Deja Vu – Say It Ain’t True – Another Subprime Loan Debacle Emerging

Who can forget the 2007-08 economic swoon brought on, in great part, by greed and over-extension in the subprime housing loan industry? File the following under the We Haven’t Learned a Blame Thing from Recent History category: it looks like the same exact thing is happening in the subprime auto loan industry.

You might have heard that 2014 was a good year for the US auto industry – its best year since 2006. Lower gasoline prices have certainly helped sales, but the industry push to get people with poor credit into cars is the main driver. (Sorry, I couldn’t resist). You’ve heard, haven’t you? No credit, bad credit, any credit – you won’t be turned away!

bad creditOne-fourth of all car loans – new and used – now go to folks with poor credit ratings, double the rate since 2010. The duration of loans is at an all-time high mark of 5.5 years, with 7 and 8 year loans now available. Really? Eight years? Some people will be doling out payments on a car they will no longer possess or that will no longer run. On top of this, wages of most of those taking subprime car loans are flat. And on top of that, Wall Street has been securitizing these loans at record levels in the last two years. Predictably on cue, the delinquency rate on subprime loans is rising as the auto repossession rate soars. Sounds familiar, doesn’t it?

There is nothing wrong with people who have poor credit getting into houses and cars. Credit is a powerful tool for social and economic mobility. All who have “made it” have been the recipients of blessed financial credit many times over. (No one can justly claim to be “self-made” – to do so is to play the part of Pinocchio.) There are people who rightfully deserve a poor credit rating, reflective of bad decision making. But there are many who have poor credit ratings due to uncontrollable and difficult life circumstances. Sometimes people need a helping hand. Having a house to live in can be a significant stabilizing factor in the life of a family – much more so than having to move from apartment to apartment chasing affordable rent payments. Having a car for transportation is a near-necessity in much of the American job market.

There is something wrong with large banks – no longer enjoying the hyper-growth and ill profits from the pre-2008 housing market – looking for similar type gains from the subprime car loan market of today. During the housing market fiasco, lenders encouraged loan applicants to fudge their stated income upward in order to facilitate closings. Concerns abound that the same type of lax administration is fueling the subprime car loan boom.

The underpaid American lower economic classes need transportation to go to work, buy groceries, and take their kids to the doctor. Easy targets for the subprime loan industry, they are vulnerable to being pushed into overpriced vehicles via loans that are predatory. Ah, the new American way for lenders: make big bucks by stuffing folks from low-income communities into cars they can only afford by being put on the hook with insupportable debt.*

In a society of rampant consumerism – what’s not to like? People who need cars get cars and lenders and investors rake in cash. Forgive my decidedly old-fashioned sentiments: Is there anyone in the lending community with a conscience yet intact?

Wells-Fargo, one of the principal subprime car loan leaders, is showing such signs of moral sense. As of March 1, Wells-Fargo is capping its subprime loans to a ten percent ceiling of all its car loans. This is significant; Wells-Fargo is announcing to its banking competitors that it has learned something from the 2007-08 swoon. Whether or not its competitors follow Wells-Fargo’s lead remains to be seen.

Fortunately, the subprime auto loan industry is only one-fiftieth the size of the pre-2008 subprime housing market. All the same, let’s hope a hard-earned lesson from the 2007-08 economic swoon is not forgotten: the uninhibited pursuit of wealth and gain oftentimes is a moral hazard that damages societal common good.

 

This blog post is representative of my work in Just a Little Bit More: The Culture of Excess and the Fate of the Common Good. The book is available through the website of Blue Ocotillo Publishing, www.blueocotillo.com, and Amazon. Blue Ocotillo Publishing – paperback – $14.95 + tax (for Texas residents) + shipping. Ebook format available on Amazon, iBooks, and Nook.

*Bruce Cockburn, They Call It Democracy (1986).

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