Posts Tagged ‘subprime’

“As the Financial Times reported yesterday, more than 1 million U.S. consumers are ‘at least two months behind on car loan repayments,’ noting that the delinquency rate in the $1.1 trillion market hit its highest level since 2009. And that’s not just limited to subprime borrowers. That figure includes everyone with a U.S. car loan….

The financial Times also cites, ‘Delinquencies on credit cards also rose by about the same amount over the period to 1.79% – the highest since 2011. The rise in bad loans comes despite persistently low borrowing costs and unemployment levels – suggesting lenders may be letting consumers take on bigger debt burdens than they can handle.

Lending to consumers with weak credit scores has been one of the fastest-growing parts of the industry. Still, the increased delinquency levels follow a period of rapid expansion and could be a natural consequence of that growth. Separate figures published on Thursday by the New York Federal Reserve showed the total amount of debt held by American households rose last year at the fastest clip since 2007.'” -Porter Stansberry

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The situation in auto loans is dangerous.  But the situation developing in student loans is much worse.  Here, loan totals have grown enormously – with wild abandon – over the past decade.  The total amount of student loans has doubled since 2009, to more than $1.3 trillion.  And why shouldn’t students borrow money like mad?  Much like subprime car buyers, they have no intention to ever pay it back….  The U.S. Department of Education reports that 51% of students are currently not servicing their debts.  That’s from data compiled last year.  Since then, the number of students getting deferments has soared, thanks to aggressive marketing of Obama’s various college-loan programs.  Not surprisingly, students who take deferments are much more likely to eventually default.” -Porter Stansberry

For the first time ever, Americans collectively hold more auto loans than mortgages.  Who is borrowing all of this money? Anyone who can fog a mirror…. 40% of all car loans being made this year are to subprime borrowers.  These loans typically have interest rates as high as 20% annually.


What kind of a person borrows money at 20% annually for more than five years to pay for a used car?  Someone who has no incentive to repay the loan.  Calling that deal a “loan” is a misnomer.  It’s a lease with zero residual value.  The borrower will never have any equity – nothing is at stake for him.  He doesn’t even have to return the car… they’ll send a tow truck.” -Porter Stansberry

Far, far, far too much money – mind-boggling amounts – has been borrowed….  Students have borrowed $1 trillion for college.…  Roughly 90% of GM car buyers finance their purchases.  And as recently as 2014, 83% of their loan book was subprime, with a shocking amount categorized as ‘deep subprime’.  Deep subprime is essentially people who don’t have a credit rating or people who are currently in bankruptcy.” -Porter Stansberry

It’s good to have nice things and to get an education, but these things must be done responsibly and according to need.

A recent report by consumer-credit-tracking firm Experian shows the average term for a new car loan is 67 months – a record.  And the average amount financed for a new vehicle is $28,711 – also a record.  The average monthly payment for a new vehicle is $488 – yet another record.  Bank of America predicts that new car-loan securitizations – the packaged sale of car loans – will reach $125 billion this year… Again, a record.  These loans will account for more than half of all consumer loan securitizations.  Keep in mind that roughly 30% of the loans in these securitized packages will be subprime. That’s why credit losses on these bonds are growing and beginning to reach levels last seen in 2008.” -Porter Stansberry

Do you want to be like everyone else?  Are you one to follow the beaten path?  Does conventional wisdom seem like the most comfortable place to be?  Let’s take a peek at what others are doing before you give a final answer.

The news is filled with, what is to me, troubling discourse.  Bloomberg News reported on March 9th that “global debt exceeds $100 trillion”.  They explain this to be a 40% increase since 2007.  Wow, that is a lot of money!  “Governments have been the largest debt issuers,” according to the Bank for International Settlements.  How long will it take to pay that off when governments have to borrow more money to cover their current expenses?!!

In a DailyFinance article from January 2, 2014, another bubble seems to be forming in automobile loans.  They give an example of a gentleman who had just filed for bankruptcy, yet received a check in the mail from a finance company for $30,000 to purchase a car from any car dealer in the area.  He went out and purchased a used BMW.  They report that “88% of GM’s North American financial receivables are firmly in the subprime category”.  With delinquencies on the rise, this cannot be a good sign.

What do these examples mean to you?  Are you currently a part of the credit growth people and governments are experiencing?  Can this discouraging news have any positive benefit for you personally?  Well, that depends!  Positive things can only happen if someone takes advantage of a situation.  The only way it can benefit you is if you do something other than the majority.

You can be different from those treading in their own sea of debt.  They are simply trying to meet their current expenses, paying interest but making no headway on their debt load.  This may even be you.  However, a simple yet willful defiance to increasing debt is the starting point.  It takes a first choice to turn the negative compounding of interest payments into your own financial reservoir.  Is it time to make a willful decision to be different?

Well, here we ago again.  Up until now, most of the “questionable” home loans available since the housing meltdown have been rural development loans offered through the USDA.  The questionable part in my mind are the “no down payment required” and “guaranteed loan” aspects.  But, according to a Reuters article, Wells Fargo is again planning to jump back into the “subprime” market.  Why?  Because they are experiencing a downturn in revenue.  Hmm, does this seem like a sound business decision?  (GM is also selling cars to subprime customers to help their sales).  Does this sound promising?

Some interesting points from the Reuters article makes me scratch my head:

1.  “…loosening of credit standards could boost housing demand…”  Shouldn’t demand for housing be boosted because people can actually afford them?  Isn’t it a false demand by any other standard?

2.  “To avoid the taint associated with the word ‘subprime’, lenders are calling their loans ‘another chance mortgages’ or ‘alternative mortgage program’.”  Does changing the name of something actually make it better?  Does duping people make these mortgages safer?

3.  “If the borrower does not meet those hurdles and later defaults on a mortgage, he or she can sue the lender and argue the loan should never have been made in the first place.”  Seriously, then why do we make the purchaser sign on the bottom line?  That point was missed during the initial crisis; purchasers were simply considered victims.  Everyone wants to blame the bank.  Thank you Dodd-Frank!

4.  “Subprime mortgages were at the center of the financial crisis, but many lenders believe that done with proper controls, the risks can be managed.”  I am sure they thought the same thing last time.  Risk is guaranteed to be risky; a la the recent death of the snake handling pastor.

5.  “The bank is looking to lend to borrowers with weaker credit, but only if those mortgages can be guaranteed by the FHA.  Because the loans are backed by the government, Wells Fargo can package them into bonds and sell them to investors.”  And there we have it!  Guaranteed by the government!  In other words, by the American taxpayer!  Let’s see, what would I provide to the American consumer if the government will guarantee it?  Anything!  The second part of the quote explains exactly what they were doing before, turning them into investments.  Subprime investments,  I’ll pass.

It looks like the strategy must be paying dividends.  According to the Wall Street Journal, “Household debt jumps as banks loosen up.”  Wells Fargo knows what works to get people borrowing.  The interesting thing is that they still haven’t resolved all of their issues with Fannie Mae and Freddie Mac from the original crisis, but see no issues with stepping back into those familiar waters.

All I can say is, good luck with that….