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The Used Car Subprime Loan Bubble: What Could Go Wrong?

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About a dozen years ago, it finally dawned on American elites that working class Americans weren’t earning enough money to keep the economy humming. So, they thought and thought about what could be done to boost the earning power of working class Americans and came up with a three-pronged strategy:

- Sleazier loans (If Americans can’t earn more money, then, uh, they can borrow more money!)

- More immigrants (Because isn’t that the solution to all our problems?)

- Sleazier loans to more immigrants!

And for a few years in the middle of the last decade, that seemed to prong the economy into overdrive, at least judging by Human Signs, SUV rims, and the World Series of Poker. Now we could go around all day about who was to blame for the subsequent subprime mortgage series of unfortunate events, but be assured that our elites won’t let that happen again (for at least another 9 to 18 months).

But subprime used car loans? That’s a no-brainer:

In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates


28 Comments to "The Used Car Subprime Loan Bubble: What Could Go Wrong?"

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  1. says:
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    What’s the definition of crazy again?

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  2. says:
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    A few months ago the local news in Oklahoma City announced that a local businessman had filed plans to build a 93,000 square foot house, supposedly the largest single-family home in the US. I hadn’t heard of the guy, so I figured he was some random energy baron but when I looked him up it turned out he sells owner-financed lemons to Oklahoma’s immigrant population.

  3. It makes me wonder when the last time we had real economic growth that was based on something real and of substance.

  4. No job? No money? No credit?

    No problemo!

    And welcome to the Ownership Society!

  5. Whenever you are thinking about the economy, you must remember that whenever a bank makes a loan, new money is created from out of nowhere.

    That is why economists who want to get the economy moving always prescribe More borrowing! Get those banks lending again! Loosen up credit standards! etc. They want to get more credit money circulating.

    All of our money today is based on debt, just like the clay tablet money used by the Babylonians. A difference between us and the Babylonians is that we can create new money faster using electro-digits than they could manufacture baked clay tablets inscribed with promises to pay in cuneiform.

  6. subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds

    Ah, there’s the rub.

  7. Securitized s**t loans on automobiles?

    Holy f***ing s**t.

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  8. says:
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    There are that many immigrants in Oklahoma?

  9. says:
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    No wonder it’s been so hard to find a decent price on a used car lately.
    On the up side, being a repo-man is so much sexier than being a bank foreclosure officer.

  10. I live in a Sand State and make a decent salary . But I have kids, private school tuitions, and an expensive mortgage to pay so I drive around in a crappy 15 year old compact with 200 K miles and change my own oil. More than once I’ve been embarrassed that I can’t volunteer to be a driver for school trips because I just don’t have the passenger space and my car looks kinda ratty. Yet whenever I pull into the supermarket parking lot I see huge Mexican families pull up in the latest model Dodge Durangos or Chevy Trailblazers. Just couldn’t figure out how they could afford them (or the number of kids they had).

  11. Cash for Clunkers in 2010 took most of the cheap good used cars off the market. So poor people were forced to either overpay for a decent used car, or buy new.

    I also noticed a lot of propaganda that US carmakers have similar quality to the Japanese. To be honest among people I know the problem cars are all American.

  12. Mexicans with the huge families and big new vehicles are not playing by Gringo rules. Which is for suckers. Being Mexican, at least one family member is employed as a Diversity Hire by some governmental organization. Furthermore, I’d imagine WIC, AFDC, etc. play a major part in their food purchases (in other words dumb gringos like us pay for their food and their kids food). That leaves spare cash for cars. And other stuff.

  13. ” lent him $15,197 to buy a used Mitsubishi sedan”

    Mitsu has long been #1 for subprime auto loans, some years by a very wide margin.

    The dealer also ripped him off charging that much for a used Galant. Current listings show galants from dealers for $10-12K with under 30K miles.

  14. “Cash for Clunkers in 2010 took most of the cheap good used cars off the market.”

    More like beat up old SUVs plus cars people doubted would survive their next smog check. Average MPG for those turned in was 15.8MPG and average age was about 15. The clunkers were probably even less efficient that 15.8 due to their age and that EPA estimates tended to be very generous back then.

    I wish we’d do a few more rounds.

    Here are the top vehicles traded in:

    1. Ford Explorer 4WD
    2. Ford F150 Pickup 2WD
    3. Jeep Grand Cherokee 4WD
    4. Ford Explorer 2WD
    5. Dodge Caravan/Grand Caravan 2WD
    6. Jeep Cherokee 4WD
    7. Chevrolet Blazer 4WD
    8. Chevrolet C1500 Pickup 2WD
    9. Ford F150 Pickup 4WD
    10. Ford Windstar FWD Van

  15. “What’s the definition of crazy again?”

    Not crazy – CORRUPT. All across the top.

    The financial industry will never be reformed until we require executives and employees of these companies to take a serious, personal financial hit for every loan that fails.

    But congress will never do that, and we all know why.

  16. Every day on my commute to work I pass a used car lot. One of the slogans that rotates on their electronic sign is “No se necesita licencia.”

    It’s obvious that this is targeting illegal aliens. And the more I think about this, the more it bothers me. Someone is here illegally, but they can get credit? They can buy a car? This dealer is happy to trust someone to make car payments when they can’t LEGALLY drive the car? And if they don’t have a license, what are the chances that they have insurance?

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  17. says:
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    Luke Lea says: “subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds

    Ah, there’s the rub.”

    Indeed, but I’m still hazy on one detail. Pardon my ignorance of high finance, but after the Bubbledammerung of 2008, why would anyone willingly buy such securities?

  18. There was a bubble in mobile homes (or manufactured housing, to use the PC term) around 2000, which burst. But you probably never heard of it, because a collapse in the value of trailer parks can’t wreck the entire economy. Neither can used cars.

    Securitized s**t loans on automobiles?

    Holy f***ing s**t.

    Pretty much every kind of debt gets securitized. Credit-card receivables are a big business. All the other kinds of securitization — credit cards, auto loans, student loans, commercial real estate, you name it — outperformed residential mortgage securitizations during the last crisis, because they never got as insanely overvalued as homes did.

  19. It’s trivial to determine whether or not banks are holding large amounts of securitizations backed by auto loans, like they were holding lots of mortgage loans.

    A couple minutes on the interwebz says they’re not. I don’t know who is (I only had a couple minutes), but somebody must be.

    Whatever does eventually go wrong with this, it’ll be different in at least some ways, apparently.

  20. “It’s obvious that this is targeting illegal aliens. And the more I think about this, the more it bothers me. Someone is here illegally, but they can get credit? They can buy a car? This dealer is happy to trust someone to make car payments when they can’t LEGALLY drive the car? And if they don’t have a license, what are the chances that they have insurance?”

    The scam, I have heard, is that these junker cars are bought by the dealer at auction for a few hundred bucks. They are put for sale for, say, $1000, dealer finances the rube with lousy credit with the requirement that buyer puts a few hundred dollars down. Since the down payment repaid the dealer for what he got the car for at auction, if the mark pays even a few payments, he’s money ahead. When the payments cease, the car is repossessed and the dealer can do it all over again.
    Zero risk.

  21. gunnar:

    It’s all about the rate of return. Who would ever place a bet on some really improbable event, like the US men winning the World Cup next time around? You’d have to be crazy, right? Or would you make that bet given favorable enough odds?

    The meltdown wasn’t caused because there were risky securities. There are *always* risky investments. As far as I can tell, the meltdown was caused partly because some risky securities had been packaged in such a way that they plausibly looked like very low-risk securities, and the rating agencies treated them that way. (And there was a lot of other stuff going on, like the creepy suicide-pact-like set of interlocking debts held on one another by a lot of big financial companies, so that a few big players going broke raised questions about all kinds of other players.)

    The interesting question is whether those loans are being repackaged via some kind of clever financial engineering into AAA rated securities which are then being loaded up on by banks and mutual funds. I wouldn’t be surprised, but maybe some iSteveites actually know….

  22. says:
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    The government caused the mortgage crisis by forcing lenders to give mortgages to minorities with no income, no down-payment and no history of paying their bills. Is it somehow forcing lenders to make car loans to people who don’t (or can’t) pay their bills too?

  23. In Massachusetts, illegals can’t obtain licenses but can register vehicles. Crazy…

  24. You should read Zero Hedge more. Its a great site that exposes a lot of the lunacy in our economy & from the Fed. Check this out:

    ….if the American people knew and understood a tenth of the insanity the banker parasites are pushing there’d be calls for armed revolt and executions tomorrow. And that’s not a right or left issue.

    These people are pure parasites, feeding off the poor thru insane elaborate junk bond schemes & other various insurance securities they come up with….

  25. […] More: The used car subprime loan bubble: What could go wrong? – The … […]

  26. says:
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    While certainly subprime used car loans don’t seem like a good idea, it is also a major catch when a person doesn’t have a car – then they can’t keep a job, wind up on public assistance and another vicious cycle occurs. Tough to find the answers.

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