Tags: auto | loan | bubble | subprime

Beware! Auto Industry and Federal Government Are Building a New Bubble

By John Morgan   |   Friday, 11 Oct 2013 11:34 AM

A new subprime loan crisis is brewing because the federal government and the auto industry — neither one exactly a model of fiscal prudence — have teamed up to create a fresh bubble that can only end in disaster.

"While the administration claims to have saved the industry and more than a million jobs, the long-run benefits of these cash infusions remain questionable," Wayne Brough, chief economist and vice president of research for the conservative group FreedomWorks, wrote in an article for Real Clear Markets.

Far from the success story touted by the Obama administration, the commentary site concludes the auto industry bailout simply provided a petri dish where disaster could grow.

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"In addition to costing taxpayers billions, the auto bailout may be sowing the seeds of the next bubble, as an industry artificially propped up by the federal government is threatened by a mounting portfolio of subprime loans, compliments of the Federal Reserve," Brough noted.

There were more than 6 million subprime auto loan borrowers in 2012 — an 18 percent jump over 2011 by some estimates. And the subprime auto loan category now accounts for $12 billion of the $105.8 billion market for asset-backed securities.

Meanwhile, in the first quarter of 2012, a whopping 93 percent — that's right, 93 percent — of GM Financial's loan were subprime, according to Real Clear Markets, which added, "In the auto loan market, there is even a new category known as 'deep subprime.'"

The auto industry is still plagued by too much government regulation, plus labor and pension issues, Real Clear Markets concluded, which is being compounded by the "injection of federal spending and easy money."

According to Bloomberg, Standard & Poor's analysts said their studies showed subprime lenders are "enabling buyers to borrow more relative to the cost of a car in a sign that underwriting standards are deteriorating amid increased competition."

The subprime auto loan market has grown steeply since 2012 because big private equity funds like Blackstone Group have been attracted by the high margins and low funding costs, Bloomberg reported.

The United States may not be alone in forging an auto loan bubble, according to The Globe and Mail. The Toronto newspaper said Kevin Williams, president of GM Canada, believes "ultra-cheap auto loans" could be causing auto sales to soar there like home sales did during the housing bubble.

The Globe & Mail said GM Canada is now offering "zero down, zero security deposit, no first month payment and zero money due at signing" for some of its models.

But is that any way to make a profit in the long run? To help escape that pricing model, Williams said the automaker intends to put more emphasis on leasing rather than sales.

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