Dalrymple column: Car loans heading down a familiar road
I’ve spent my working life making mortgage loans; I wouldn’t know how to make a car loan.
But you don’t have to be a French chef to know that food poisoning is a bad thing.
Bloomberg recently published an article on problems in the sub-prime car lending business. You can easily dial it up and read it yourself, so I won’t rehash the whole thing here. But there are some almost eerie echoes of the mortgage lending boom back, say, in 2006.
The subject of the article is Santander, a multinational corporation and, according to the writer, the largest sub-prime auto loan lender/servicer in the world. Santander does what many mortgage lenders did in the ramp up to the Great Meltdown in 2008: it buys sub-prime auto loans, keeps some in its own portfolio, and packages the rest into securities, backed by the loans, to sell to investors worldwide. According to Bloomberg, it manages $26.3 billion in this kind of paper, with ownership of the loans split almost 50-50 between those in its own portfolio, and those backing the marketed securities.
Delinquencies in this mass of sub-prime car paper are spiking, and it’s a big number: 14.5% of that multi-billion dollar number are past due. And the delinquencies are growing. A year ago, the delinquency ratio was 13.8%; that kind of increase in an already big delinquency number is a code red situation in any kind of lending.
And here’s where it gets interesting to a veteran of the trenches of the mortgage crash that triggered the Great Recession:
Early payment defaults have shown a significant upswing, according to Bloomberg. This means that borrowers quit making payments early on, say, in the first six months. Many are not even making the first payment, which leads Santander execs to believe that many borrowers got financing “through fraudulent applications.” This is exactly what happened in mortgage lending in the years between 2005 and 2008. Money on the table to lending is like a 70 mile per hour wind to a brush fire. Everybody wants to grab some of the loot.
Borrowers need transportation, and this is a way for them to get it. Investors want high yields. Loan producers and salesmen want commissions, dealers and manufacturers want to sell cars. With so many, with so much vested interest, is it surprising that everybody wants to get in on the act? And, with so much at stake, what’s wrong with changing a few numbers here and there? It’s good for the economy, right?
Pretty soon, people are saying, “Hey, I can get creative on my app, and drive a new bomb for a year free before I give it up. What have I got to lose?”
I can assure the guys and gals at Santander that fraudulent loans will increase exponentially. They may or may not know what’s coming. Most probably don’t. Rather they believe in the corporate party line, just as the people at Countrywide, Indymac Bank, Fannie Mae and Freddie Mac did.
For we corporate wonks can get creatively articulate when faced with impending disaster. Sometimes, we even believe what we say.
Angelo Mozilo was the founder of Countrywide Home Loans, and Indymac Bank. He was, rightly or wrongly, the poster child of the Great Meltdown. The failure of his businesses took a lot of his vast wealth, and he paid millions in fines, but he still walked away with quite a bit. It’s quite possible that he feels a twinge of pride of authorship when he hears some of the utterances coming out of Santander’s corporate mouth:
We believe that our “management of risk” is satisfactory and “consistent over time.”
Our securities are “structured with credit enhancement,” such as loan buy back provisions, among which is that early payment default event. Smart move, except that didn’t work for Freddie and Fannie, Countrywide and IndyMac, Bear Stearns and Lehman Brothers, Merrill Lynch and Washington Mutual Bank, to name a few rather large players. Just take a look at the list of failed banks from 2008 through around 2013. In almost all cases like this, the producers of toxic loans (a phrase coined by Angelo Mozilo, by the way) don’t have the capital to repurchase billions in bad paper.
It’s kind of like watching the Halloween moviethon of slasher flicks: same plot, different cast.
Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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