many of the troubled loans were made by finance companies, which are not large enough to harm the broader financial system.

Still, widespread repossessions could deliver a stinging hit to the economy, as Americans struggle to get to work or go about their daily lives in areas with limited public transportation.

Nashua Moore, 28, gets up at 2 a.m., takes two buses, and reaches her office in Las Vegas by the time her shift as a medical dispatcher starts at 5 a.m. She schedules plenty of time to avoid being penalized for being late. By car, her commute takes about 20 minutes, she said.

"I was desperate to get a car," said Ms. Moore, who went back to work this spring after her daughter was born.

She borrowed $6,580 at a 30 percent interest rate to purchase a 2008 Chevrolet Impala. Her car was repossessed this fall, after she got in a dispute with the dealership. She is now working with a legal aid lawyer to get her down payment back and other damages.

"I see this all the time," said her lawyer, Sophia Medina, of the Legal Aid Center of Southern Nevada.

Auto loans are one of the few types of lending that has not been curtailed after the financial crisis.

Lenders have been willing to take more risks with auto lending based on a belief that Americans — even those who are struggling — will keep making car payments because they need their cars to keep their jobs and to keep their households functioning.

As competition becomes fierce, banks, private equity firms and credit unions have been extending loan terms as long as seven years — longer than many used cars are on the road.

Most of the growth in subprime lending has been driven not by traditional banks but by finance companies that specialize in making loans to borrowers on the financial margins. Subprime lending is more profitable because lenders charge interest rates as high as 30 percent and they often bundle the loans and sell them to investors — much as mortgages were securitized before the financial crisis.

The New York Fed noted in the report that overall delinquencies among prime auto borrowers remained low, despite "notable deterioration in the performance of subprime auto loans."

Analysts at Fitch Ratings said that although losses on subprime loans were rising, they were within the firm's expectations.

Annualized net loss on an index of subprime auto loans hit 9.6 percent in October, up from about 8 percent a year earlier, according to Fitch.

"Subprime auto performance could decline further if there are any stresses to the underlying economy," Kevin Duignan, Fitch's global head of structured finance, said in an interview.

As auto lending has boomed, regulators and investigators have been looking into increased cases of fraud where dealers have misstated borrowers' income to qualify them for loans.

Ms. Morin, the borrower from New York, said that when she asked for a copy of her loan application, she noticed that the document listed her monthly income as more than $3,300, which was false. She collects about $850 a month in Social Security.

Ms. Morin worked with the consumer law clinic at the Syracuse University law school, which contacted the lender, a credit union, on her behalf. Ms. Morin's loan was forgiven and her default was scrubbed from her credit report.

"I wasn't car smart, I was just an average person," Ms. Morin said. "I am car smart now."
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Old 12-01-2016, 07:53 AM
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Presuming this is a true story:

Who is at fault here? The elderly woman who wanted a pearl necklace and signed documents without understanding and correcting? or the scum bag who filled out the loan application with an incorrect income?

"Violette Morin, of Pulaski, N.Y., a 74-year-old grandmother, said she did not need or particularly want to buy a car. But after receiving a mailing from a local dealership promising a prize of a pearl necklace and a fishing rod, she visited the used car lot in May 2015.

The dealer qualified her for a $20,350 loan, according to her lawyer, to purchase a 2011 Ford Fusion. Earlier this year, she stopped making the payments. "I eventually had them come and get the car because I couldn't pay for it," said Ms. Morin, who lives on Social Security, receives food stamps and lives in subsidized housing.
Ms. Morin, the borrower from New York, said that when she asked for a copy of her loan application, she noticed that the document listed her monthly income as more than $3,300, which was false. She collects about $850 a month in Social Security."
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Old 12-01-2016, 07:56 AM
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It's a huge problem, and not all the bank's fault.

It is truly sad that Americans do not have any common sense or personal accountability these days.

In our situation, my wife and I could go to Ford and finance the most top of the line F350 Rancher they had today without issue. We could take out a 7 or 8 year loan. We could make the payments.

It would be beyond idiotic to do so, and I know that because I have common sense.

Americans need to quit playing victim. Do you damn research, and use some common sense. Financing a depreciating asset that you will be upside down on before the ink dries is just plain stupid, and no one's fault but yours.

And no, I am not against using financing. Quite the opposite actually.
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Old 12-01-2016, 07:58 AM
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30%!!! These people are crazy. My wife and I were told with our great credit we could have any car we wanted on the lot. That is all they were basing it on, we had not told them if we made $1,000 or a $1,000,000 a year. They just want to move product and do not care what it takes.
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Old 12-01-2016, 08:01 AM
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It's 99% the fault of the lender...they, apparently, do not do their due diligence.

Sure, Americans want anything and everything, but there are risks in business that need to be allowed to play out. Bailouts in 2008 and beyond simply reinforce the same bad behavior.
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Old 12-01-2016, 08:11 AM
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Fraud is fraud.
Sounds like either the dealer or the borrower fruadulently falsified income on the loan application.

Falsifying a loan application is a felony in most jurisdictions.

So why no prosecutions?
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Old 12-01-2016, 08:18 AM
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You really don't have to go past "sub-prime" to see the problem.
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Old 12-01-2016, 08:46 AM
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Question for the usually frugal THTers:

Would you buy one of these repossessed vehicles if it seemed in good shape?

Do lenders sell these cars themselves or to dealers or send them to auction?
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Old 12-01-2016, 08:54 AM
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Originally Posted by NCSUboater View Post
It's a huge problem, and not all the bank's fault.

It is truly sad that Americans do not have any common sense or personal accountability these days.

In our situation, my wife and I could go to Ford and finance the most top of the line F350 Rancher they had today without issue. We could take out a 7 or 8 year loan. We could make the payments.

It would be beyond idiotic to do so, and I know that because I have common sense.

Americans need to quit playing victim. Do you damn research, and use some common sense. Financing a depreciating asset that you will be upside down on before the ink dries is just plain stupid, and no one's fault but yours.

And no, I am not against using financing. Quite the opposite actually.
Well said!
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Old 12-01-2016, 09:18 AM
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Originally Posted by IES99 View Post
Question for the usually frugal THTers:

Would you buy one of these repossessed vehicles if it seemed in good shape?

Do lenders sell these cars themselves or to dealers or send them to auction?
1. No, because a person who can't make the payments can't afford to change the oil for one especially if they know they aren't keeping the car.

2. It depends on the lender. The local community bank might retail it, while a bigger lender would simply send it to the auction.
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Old 12-01-2016, 10:13 AM
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I stopped by my credit union just a few days ago. They sell there own repo cars. Had 7 on the lot Most are 3-6 years old and prices were not bad. I probably would by one from them but I don't like car payments
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Old 12-01-2016, 11:19 AM
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That long article above has a bunch of BS in it.

I'd hate to think how high the total delinquency is if they've got 2.4% over 90 days late. When I was in the auto loan business, our goals were 2.0% over 30 days late.

Whenever we saw over 60 day delinquency over .5%, we'd have heart attacks. We'd simply have an army of wreckers and repo agents hauling in those non-performing loan. And any company with such past due problems is losing their ass on the bottom line.

This type of subpar loans are often through tote the not car lots and other preditory loan companies. And often, the dealers they're dealing with are not the really good dealers.

The bottom line: New automobiles and trucks have an average cost of $32K. 60 month payments on that amount is about $650 per month. Finance a diesel pickup and you could easily finance $50K--about $950 per month. Let's face it, but the average consumer cannot afford such expensive payments. But they see their friends and neighbors driving such vehicles, and they fall into a trap.

Everyone needs to live within their means, but that's getting increasingly difficult with few high paying jobs and healthcare costs going out the roof. Our economy's just not good enough to pay people enough to buy such expensive vehicles.
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Old 12-01-2016, 11:29 AM
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.

The bottom line: New automobiles and trucks have an average cost of $32K. 60 month payments on that amount is about $650 per month.


That is half the problem. That is 8% to get to that number. If people borrow at that rate they are not good with math.
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Old 12-01-2016, 01:33 PM
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At a 30% interest rate, lenders can have a few deliquents in their portfolio and still make a boatload of money.
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Old 12-01-2016, 01:34 PM
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Originally Posted by IES99 View Post
Question for the usually frugal THTers:

Would you buy one of these repossessed vehicles if it seemed in good shape?

Do lenders sell these cars themselves or to dealers or send them to auction?
No if they can't make the payments they probably didn't do any maintenance.
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Old 12-01-2016, 01:44 PM
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Originally Posted by IES99 View Post
Question for the usually frugal THTers:

Would you buy one of these repossessed vehicles if it seemed in good shape?

Do lenders sell these cars themselves or to dealers or send them to auction?

I was in this biz and use to sell, fix, manage, and repo when needed cars at a sub prime lot.


Cars where bought from auction, fixed and cleaned in house, and sold at our location with a sub prime backer (bank). Just had to met the qualifications (2500 month income of any source that is provable) and have the down payment that did not come off the price of the car at all.
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Old 12-01-2016, 01:45 PM
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Payment buyers. No one gives a crap about unimportant details like "interest rate" and "length of loan". None of that matters. How low can you get my payment, that's all I care about.

Was buying the wife a new to her car back in July. Found one she wanted, but they were priced 2k over book. It was in perfect shape, but a ripoff. So I offered 2k less (paying cash here). Did the dealer try to deal on price? No, they proceeded to tell me the payments would be under $200 so why does it matter what the price is.

We got the car for 2k less after paying cash. They were shocked we wouldn't finance.
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Old 12-01-2016, 01:45 PM
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Originally Posted by SeaJay View Post
At a 30% interest rate, lenders can have a few deliquents in their portfolio and still make a boatload of money.
Yup.

usually there is a down payment up front too that does not apply to the total cost of the car. That money is all house money.

then when they fall behind, you repo the car, reservice it, and re sell it. I have sold the same vehicle at least 3 times in the course of a year. .
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Old 12-01-2016, 01:58 PM
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30% is the "Buy here Pay Here" crowd. They make money selling the same car 6 times a year.
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Old 12-01-2016, 02:17 PM
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it is not uncommon for delinquencies to go UP when the economy is better

loans are a "numbers game" you are shooting for X% return on Y dollars loaned and if you do better great if you hit that number really good

when times are good and lenders are making a lot of successful loans on people with good jobs and good credit they can afford to hook a roach up at a higher rate and take the risk they do not pay

of course they prefer they pay, but if they do not they can still make their numbers with the good buyers

also it is much easier to take the car back and recondition it and resell it when times are good Vs when times are bad

in 2009 and 2010 there were lenders that were just not picking up repos even when they could because they were trying all they could to milk the loan longer and get any payment and the value of the car was next to nothing plus if they repoed the car it reflected differently on the books Vs an outstanding late loan

and of course there are the dealers that make their way getting a $3,000 to $5,000 car with $1,500 down and $65 a week for 104 weeks and they almost hope the get the car back the first few times because they will drop the price $250 and the down payment $250 and repeat until the car is something they want gone
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