In Auto Industry, Subprime Loans Find New Life
Houston car dealer Alan Helfman served a woman in his showroom last month with a credit score lower than 500 and a desire for a new Dodge Dart for her daily commute. She drove away with a new car.
Bloomberg reported that a year ago, with a credit ranking in the bottom eighth percentile, “I would’ve told her don’t even bother coming in,” said Helfman, who owns River Oaks Chrysler Dodge Jeep Ram, where sales rose about 20% this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs and bring me some down payment.”
As the fifth anniversary of the Federal Reserve’s policy of keeping interest rates near zero approaches, the market for subprime borrowing is once again becoming frothy, this time in the car business. As with mortgages in 2006 and 2007, the central bank’s stimulus is making it easier for people with spotty credit to buy cars as yield-starved investors purchase riskier bonds linked to auto loans.
While surging light-vehicle sales have been one of the bright spots in the U.S. economy, it’s increasingly being fueled by borrowers with imperfect credit. Such car buyers account for more than 27% of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25% last year and 18% in 2009, as lenders pulled back during the recession.
Issuance of bonds linked to subprime auto loans soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, according to Harris Trifon, a debt analyst at Deutsche Bank AG. The market for such debt, which peaked at about $20 billion in 2005, was dwarfed by the record $1.2 trillion in mortgage bonds sold that year.
Shoddy home loans packaged into bonds by Wall Street banks fueled the financial crisis. Experience showed that vehicle loans are safer because the underlying asset can be more accurately valued, it’s easier to repossess, and people who need a car to get to work prioritize that payment.
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