Subprime loans already being abused again, this time to push car sales | Hacker News Reader

Subprime loans already being abused again, this time to push car sales

nytimes.com

30 pointsck225 comments

Banks have money, thanks to the government. And they will find ways to lend that money till they again dig themselves a hole.

Well, with 859,000 sub-prime car loans already handed out, seems like they're well on the way already.

Can anyone explain to me how handing out sub-prime loans to anyone is a "sign of health returning to the economy?"

Its like how being diagnosed with cancer is a sign that you're still alive. At least temporarily.

“Sub-prime credit rating” ≠ “guaranteed to default”.

If you look at the graph next to the article, the number of sub-prime auto loans being issued is not up to the level it was during 2005–2009. (Unfortunately the graph doesn’t go any farther to the left, so I can’t tell if 2005–2009 was a bubble in the auto-loan market or just business as usual.) And defaulting on a $20K car loan is not nearly as disastrous (for the borrower or the lender) as defaulting on a $200K mortgage.

defaulting on a $20K car loan is not nearly as disastrous

Unless of course there are 100 times the number of housing defaults, because the car is not worth the price it was bought at a month later after it's used. Unlike land, cars never increase in value, they only plummet.

I've never owned a car newer than 10 years old, I don't know why people have to drive brand new cars, they certainly don't get better gas milage (and apparently many people are using the credit to buy SUVs anyway).

Among the reasons why the sub-prime mortgage crisis has been Bad For America are:

¶ People who live in depressed areas who are underwater on their mortgages can’t move to someplace with better job prospects unless they abandon hope of recovering the equity in their current house.

¶ In neighborhoods where a significant number of houses have been foreclosed on (or where there is a lot of excess capacity because it was built up right before the bubble burst), all property values suffer, even the value of houses where the owners have good credit and have been making their payments.

¶ It’s a PITA for a bank to sell a foreclosed house, especially in a neighborhood where there have been a lot of other foreclosures (see above).

None of these factors apply to car loans.

There is nothing wrong with sub prime loans. When sub primes are priced as if they weren't, and then sold around the world with staggering leverage, then you have a problem.

Especially since no-one from the financial industry has been put in prison for what was done.

Zero punishment, even when caught, so zero risk.

They are also doing end-runs now around housing regulations, discovering that by requiring 20% down payment, the bank escapes liability for bad loans, regardless of other terms or buyer worthiness.

Zero Punishment? Tell that to Lehman Brothers. You do realize that the banks lose money when mortgages go bad, right? If your complaint is that the federal government through Fannie Mae and Freddy Mac is underwriting the risk of these loans, I would agree that's a problem. But the solution is to no longer underwrite loans, not throw business people in jail.

You're confusing fraud with poor business decisions. The economic damage happened because people got irrational about the housing market for various reasons.

The result was poorly priced loans that were bought with extreme amounts of leverage (100x was not unusual). When your collateral turns out be worth a fraction of what you thought, your lenders get prickly and want their money back. Except there is no money. Take that and spread it all around the world, and you have a mess.

Fraud, although I'm sure there was a bunch of it (as there always is) that really had nothing to do with it. Don't look for conspiracy when incompetence is staring you in the face.

This was not a financial industry problem. It was created by unrealistic homeowners, opportunistic bankers, stupid politicians, and a culture that says (for some reason I can't fathom) that home ownership is inherently good. In other words, just about everyone. If you bought or sold a home in the last 10 years, you contributed to the mess in your own tiny way.

And yes, it will happen again. Not one thing of substance was done to stop it after the fact. In fact, the government (yes, that's our fault again) has increased the likelihood of future meltdowns by introducing an unprecedented level of moral hazard by bailing out troubled entities.

The fact is, sub-prime market is where banks make most of their money, not the prime market. These loans have ridiculous fees ($2000 in fee for $3000 car) in addition to high interest rates to bypass state usury laws. Banks don't really care, they get these fees and sell the loans to investors.

I am hoping to make some change in this market. I am working on a start up that would help those with limited credit, like Gen Y, get car loans at better than bank rates. More when I have a decent beta page ready, which should be soon :-) But would be interested to learn if those just starting their careers (18-24 yrs) are facing problem getting car loans at reasonable interest rates.

I found this article interesting, but I think the submission title might be guilty of "gratuitous editorial spin" as outlined in http://ycombinator.com/newsguidelines.html.

the big problem for the US is the American consumer. For the last 20 years the average American has been using $1.10 for every dollar made. This has been possible due to cheap loans and rising real estate prices.

The bare truth is that for the last many years America, and to some extent Europe, has been living well beyond its means.

That's not necessarily bad. As long it's credit for durable goods not experiencing bubbled up prices. There's good and bad leverage. Good leverage is essential to develop a healthy economy.

I entirely agree that borrowing for durable goods isn't a bad idea if you can afford it.

My argument is that for the last many years normal households have been buying stuff they can't afford with money they don't have. And now that the housing prices aren't rising anymore they have serious trouble since they can't take out another mortgage on their house.

Cars != durable goods.

Econ 101: product with a life span of at least 3 years.

http://www.esa.doc.gov/about-economic-indicators http://en.wikipedia.org/wiki/Durable_good

Yes, you're correct by the definition. I was thinking in terms similar to those articulated more clearly in this comment by RyanHolliday: http://news.ycombinator.com/item?id=2284071

A car loses 30% of its value as you roll it off the lot, and it continues losing value steadily until the cost of keeping it on the road surpasses the cost of buying a replacement.

The thing that's important here is the definition of "durable goods," I think. It makes the discussion a lot simpler if we avoid the "doesn't wear out quickly" definition and use the "yields utility over time."

The thing of it is, there really aren't many (if any) goods purchased by consumers that are genuinely durable goods under that definition. Houses, possibly, but we clearly know that can turn out badly. Everything else. . . . well, everything else depreciates, most often quickly. Cars, televisions, appliances, and so on.

There just isn't a return on investment in terms of dollars and cents for consumer purchases that justifies the use of debt. If a business borrows money, they're just leveraging to increase profits. If a consumer borrows money, it's typically because they're not patient enough to wait until they have the cash (been there, done that, know from personal experience).

Anyway, the point of everything I said is to say this: I don't think there's good leverage for consumers, with the possible exception of student loans and a mortgage (for a reasonable house!). Everything else is just impatience.

EDIT: Given my school loans I'm actually pretty skeptical of the utility of student debt, too.

I don't entirely disagree, but I will observe that if you have have to borrow money for a water heater, furnace, toilet, cooktop, refrigerator or similar (because you lack one that works), that's almost certainly a wise thing to do. Same with a car if you need a reliable car to get to (or perform [pizza delivery]) your employment. I don't know that financiers would call that leverage or not, but not all consumer borrowing is irresponsible or even EV-negative. I wouldn't characterize the purchases of items like that on credit as impatience.

Yes - credit for emergency situations - but even in those cases, it's only correct if you are spending within your means. A cooktop/toilet/refrigerator or similar are not that expensive - people should have at least several months of cushion money in the bank after they've been in the workforce for a few years... there should be no need to live paycheck to paycheck and borrow at absurd rates on credit cards.

I would strengthen your statement by saying that if you are borrowing, you are by definition spending beyond your means regardless of the circumstance.

On contemplation, I agree completely.

I'm tempted to say there are edge cases, say your car broke down, you need some repairs, it's within your budget, but you can't pay until your next payday in 4 days, but you need it fixed today. That's what we've all been told is the sort of ideal situation a credit card is good for - but then I realize, that implies you are living check to check - which is already a bad position to be in - the credit card might save you in that moment, but it won't fix the overall financial problem you have.

(gonna ramble here) As soon as people start working, whether in highschool, college, or after, they should start forming a cushion. That cushion should on average grow throughout their entire working life. This isn't retirement savings. It's not an investment. When it gets big enough, sure, you can cap it and start investing, etc.. you don't need 10 years living expenses sitting in the bank.... but what about 6 months? What about a year? That's not absurd to me. Imagine the comfort of knowing you can lose your job, maybe be a bit more frugal, maybe pause on contributing to your retirement fund and no big vacation this year, but you have enough liquid cash in the bank that you don't need to work for a year. That cash becomes something you treasure. You don't WANT to dip into it. You won't just blow it on junk once it gets bigger. YOu won't just take a year off for fun - you'll just take comfort in the fact that you don't care when payday is and can think long term. You can make rational decisions about your job, changes in life, etc. It keeps you far, far away from the punishing cycle of debt the banking industry makes it so easy for you to get caught up in. It gives you HUGE leverage in financial situations.

It's basically cash in the bank that you can call on at any time. Anyone who has been working more than a few months should not be living paycheck to paycheck - if we could just get that message across to more people, things would be a lot better for all. People always say "oh, easy for you to say, I have expenses, blah blah....". Those same people, if given a 50% raise, will tend to increase their spending habits by 50% and still live paycheck to paycheck.

We need to stop thinking like a credit society. The credit score needs to stop being the most important financial market we measure by.

Even when it comes to housing - We need to stop talking about "buying a house" when we mean "mortgaging a house".

Everyone always counters with "Well, how else am I supposed to afford a house?". One answer might be "If you don't have enough to buy the house outright, you CANT afford the house". Sure, there are reasonably low risk situations responsible people can put themselves in and buy rather than rent, and come out ahead - but how many people actually do that -vs- get into the danger zone? I wonder.

Some cultures work for the benefit of future generations - they are a generation ahead at all times. The parents buy the house and pay for school for the kids when they grow up/get married/whatever, as their parents did for them. The kids, grown up, finished school, work to save up money to buy their kids an education and a house, and so on. What rule says we have to stay behind, when we could be a generation ahead with a little planning?

TL;DR: Agreed

If at some stage, the money goes into improving productive capacity, then it is not too bad. The consumers themselves may not be increasing productive capacity, and in my opinion are generally not, but the companies their money goes to often are.

US purchasing power parity GDP per capita is in the top ten in world. http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP...

This seems to me as good a measure of productive capacity as any. The consumers of the US may be borrowing heavily, but the previously borrowed money mustn't all have been pissed down the drain.

This is a vastly different issue from subprime home loans. The key difference is that depreciation of cars is reasonably predictable; car prices are not typically subject to speculative bubbles.

Reply on news.ycombinator.com