Investors on the hook — literally — for subprime car loans

Yesterday, I wrote about the looming debt crisis in student loans and how the default numbers were escalating.

I said then that after 2008-2009 Great Recession how Wall Street moved out of the mortgage paper selling sector and moved into the less regulated student and car loans, since these debt instruments did not fall under any regulation coming out of Dodd/Frank or other initiatives coming out of Washington at the time.

Well look what they did. Student loan amounts have more than doubled to $1.4 trillion since 2008 according to the Federal Reserve.

And “subprime” auto loans are the new canary in the coal mine as default rates near 10% up from 8% a year ago and the amount of repossessed cars nears 2010 levels depressing the secondary sales market.

The no look auto loans, which prompted record car sales in 2015 and was pointed to by the Obama White House as a sign of recovery, are now on the back of the repo man’s tow truck heading to resale market.

Because of this flood of defaulted loan vehicles recoveries on subprime loans fell to 34.8 percent in January, the worst since early 2010, S&P Global Ratings loan data states.

So the underlying asset for these loans has deteriorated to the point where the car sale does not satisfy the note and the investors go upside down on the tranche.

Where have I heard this before?

So where do the banks go now to find the next honey pot to exploit?

  • Commercial real estate is not the answer. Drive by any strip mall or shopping center and see all the shuttered store fronts.
  • Same would go for factoring of short-term notes to retailers or manufacturers as those industries are slowing in the former or lagging in the latter.
  • What about going back to residential mortgages? Surely there’s more profits to mine after the dust settled? Not just yet since the Trump administration has yet to gut the Consumer Financial Protection Bureau (CFPB) and Dodd/Frank.

Well there’s always the prop trading desk. I’m sure these banks are trying to get the band back together on its proprietary trading of the banks own assets. There could be a treasury trove of government paper flowing through the system on Uncle Sam’s infrastructure notes and well as the possible wind down in Sallie Mae (student loans) and Fannie Mae and Freddie Mac (residential mortgages).

You have to know there’s always some sleepy back-water derivative market, just ripe for exploitation for these large banks to pillage.

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One thought on “Investors on the hook — literally — for subprime car loans

  1. Pingback: Markets running a fever (chart) over health care vote | GRAY'S ECONOMY

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