Skip to main content

It was the invention and subsequent abuse of sub-prime mortgage securities that crashed our economy. Now these idiots are trading sub-prime auto loan securities.

Private equity firms are investing in chains of used-car lots, and auto loans are being packaged into securities much like subprime mortgages. They're attracted by the industry's average profit of 38% for each car sold. [...]

Subprime auto loan issues now represent a larger percentage of all auto-loan securitizations than at any time since 2006, according to Moody's. [...]

The returns on subprime auto-loan securities vary, but one offering sold late last year paid 3.5% annually on A-rated bonds maturing in three years — about six times the yield on comparable U.S. Treasury notes. On a $1-million investment, an investor would expect a return of $105,000, plus the principal, over the three years.

This spring, Moody's warned that the market for subprime auto-loan securities could get overheated. "New market entrants lured by profits and low-cost financing are susceptible to expanding 'too much too fast,'" the ratings firm wrote.

Yeah, nothing could ever go wrong with such a thing. There's no way this will ever lead to exploiting poor people.  Oh. Wait. It already does:

Many require customers to return to the lot to make their loan payments — that's why they're called Buy Here Pay Here dealerships.

If buyers default, as about 1 in 4 do, the dealer repossesses the cars and in many cases sells them again.

The dealerships make an average profit of 38% on each sale, according to the National Alliance of Buy Here Pay Here Dealers. That's more than double the profit margin of conventional retail car chains like AutoNation Inc.

"The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving." [...]

Jeff Williams, chief financial officer of America's Car-Mart, one of the largest Buy Here Pay Here chains, said his company fills a pressing need for millions of Americans who can't qualify for conventional auto loans.

"Our customers live paycheck to paycheck, and we work with them," Williams said. "We consider ourselves to be the good guy of the industry."

Good guys. Right. Greedy, exploitive bankers and corporations is what they are. They are the 1%.

Cross-posted from Eclectablog.

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

  •  I Wonder if This Includes the Auto Title Loans (5+ / 0-)
    Recommended by:
    a2nite, Rich in PA, DRo, tardis10, Larsstephens

    I'm now hearing advertised on talk radio, taking out loans on cars you fully own?

    I've logged onto a page of one of them but there's no way to find anything out without formally applying and giving contact info, and they seem to need to contact you back before you can find out the rates.

    I presume it's the usual 5x mafia rates of today's commercial lending.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy.... --ML King "Beyond Vietnam"

    by Gooserock on Wed Nov 02, 2011 at 05:41:12 AM PDT

  •  Tipped and rec'ed (3+ / 0-)
    Recommended by:
    Egalitare, mslat27, Larsstephens

    The radical Republican party is the party of oppression, fear, loathing and above all more money and power for the people who robbed us.

    by a2nite on Wed Nov 02, 2011 at 05:43:02 AM PDT

  •  I think this works for everyone (2+ / 0-)
    Recommended by:
    johnny wurster, Hoodoo Man

    Unlike housing, where you can rent if you don't buy, cars are something you either buy or have zero access to.  Subprime auto loans have (1) made cars accessible to millions of people who couldn't otherwise afford one, (2) maintained a healthy used car market, (3) spread out credit risk, which is what securitization is supposed to be about.  I don't see a bad story here at all.  People who lose their homes are worse off than if they never bought them, but that's probably almost never the case for people who lose their cars.  

    You know, I am so much against the majority Kossack view on this narrow question, first yesterday and now today, that I feel obliged to include a disclaimer: I don't deal in used cars, nor does anyone I've ever known!  I just think that of all of the segmented credit markets in our country (houses, home furnishings, college, you name it), this one works the best for people at the bottom.  

    But nobody's buying flowers from the flower lady.

    by Rich in PA on Wed Nov 02, 2011 at 05:46:45 AM PDT

    •  The issue is not (5+ / 0-)

      the loans themselves. The problem is the securitization, just as it was in the housing bubble. Once again, the banksters have created an unregulated financial product that can be sliced, diced, insured, reinsured, and resold until the underlying assets are impossible to evaluate wrt risk, thus setting up another potentially disastrous cascading failure.

      The buy here pay here dealers are simply another symptom of the stagnant wages that have decimated the middle and working classes over the last three decades. And these risky investments that return a princely 3.5%? I remember when a 12 year old with a freaking passbook savings account could get a better rate of return, with no risk whatsoever. Something is seriously wrong when people think these things are normal, or acceptable.

      "A lie is not the other side of a story; it's just a lie."

      by happy camper on Wed Nov 02, 2011 at 06:02:32 AM PDT

      [ Parent ]

  •  You know there was a diary on this very topic (4+ / 0-)

    last night by someone else.  People seemed to pooh-pooh that diary because the scale of auto loans is smaller than homeloans, and therefore the bursting bubble wouldn't be as large a catastrophe. Personally I think it's newsworthy and I'm glad people are picking it up. It matters, in that it shows how things like Moody's bullshit ratings fraud and predatory lending never end, and it won't until the rules are changed.

    Gentlemen, you can't fight in here! This is the War Room!

    by bigtimecynic on Wed Nov 02, 2011 at 05:49:49 AM PDT

  •  Hooptie Preservation Debt Instruments!! (1+ / 0-)
    Recommended by:
    trueblueliberal

    Occupy Wall Street AND K Street!!!!

    by Egalitare on Wed Nov 02, 2011 at 06:01:26 AM PDT

  •  There's a mixed bag here (1+ / 0-)
    Recommended by:
    Egalitare

    While regulation of subprime auto securities seems appropriate, it seems wrong to prohibit them.

    1.  If the capital markets don't provide credit, we're stuck with just the banks and the auto companies.  They are only lending to "prime" customers.  If we don't permit this, how is anybody without supurb credit going to be able to get a car loan?

    2.  The banks and auto companies are generally happy to finance new car purchases, but what about used cars?  A subprime market is essential to finance used cars.

    3.  The best way to have affordable credit is for lenders to be competing against each other.  If the securitization market enables more of these companies to exist, basic economics suggests that competition will likely drive down interest rates and make them more affordable.

    We need regulation to assure that we don't have the same abuses that happened in the mortgage crisis, but sub-prime auto securities seem to me to be a possibly helpful idea that should not be prohibited.

    •  This gang thinks that Dodd-Frank is... (1+ / 0-)
      Recommended by:
      Hoodoo Man

      ...too much regulation.

      I expect them to lobby like there's no tomorrow that regulating Sub-Prime Used Auto Loan CDOs (and I am certain that they will NEVER be described in those terms when sold on Wall Street) would be "economically disadvantageous to used car customers."

      Next thing you know the ONLY used car loan you'll be able to get will be a Sub-Prime used car loan, and brokers will get an upfront bonus for putting customers in those loan packages. It seems to me I've seen this movie before, and I don't want to see the sequel.

      WITH regulation, fewer problems. I am highly skeptical that we will get regulations for this or any other new "exotic financial instruments" in the near term.

      Occupy Wall Street AND K Street!!!!

      by Egalitare on Wed Nov 02, 2011 at 08:29:58 AM PDT

      [ Parent ]

      •  You raise good points (0+ / 0-)

        Car dealers will use the financing source who pays them the most money for a loan.  It they get more from the subprime finance company, they'll use the subprime company.  Consumers typically don't have a clue when they get financing at their car dealers.

        It's not crazy to expect that some car dealers might steer consumers to the subprime loan when they might qualify for a prime loan at a lower interest rate.

    •  supbprime loans are the primary way... (1+ / 0-)
      Recommended by:
      Hoodoo Man

      ...people finance cars.  If the subprime market collapses, then car sales will collapse as well (as it did in the fall of 2008).

      GODSPEED TO THE WISCONSIN FOURTEEN!

      by LordMike on Wed Nov 02, 2011 at 08:47:39 AM PDT

      [ Parent ]

    •  My credit union (2+ / 0-)
      Recommended by:
      Hoodoo Man, Larsstephens

      was happy to loan me the money to buy a five year old Malibu a few months ago, no money down. 4% interest.

      I don't think securitization drives any sort of competition among these lenders. They're charging 20%... My credit card rate is lower than that.

      "A lie is not the other side of a story; it's just a lie."

      by happy camper on Wed Nov 02, 2011 at 08:53:40 AM PDT

      [ Parent ]

  •  I worked in the industry for a short period (0+ / 0-)

    First understand that the people getting a loan are usually very bad credit risks.  These people have had repo's and declared bankruptcies and done all sorts of credit score destroying activities.  These people need/want a car really bad and for the most part are just happy to have someone give them a loan.  It was mixxed bag of people, about half would be great and they would pay the loan long enough to get a good enough credit score to get a better loan somewhere else.  The other half was a disaster and might make a payment or two then stop paying and be on the run until the car got repo'ed.

    If I remember correctly the profit margin was closer to 50% with all the fees, so it was not a bad deal for the investors, but as I said above the people getting the loans were very happy that someone would lend them money.

  •  How do you think dealers make their money? (1+ / 0-)
    Recommended by:
    Hoodoo Man

    It's not from actually selling cars.  If you walk in with an 800 credit score, they want you in and out of the showroom as quickly as possible.  You are a loss to them.  They only get a few bucks off the actual car sale.  Where they make their money is financing, especially subprime financing.

    They like the poor folks who come in with crap credit.  They can charge 25-50% interest on a loan (yes, those are real rates), and the poor suckers take it 'cos they don't know better.  If they default, no biggie, repo and resell to some other poor schmuck.  It's the biggest scam in the book, and it's been going on for ages with no oversight.

    Remember at the end of 2008 when all the car sales collapsed?  It wasn't 'cos of the economy or gas prices.  The subprime auto market collapsed along with the subptrime home market.  Dealers lost access to subprime financing and their primary method of making sales--ripping off poor people.

    Some of the stuff auto dealers do make investment bankers look like saints.

    GODSPEED TO THE WISCONSIN FOURTEEN!

    by LordMike on Wed Nov 02, 2011 at 08:44:58 AM PDT

  •  wrong!....Some poor are greedy and exploit (0+ / 0-)

    Some poor are greedy and exploit the system.....there are MANY poor living in public housing who are driving cars that they are essentially renting.....which begs the question if your rent is being subsidized by taxpayers ...how is it that you are able to afford to make car payments and insurance of hundreds of dollars.....

    YOUR PREMISE SUPPOSES THAT THE POOR ARE STUPID...we know that the poor are  uneducated...as I have yet to meet a poor person who is educated....I met educated persons who are broke....so before you go off on a spiel....there is a difference between being poor and being broke.......

    EXACTLY.....WHEN IS IT A POOR PERSON'S RESPONSIBILITY FOR HIS CONDITION.......or is okay for the kids in poor communities to skip going to school for 12 years and then complain that they can't find a job!!!!!

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site