Tags: Warren | auto | loan | market

Sen. Warren: 'Auto Loan Market Looks Increasingly Like Pre-Crisis Housing Market'

By    |   Thursday, 16 Apr 2015 12:00 PM

You can add Sen. Elizabeth Warren, D-Mass, to the list of those who are concerned about the rapid growth — and deteriorating quality — of the subprime auto loan market.

"Right now, the auto loan market looks increasingly like the pre-[financial] crisis housing market, with good actors and bad actors mixed together," she said in a speech Wednesday, according to MarketWatch.

"The market is now thick with loose underwriting standards, predatory and discriminatory lending practices and increasing repossessions."

Auto dealers received an exemption from Consumer Financial Protection Bureau (CFPB) rules, Warren noted. "It is no coincidence that auto loans are now the most troubled consumer financial product. Congress should give the CFPB the authority it needs to supervise car loans," she said.

Institutional investors are going nuts over subprime auto-loan bonds, enticed by their hefty yields in a low interest-rate environment.

But some experts are worried that the investment spree is going overboard and could end in disaster, as strapped borrowers default on their loans.

The issuance of such bonds soared 302 percent to $20.2 billion early this year from 2010, according to Thomson Reuters IFR Markets.

The strong demand for these bonds comes at the same time as a rise in the number of subprime auto loans that contain falsified income or employment information, The New York Times reported.

"There is so much money looking for a positive return that people get lazy," Christopher Gillock, a managing director at Colonnade Advisors, a financial advisory firm that has worked with subprime auto lenders, told The Times.

"Investors see it is rated triple-A, turn off their brains and buy into the paper." He said that no subprime auto-loan bond deserves a triple-A rating. Only three blue-chip companies have such a rating: Exxon, Microsoft and Johnson & Johnson.

This sounds eerily familiar to the subprime mortgage market before the 2008 financial crisis, doesn't it? Fortunately, the size of the overall auto loan market pales in comparison to the mortgage market — $948 billion compared with $8 trillion.

But the problem is substantial. "Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession," The Wall Street Journal reported.

And economists are noticing. "It's clear that credit quality is eroding now, and pretty quickly," Mark Zandi, chief economist at Moody's Analytics, told the paper.

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You can add Sen. Elizabeth Warren, D-Mass, to the list of those who are concerned about the rapid growth — and deteriorating quality — of the subprime auto loan market.
Warren, auto, loan, market
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2015-00-16
Thursday, 16 Apr 2015 12:00 PM
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