Thursday, December 6, 2007

Next Prediction Coming True - Auto Loans Going Bad

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Well my predictions from Tuesday's post [Et tu, 1st Half 2008? Predictions for the coming 6 months] are already coming true, in much quicker fashion than anticipated. First came central banks ignoring inflation to start cutting rates in unison to bail out the US (first Canada, then UK, more to come)

Now? Auto loans...

I wrote Tuesday:
Auto sales will see a horrid 2008 for all the same reasons mentioned above - negative wealth effect, lack of confidence, inability to finance via home, wage stagnation in the face of real inflation.

I should of added the thoughts about auto loans following same pattern as mortgages, but the knee bone is connected to the jaw bone is connected to the elbow... once you are late on mortgage, then comes car, then comes credit card - you get the picture. I guess if you can't keep up payments on your current car it is going to be tough to be out there for a new car next year. Here comes the auto loans per WSJ
  • Now, signs of stress are creeping into another key consumer area: auto loans. Delinquencies in the auto-loan market are ticking up to their highest level in several years. Lenders are tightening terms in some cases, and interest rates have risen from the rock-bottom levels of a few years ago.
  • About 4.5% of auto loans made in 2006 to top-rated borrowers were at least 30 days delinquent as of the end of September, up from 2.9% the previous month, according to a Lehman Brothers survey of companies servicing these loans. That is the biggest one-month jump in at least eight years.
  • Lehman says 12% of subprime borrowers, who have poorer credit records, were delinquent on their 2006 auto loans as of September. That is the highest level since 2002 and up from 11.1% the previous month.
  • "The numbers will get worse for auto loans," says Dan Castro of GSC Group, a New York firm that runs debt-related investment funds. "We're starting to see signs of rising losses, and delinquencies are creeping up."

  • The trouble signs in auto loans suggest that the credit woes could be spreading to the broader economy, a development that has been worrying investors and policy makers in Washington.
  • The typical delinquent borrower in a car loan isn't a speculator but someone who became unable to make what previously seemed like a manageable payment. That is why car delinquencies are closely linked to the health of the economy.
  • Many auto loans undergo the same Wall Street financial engineering as the mortgage loans that stand at the center of the credit crisis, making this a potential issue for investors. Auto loans often are bundled together into securities, sliced and diced into pieces with varying levels of risk and return, and sold to investors around the world.

  • In 2006, $89 billion of auto loans were packaged into asset-backed securities and sold to investors, according to Standard & Poor's, making it the biggest asset class for such securities next to mortgages and credit cards.
  • Borrower problems also could deal a blow to the already-struggling auto industry. Auto sales held up during the 2001 recession in part because lenders were able to offer easy borrowing terms. If lenders tighten terms in response to the delinquencies, it would make it harder for some people to buy cars.

  • There are reasons to believe the problems in auto loans won't reach crisis levels. Auto lenders and credit counselors say many consumers see their cars as a necessity and would sooner hand back the keys to a home and look for a rental than default on a car loan.

  • Still, auto loans, like home loans, saw credit standards loosen in 2005 and 2006. CarMax Inc., of Richmond, Va., the largest used-car retailer in the country, said at the end of 2005 it lowered lending standards. For example, it allowed consumers to put down less money to buy more expensive vehicles. Car Max made about 140,000 car loans last year.

    "We had been too strict and wanted to make more loans and maximize profitability. We expected our delinquencies and losses would go up, but they are up higher than we thought," said Katharine Kenny, head of investor relations at CarMax.

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Takeaways:
  1. Obviously car loans are not nearly as big of an issue but this is another sympton... of a disease. Instead of treating the root cause of disease we put band aids on the parts of the body that should be 'expunged' anyhow. For votes.
  2. Notice the spread to prime grade borrowers. As I keep saying, its not a subprime issue - its basic lack of affordability, stress on every 'average family' to pay all these bills, in a relatively stagnant wage environment, with high inflation and inability to draw equity from their homes. This is the big issue. Not subprime loans to people who shouldn't of had loans in the first place.
  3. Notice the securitization. The same bad habits. And trust me, its not car loans that will be the 'next big thing' - think credit cards. Think 2008. Think where all these CDOs chock full of credit cards (not secured by anything, not even a house) are sitting. Possibly in your state treasuries office. It's all tied together. And it's all coming no matter what Wall Street (equity market) believes. The bond market knows...
  4. Again all this and we are coming of a supposed 5% GDP 3rd quarter (yeh right)? What happens in a normal quarter? Or below trend GDP quarter?
  5. And I know no one cares about the auto industry anymore, but it does employ real people with real jobs and real spending. As the pool of new car sales contracts, it will hurt a lot of people - in both domestic and foreign plants... and their suppliers... and their supplier's suppliers. It's all connected. Virtuous on the way up. Not so much on the way down. No matter what bailouts we attempt.
This is why you have to listen to these companies, not these government report. Whatever comes out tomorrow by the BLS, is just that... without the L. BS. So let's enjoy our gains, take them where we can get them and realize 2008 will not be a good year for the economy. The market discounts 6 months out... this one is discounting out 2.5 years and ignoring everything between now and middle 2009. When the equity market chooses to acknowledge that the Fed is not bigger than the economy... well this is an open question. But these are the real trends and at some point Main Street and Wall Street must meet.

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Getting auto insurance is a mandatory measure before going for any kind of mortgage. This is important particularly for creditcard users, because people seldom read any of their free credit reports or they would realize the hazards that come with one. An online credit card instead can be a good way to start using one. At least that will spare one from payday loans.
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