Sub-prime Auto Loans and Wall Street Thinking
Although it’s a relatively small market, sub-prime auto loans have become a profitable market for Wall Street banks. As Jessica Silver-Greenberg and Michael Corkery reported in yesterday’s New York Times, the institutional thirst for high yield is being slaked by securitizing loans on used cars owned by people with poor credit. According to reporters’ investigation, this type of subprime loan represents about 27% of the market for auto loans or about $120 billion in annual issuances. While subprime auto loan issuance is growing rapidly, it pales in comparison to the size of the subprime mortgage market in 2006-2007.
I can’t add to the fine reporting of Silverberg-Green and Corkery. I recommend that you read their exposé, “In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates”. They document the same unsavory practices that helped to generate subprime mortgages, albeit on a smaller scale. The loan originators help car buyers file false applications and pressure or cajole purchasers into buying more car than they can afford. The banks eagerly scoop up the loans, so they can be packaged and then sliced and diced into securitizations. Sound familiar?
The article demonstrates how little Wall Street has changed in the last five years. If there’s a fee to be earned, the banks will manufacture products even if they exploit the consumer and/or have a high probability of turning out to be toxic. The banks continue to justify these types of investments because they offer consumers with poor credit scores an opportunity for American dream, be it a home, car, or student loan.
In addition to the usual rationale that securitized subprime lending simply represents market forces at work, Wall Street seems to have picked up one more excuse. Because the subprime auto market is small and doesn’t pose systemic risk, Wall Street says this kind of lending is okay. Even if these securitizations implode, the overall health of our financial system won’t be imperiled and taxpayers won’t have to bail out the banks, so according to Wall Street we shouldn’t be concerned. In other words, if it isn’t too big to fail, it’s okay for us to turn a blind eye.
On the one hand, Wall Street is trying to get rid of or at least emasculate Dodd-Frank. On the other hand, they’re more than willing to use the central tenet of Dodd-Frank, preventing another “too big to fail” bailout, to justify unsavory investment practices. As I’ve repeatedly argued over the last couple of years, when you engage in amoral behavior, it usually leads to immoral results. Wall Street is at it again in the subprime car loan business.