Monday, September 17, 2007

Is a 10 Year Car Mortgage Far Off?

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Some interesting stats from this TheStreet.com article on the increasing length of auto loans. Can we be too far off from a 10 year auto loan as we stretch ourselves in any conceivable fashion to buy things we truly can't deserve? And/or are all the other pressure points in the budget finally getting to middle class America in aggregate? Gosh.
  • In the case of auto lenders, rate resets aren't the problem -- the rates on most auto loans are fixed. But the terms of these loans are getting longer as consumers stretch to buy more car than they can afford. Longer terms help to lower monthly payments, offsetting the impact of rising interest rates and allowing them to put less money down. "Most consumers still come into dealerships and tell the salespeople that they want to pay a certain amount of money per month for their car," says Jesse Toprak, executive director of industry analysis for Edmunds.com. "That is probably the single worst way to shop."
  • According to Edmunds.com, the average financing term for loans on new cars was over five years, or 63.8 months, at the end of August. That's up from 59.8 months five years earlier.
  • Some loans are even longer -- as long as eight years. According to JD Power & Associates, nearly 39% of loans made year to date had original terms of between 72 and 83 months, up from 31% in 2004. And 3.9% of loans made so far this year had original terms of at least 84 months, up from 2.4% two years earlier.
  • But auto loans of five, six or even eight years are risky for lenders because, unlike homes, cars and trucks depreciate rapidly. Most vehicles lose about a third of their value once they are driven off the lot. So the longer borrowers stretch out payments, the more time loans spend underwater -- a term meaning the balance is bigger than the value of the vehicle securing it.
  • And the longer the loan, the more likely owners will still be making payments when they want or need to buy a new car, a concept known as "negative equity." "At least one in four customers who trade in a car have negative equity," says Toprak. How much negative equity? The average is at least $3,000.
  • Lenders aren't just extending the terms of auto loans. Data from Standard & Poor's on pools of auto loans that are bundled into securities indicates average credit scores are slipping and investors are putting less money down. S&P says that, among securitized auto loans to prime borrowers, 30-day delinquencies increased 37% for 2006 issuances compared with 2005, and are up by 24% for 2005 securitizations vs. 2004. The figures are as of the end of July.
  • GMAC says it has experienced little fallout from the recent turmoil in the credit markets. "We've remained consistent in our credit scoring criteria and the way we do our underwriting," says spokesman Mike Stoller. "Our delinquencies are still in the band of historic lows." "Other businesses, like banks, are the ones that are really pushing longer-term loans," says Ford Motor Credit spokeswoman Brenda Hynes. "Any sort of loans that we do, we're basically following that market to be competitive. As far as the effect of the current credit crunch, we aren't seeing any change, and our purchase policy hasn't changed, and thus the length of our contracts haven't changed either."
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Takeaways: The last 2 points say it all. This 'securitization' of all things debt is amazing. Deja vu all over again. As with the statements in the last point - they sound just like the Countrywide CEO and many other lenders in the mortgage business are now saying... we brought to market what the consumer wanted/needed.

Just another data point

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