Here comes the down side to the heavy marketing of automobiles in upside down deals
I’ll be paying attention to the partisan bickering to see if that issue is considered.
I’ve been reading articles claiming this is the next big economic meltdown for a few years now. Forbes wouldn’t let me read the whole article so I don’t know if there is anything new here.
Potentially a problem but with many differences to the foreclosure problem. It takes years for the banks to foreclose on a home. Takes time and legal action to evict the owners. Takes cleanup and repair work and months to re-sell the home with tons of operating costs in the meantime - taxes, utilities, real estate agents, ect. The debt stays on the books for a year or more and the loss can easily be 6 figures.
Takes weeks to foreclose on a delinquent car loan. Snatch the car from the driveway, car then goes to auction, the loss is written off the banks books and life goes on in a matter of a month or so. All with at least one less zero on the overall loan and loss.
It is a problem for the car owner, less so for the bank, and a boon to used car buyers because of the influx of repossessed cars will flood the market. I don’t see the same magnitude of risk.
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I don’t think it’s the same at all. The biggest problem with the mortgage collapse, was the banks and the bundling of prime and sub-prime loans into one big bundle and calling it prime.
Believe it or not a lot of middle class people pay cash for their vehicles. I know very few people who have ever paid cash for their house.
People were speculative buying homes before the housing crash for investments. No one I know of buys new cars for investments. Cars are never an investment.
All true, but lots of people still buy cars on time, and the expensive ones can easily be 8 year loans. This is especially true for expensive rides, like pickup trucks for instance. People shouldn’t do this, of course, but they do it anyway.
One of the biggest parts of the collapse was the mortgage insurance. There’s no such animal for cars. Companies like AIG guaranteed (insured) these loans. When they failed then AIG was asked to, pay up. They then faulted. It was a cascading effect. Too many differences between car loans and mortgages to think they’d act the same.
One side note. Michael J. Burry - the one who foresaw the collapse of the market and bet against it…also recently made a lot of money because he also foresaw the collapse of the market because of the Covid-19 virus.
My 403-b (educator version of a 401-k) was originally managed by AIG.
When things began to look unstable in regard to that company, I called them to begin the process of moving my account to Vanguard.
The AIG guy on the other end of the phone asked the obligatory question:
May I ask why you want to do this?
My answer was that I no longer trusted AIG’s ability to withstand their current financial situation, and in response, the phone guy whispered… Neither do I!
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Just my immediate impression on the issue. The mortgage issue was because lenders could lend to anyone without the ability to pay and then hurry up and sell the loan to the feds and collect their cash. Not so for auto loans as far as I know. The individual banks carry the paper for the whole length of the loan. First they adjust the interest rate or hold off on approving the loan due to credit worthiness, then they can quickly reclaim the car and sell it, and if they lose money on the deal, it doesn’t affect everyone else.
Now if it is manufacturer financing which might be looser, I suppose that could be a bigger issue to the company, like GMAC was.
Just my thought on the housing market collapse. I think it was due to the $4.50 a gallon of gas price. Suburbia on thin ice could no longer afford gas to get to work and a mortgage. The current situation with so many out of work leads me to think we are going for a repeat for cars and houses.
You’re impression is NOT reality. The mortgage collapse is very well documented. You don’t have to speculate. Mortgage companies had a huge cash reserve sitting around not doing anything. They are the ones who relaxed the mortgage requirements. I have two relatives who are very high up in a couple small local banks. They are very conservative banks and did NOT follow the same practices that banks like Chase or Citi-Corp followed. They kept their own conservative standards. When the market collapsed they were one of a hand-full of banks that were doing OK.
JP Morgan invented the mortgage bundling, If this was any other industry - people would have gone to jail for fraud.
I don’t think I was speculating. They bundled the junk mortgages and sold them nearly the next day to the feds as a bundle. Then when they were not repaid by the owners, the feds were left holding the bag. Of course there is more to the story but car loans are normally not bundled and sold by lenders, but you know.
Neither automobile buyers nor home buyers were/are involved with instigating and developing the business practices which were or are the cause of financial trouble. The buyers were/are the gullible victims of well marketed schemes to gin up an unhealthy demand for goods that they actually need. But these days retail financing in a George Bailey Savings and loan where George loans money to finance homes and cars that he acquired from people depositing savings with him to accumulate the down payment for a home or car of the own. The Baileys needed to pay a reasonable interest to get peoples savings and that required charging enough interest to stay in business.
These days brokers write mortgage loans which they sell to investment banks and take out a cut for themselves and have no concern for the loan failing.
I often hear the term “free market” used to describe various situations concerning prices, interest, etc as though those values are the result of free trade, i.e., honest bargaining. But that hasn’t been true for many decades. In a “free market” there could be no negative interest on loans. Negative interest is the result of micro management of macro economics gone mad.
Of course this is a pet rant for me here and elsewhere. The economy on America’s Main Sts can’t provide for a comfortable life in return for honest effort from labor. And labor, looking for the means to acquire and maintain all that would seem their right to enjoy in return for their loyal hard work are all too often cheated in seemingly easy money deals that are easy to sign up for but difficult to dig out of. Just look at the ‘bill consolidation’ and credit card balance transfer schemes. In my NSHO I believe that the federal government should have the responsibility to regulate all manner of marketing and financing and require truth in advertising with zero tolerance for scamming. P.T. Barnum said “a sucker is born every minute” but he was only swindling the public out of a couple of dimes for some razzle dazzle entertainment. These days time shares, rent to own, pay-day loans, non bankruptable student loans for useless phony education, etc., are robbing people and some who recognize the sorry state of affairs rationalize it as being perfectly acceptable because ‘smart people’ avoid all those traps for themselves while cashing in on the situation when they have an opportunity.
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I was in high school in 1958 and remember that recessionary period well. One thing that helped bring Detroit out of that recessionary period is that cars wore out faster and had to be replaced. Also, the big three came out with compact cars–the Ford Falcon, the Chevrolet Corvair, and Chrysler’s Valiant. These cars sold well and did help the economy. The other benefit is that a lot of motorists longed for their former, larger cars. These cars were often traded for a larger car within three years. In fact, I remember back in 1958 that the Desoto/ Plymouth dealer had a stripped down 1958 Chevrolet Delray and a stripped down Rambler sedan on the lot. Both cars had less than 5000 miles on the odometer and both had been traded for top of the line DeSotos. The former owners of these stripped down cars to save money found them such a come-down from their previous cars that they quickly traded them in. Today, I am not sure there is a Detroit as I knew it back in the 1950s and 1960s. People don’t trade cars every three years. I live in an area that had auto parts plants that are now gone. Over 50% of our public students qualify for free lunches and even breakfast. With the schools closed, the school buses are delivering the free breakfasts and lunches to students. People work two low paying service jobs and both the husband and wife in the family have to hold jobs.
What hasn’t helped the housing business in my community is that the young professionals that teach at the university are mostly on year to year contract positions and rent apartments instead of buying a house. The young medical professionals are equally as unlikely to buy a house.
@Rod_Knox. I agree with you about businesses such as rent to own. I was on a team delivering food baskets at Thanksgiving to families that the Salvation Army had listed as being in need. At one house, the refrigerator had quit and the single mother was on her way to a rent to own store to rent a refrigerator. There was no way she could buy even the least expensive new refrigerator. My own church was replacing a couple of old refrigerators that had been donated some years back. The refrigerators were still operating. The electric company would have given us $40 for each refrigerator because these refrigerators are not energy efficient. I insisted that the old refrigerators be given to an organization that gives the refrigerators to those who need one. While the refrigerators may not be as energy efficient as the new ones, it is still better for the recipients than to make monthly payments to a rent to own.
The same, I believe, is true for cars that are donated for transportation for those in need. Even though some of these cars may not be energy efficient, it’s better than acquiring a car from a buy here pay here lot.
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Fannie Mae and Freddie Mac bought a lot of mortgage bundles because that is what their charter was. They had high standards, but were intimidated by national elected representatives, both Democrats and Republicans, to buy subprime loans too. That wasn’t all there was to it. The entire mortgage loan industry seemed to conspire to make loans ever more available to poor credit risks. Ratings companies became more lax in their assessments. Highly risky interest only mortgage loans became popular, allowing people that never could have afforded the homes they bought to take possession for a little while. There is a lot more to it than what you say.
Like I said “of course there is more to the story”, but the point was car loans are a little different. Maybe they are being sold to someone but I don’t think so.
I just don’t hold the same view of the general public as being helpless in the face of fast talking salespeople and flashy ads on TV. Some sure, but to think the answer to fraud is to have the feds take over wouldn’t get my vote. Beware of members of Congress saying they are voting strictly for the public benefit. Dig deeper.
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Just as the cost of higher education has skyrocketed due to the easy availability of student loans, and the cost of real estate has skyrocketed due to lax mortgage underwriting standards, the cost of new cars and trucks has skyrocketed due to easy credit. Turn off the spigot of easy credit, and suddenly that $30,000 sedan or $60,000 pickup might as well cost a million dollars. In fact, if auto financing was held to the same standards as mortgage underwriting after the previous economic collapse, anything above $15k for a sedan or $20k for a truck or SUV becomes a tough sell.
I have long thought our economy was a house of cards built on a foundation of bullsh**, and that this house of cards would collapse sooner rather than later. When the cost of everything increases by leaps and bounds, but wages barely increase if at all, it’s not difficult to see that people are taking on debt to make up the shortfall, and that this is not sustainable for very long.
I expect to see huge numbers of people default on their car loans, student loans, credit cards, and perhaps even mortgages in the not-too-distant future.
Hopefully, this economic collapse will create a demand for smaller fuel-efficient cars and for smaller more space-efficient homes. Time will tell, of course.
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Car loans may be a little different, but we’re still set up for problems with them.
There are a lot of 5+ year loans out there right now, on expensive vehicles. Some loans stretch 8 years. On a car.
So, mass defaults on car loans precipitated by, oh I dunno, the recession that’s starting right now, means a whole lot of repossessed vehicles. Now the banks own a giant fleet of cars that they can’t sell - that pesky recession again - and they’re out a lot of money, and run immediately to the taxpayer for bailouts again. Meanwhile, because they’re feeling poor, they stop lending money even to those of us with good income and good credit who can pay them back, and the economy grinds, once again, to a halt.
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The core cause of the Mortgage Meltdown was “Willing Suspension of Disbelief”, no different from jumping at buying a Cream Puff car at a Ridiculous Price or just plain greed.
Instead of asking, “How in creation can anybody afford to repay this mortgage?!” and “Is the house backing this loan really worth this?”, the Mortgage Bond buyers simply saw a great return, closed their eyes and handed over their money…
Will something similar happen with Auto Loans? Probably.
As long as there’s people who are willing to buy blinged out $60,000 “work trucks” and bigger fools willing to lend them the money to buy it, manufacturers will make them and dealers will sell them.
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NO…They bundled subprime mortgages with prime mortgages and then had then rated by one of the Rating companies as prime…which they were NOT. They were NOT bundling prime mortgages together and subprime mortgages together. They were mixing them together so they could up the value of the subprime mortgages. When banks were able to do this they then started lowering their standards on mortgage qualifications because now the risk was minimal. They ju
st bundled the subprime mortgages with prime mortgages and no more risk.
Currently, behind the scenes, I suspect that the Fed has printed $trillions and used a huge amount of those $$$ to buy bank(?) assets(notes) and automobiles are certainly a part of those assets. If/when automobiles are repossessed the value of the notes become near worthless and eventually that will show up as a drastic reduction in the value of the Fed’s asset balance. But who cares, right? There’s plenty of paper and ink. And there will be some great bargains at auctions all over the country. And new car dealerships can become yoga studios due to having no customers for over priced automobiles.
Unfortunately in my area one of the dealers that may not survive has had several dealer ships and has a very good reputation . The owner is also civic minded and supports a lot of charities .