Another credit crunch
Posted by Techie
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Another credit crunch January 01, 2008 | Registered: 16 years ago Posts: 3,454 |
Tuesday, January 1, 2008
Auto loans have whiff of bad debt
Ken Bensinger / Los Angeles Times
http://www.detnews.com/apps/pbcs.dll/article?AID=/20080101/AUTO01/801010371/1148/rss25
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville, Calif., made it easy; they just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets. "I didn't realize how much debt was in it," said Post, who since has moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she literally would have to pay someone to take it off her hands. "We have no options," she said.
Americans haven't been taking out only risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to. As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45 percent of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, like Toyota Financial Services and Ford Credit, are offering seven-year financing, and a few credit unions, particularly in the West, are tinkering with the eight-year note.
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40 percent in the past decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than their car is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.
The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.
The response of the automotive finance industry? Extend loans further, and allow the indebted customer to roll what they owe into a new loan with little, if any, effect on their new monthly payment. In effect, the driver is paying a loan on two -- or more -- cars at once.
Richard Apicella, head of Benchmark International's auto finance division, published a report on car loans last month that called the ever-lengthening deals a "dangerous" problem. Combined with Americans' desire to drive new cars every few years, he said, the effect "is like a drug. Once you get hooked on it, it gets harder and harder to break the cycle."
From the point of view of people who sell cars and car loans, long-term loans are good for business and good for buyers. "The job of a successful dealer is to find a funding package that's acceptable to the customer," said Paul Taylor, chief economist of the National Automobile Dealers Association. "These loans allow them to get a luxury car rather than a more modestly priced vehicle."
Cindy Gerhardt has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.
Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle -- and increase her debt by another $25,000.
"It's our own fault that we traded in vehicles so many times, but we never thought it would get to this," said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. "Not one dealer ever said this was a problem. Ever. I never had a dealership say no."
It's not just individual consumers that are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30 percent of the loans that are originated by banks, and 100 percent of those issued by automaker financiers are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Association.
Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic mortgages made in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers simply might default, leading to expensive repossessions.
And even people who keep paying their bills could reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has taken a hit this year from slower consumer spending and higher gas prices.
It also could lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poors, which rates auto debt for sale on the secondary market, calls a "credit concern."
This month, S&P reviewed its ratings on $113.5 billion in auto-loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades, but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."
S&P has found that delinquencies of more than 60 days on car loans issued to borrowers with the best credit this year are up 20 percent compared to those issued last year, while delinquencies on loans issued this year to sub-prime borrowers increased by 16 percent. Delinquency rates on car loans are still far lower than on mortgages, but there is growing concern in the financial services industry. Indeed, Tom Webb, chief economist of used auto analysts Manheim Consulting said he expects the tally for 2007 repossessions to be up by 10 percent.
Mark Pregmon, executive vice president for consumer lending at SunTrust Bank, is among the worried. "Any time you extend the maturity of the loan, you take on more risk. The question is whether there's enough assessment of that extra risk," he said. "Obviously it's a problem. It's a house of cards."
In the 1970s and '80s, the length of a car loan hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.
One key was interest rates, which fell from a high of 17.8 percent in the early 1980s to lower than 5 percent today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have gotten steadily more affordable -- as compared to median family income -- since the late 1990s.
With less expensive money at hand for more affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.
At the same time they extended loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments. Today, most lenders offer financing on 100 percent or even 125 percent of the sticker price, and some offer the most creditworthy buyers loans for twice the value of the vehicle they're purchasing. Last year, the average amount financed for new cars reached 99 percent, according to the Consumer Bankers Association, up from 95 percent in 2005.
Lenders are beginning to brace themselves for problems; many have said they intend to tighten standards and require increased down payments.
Despite warnings from S&P, the CBA, Lehman Brothers and others, there is little sign that the automobile industry is willing -- or, with consumers demanding low payments, even able -- to reduce the lengths of the loans they issue.
"For banks, it's a matter of meeting consumer demand: no money down and extend the term," said SunTrust's Pregmon. "But as a lender, you've got a moral obligation as well. Are we putting the clients in loans they can't afford?"
It looks like the housing credit crunch is only what we see on surface. There is a much deeper problem. It boils down to the fact that many people spend much more than they earn. In order to support such a lifestyle, they must borrow. Borrowing without repaying eventually catches up. It does not look good right now, it appears that people were using equity in their house in order to support the lifestyle they wanted to live.
This is where the people who rented and did not rely on "miracles" of house equity have actually came out ahead. They lived within their means and did not do what "everybody"(RT) did.
Then, there are these "investors" who thought they'd make all this money on housing but instead are renting these properties for next to nothing and paying for it themselves.
We have relied on credit for too long and time came that we have to start paying and we can no longer borrow from one to pay for the other. I just do not know how are we going to pay if our wages keep dropping and we are loosing our jobs to foreign countries.
Auto loans have whiff of bad debt
Ken Bensinger / Los Angeles Times
http://www.detnews.com/apps/pbcs.dll/article?AID=/20080101/AUTO01/801010371/1148/rss25
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last year for a shiny new Ford F-350 turbo diesel with an extended cab, it seemed like a great deal. Even though they still owed $9,500 on their SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville, Calif., made it easy; they just added the old debt to the price of the new truck and gave the couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long obligation, but they couldn't pass up a monthly payment under $700. Now they're having regrets. "I didn't realize how much debt was in it," said Post, who since has moved with her family to Iowa. Now, she'd like to get rid of the truck but can't, because there's so much debt that she literally would have to pay someone to take it off her hands. "We have no options," she said.
Americans haven't been taking out only risky mortgages for homes in the last few years; they've also been signing larger automobile loans for significantly longer terms than they used to. As a result, people are slipping into a perpetual cycle of automobile debt that experts think could lead to a new credit crunch extending from dealerships to driveways and all the way to Wall Street.
Gone are the days of the three-year car loan. The length of the average automobile loan hit five years, four months in October, up more than six months from 2002, according to the Federal Reserve. And nearly 45 percent of loans written today are for longer than six years. Even some staid lenders owned by the carmakers, like Toyota Financial Services and Ford Credit, are offering seven-year financing, and a few credit unions, particularly in the West, are tinkering with the eight-year note.
At the same time, the amount of money drivers owe on their cars is soaring. In October, the average amount financed hit $30,738, up $3,500 in just a year and nearly 40 percent in the past decade, according to the Fed. More troubling, today's average car owner owes $4,221 more than their car is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.
The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.
The response of the automotive finance industry? Extend loans further, and allow the indebted customer to roll what they owe into a new loan with little, if any, effect on their new monthly payment. In effect, the driver is paying a loan on two -- or more -- cars at once.
Richard Apicella, head of Benchmark International's auto finance division, published a report on car loans last month that called the ever-lengthening deals a "dangerous" problem. Combined with Americans' desire to drive new cars every few years, he said, the effect "is like a drug. Once you get hooked on it, it gets harder and harder to break the cycle."
From the point of view of people who sell cars and car loans, long-term loans are good for business and good for buyers. "The job of a successful dealer is to find a funding package that's acceptable to the customer," said Paul Taylor, chief economist of the National Automobile Dealers Association. "These loans allow them to get a luxury car rather than a more modestly priced vehicle."
Cindy Gerhardt has rolled over so much debt on successive vehicle purchases -- five in three years -- that she now owes almost $43,000 on two trucks worth no more than $29,000 and, she says, perhaps as little as $22,000.
Faced with car payments that exceed her monthly mortgage, she tried to trade in the pair for a single vehicle. But with so much unpaid principal on the vehicle loans, the only offer she got from the dealer was to trade in one truck on yet another new vehicle -- and increase her debt by another $25,000.
"It's our own fault that we traded in vehicles so many times, but we never thought it would get to this," said Gerhardt, a secretary who lives with her husband and two children in Clinton, Okla. She recently tried to refinance her mortgage, she said, but was declined because her car payments were too high. "Not one dealer ever said this was a problem. Ever. I never had a dealership say no."
It's not just individual consumers that are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30 percent of the loans that are originated by banks, and 100 percent of those issued by automaker financiers are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Association.
Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic mortgages made in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers simply might default, leading to expensive repossessions.
And even people who keep paying their bills could reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has taken a hit this year from slower consumer spending and higher gas prices.
It also could lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poors, which rates auto debt for sale on the secondary market, calls a "credit concern."
This month, S&P reviewed its ratings on $113.5 billion in auto-loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades, but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."
S&P has found that delinquencies of more than 60 days on car loans issued to borrowers with the best credit this year are up 20 percent compared to those issued last year, while delinquencies on loans issued this year to sub-prime borrowers increased by 16 percent. Delinquency rates on car loans are still far lower than on mortgages, but there is growing concern in the financial services industry. Indeed, Tom Webb, chief economist of used auto analysts Manheim Consulting said he expects the tally for 2007 repossessions to be up by 10 percent.
Mark Pregmon, executive vice president for consumer lending at SunTrust Bank, is among the worried. "Any time you extend the maturity of the loan, you take on more risk. The question is whether there's enough assessment of that extra risk," he said. "Obviously it's a problem. It's a house of cards."
In the 1970s and '80s, the length of a car loan hovered between 36 and 48 months, and drivers typically kept their cars longer than the life of the loan. A number of factors changed that.
One key was interest rates, which fell from a high of 17.8 percent in the early 1980s to lower than 5 percent today, according to the Federal Reserve. Another was affordability. According to an index tracked by Comerica Bank, cars have gotten steadily more affordable -- as compared to median family income -- since the late 1990s.
With less expensive money at hand for more affordable cars, the temptation to keep buying became huge. Today, according to Pregmon, financed cars are typically turned over in 24 to 36 months.
At the same time they extended loan maturities, lenders, competing with one another, began offering more money and requiring smaller down payments. Today, most lenders offer financing on 100 percent or even 125 percent of the sticker price, and some offer the most creditworthy buyers loans for twice the value of the vehicle they're purchasing. Last year, the average amount financed for new cars reached 99 percent, according to the Consumer Bankers Association, up from 95 percent in 2005.
Lenders are beginning to brace themselves for problems; many have said they intend to tighten standards and require increased down payments.
Despite warnings from S&P, the CBA, Lehman Brothers and others, there is little sign that the automobile industry is willing -- or, with consumers demanding low payments, even able -- to reduce the lengths of the loans they issue.
"For banks, it's a matter of meeting consumer demand: no money down and extend the term," said SunTrust's Pregmon. "But as a lender, you've got a moral obligation as well. Are we putting the clients in loans they can't afford?"
It looks like the housing credit crunch is only what we see on surface. There is a much deeper problem. It boils down to the fact that many people spend much more than they earn. In order to support such a lifestyle, they must borrow. Borrowing without repaying eventually catches up. It does not look good right now, it appears that people were using equity in their house in order to support the lifestyle they wanted to live.
This is where the people who rented and did not rely on "miracles" of house equity have actually came out ahead. They lived within their means and did not do what "everybody"(RT) did.
Then, there are these "investors" who thought they'd make all this money on housing but instead are renting these properties for next to nothing and paying for it themselves.
We have relied on credit for too long and time came that we have to start paying and we can no longer borrow from one to pay for the other. I just do not know how are we going to pay if our wages keep dropping and we are loosing our jobs to foreign countries.
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Re: Another credit crunch January 02, 2008 | Registered: 17 years ago Posts: 3,073 |
Okay, let me get this straight. First, people buy cars that are so expensive they won't even be paid off after 6 years. Then they trade in said cars for something even more expensive AND add the unpaid amount from the previous car to the new car loan. And they do this so many times they eventually end up with a loan twice as much as the new car is worth...what says "grown up" or "responsible adult" about that?
I'm no financial wizard, and in fact am quite bad with my money, but EVEN I know that is a stupid thing to get involved in. What the hell is wrong with people? They breed, buy huge houses, every fuck thing under the sun, jewelry, designer clothes, new "home entertainment systems", cell phones, a new car every couple years, and then they start whining about how they can't afford anything? They need help to save their homes? They can't afford gas or food? They need charity for christmas?
Have I completely lost my mind in thinking that one should work to take care of the basics (food, shelter, clothing) first and THEN if there's anything left over, you can spend THAT on the fun stuff? And if you don't have enough money right then to buy what you want you save until you do? And if you are up against the wall financially, you cut OUT the fun stuff, and even cut back on the basics (spaghetti instead of steak)? What? The? Fuck?
"It truly is the one commonality that every designation of humans you can think of has, there's at least one asshole."
--Me
I'm no financial wizard, and in fact am quite bad with my money, but EVEN I know that is a stupid thing to get involved in. What the hell is wrong with people? They breed, buy huge houses, every fuck thing under the sun, jewelry, designer clothes, new "home entertainment systems", cell phones, a new car every couple years, and then they start whining about how they can't afford anything? They need help to save their homes? They can't afford gas or food? They need charity for christmas?
Have I completely lost my mind in thinking that one should work to take care of the basics (food, shelter, clothing) first and THEN if there's anything left over, you can spend THAT on the fun stuff? And if you don't have enough money right then to buy what you want you save until you do? And if you are up against the wall financially, you cut OUT the fun stuff, and even cut back on the basics (spaghetti instead of steak)? What? The? Fuck?
"It truly is the one commonality that every designation of humans you can think of has, there's at least one asshole."
--Me
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Re: Another credit crunch January 04, 2008 | Registered: 17 years ago Posts: 1,790 |
I hear you, Feh! I remember the days of 4/year car loans. The thought of paying a car for six years would freak me out! A 5-6/year loan is very foolish. The car is worth nothing by Year 5...but the person is still paying through the ass while dealing with repairs as the warranty is usually over.
I literally got a headache the first time I financed a car. I was like, "I am indebted to the bank for the next four year..." I often made double payments. When that car tanked out, my payoff was really low when I went to lease a car. I had manageable payments because of that ($170 a month). I cannot imagine how people pay over $200/monthly for their auto loan. Put insurance on top of that as well as maintenance and fuel, it makes it even more costly to drive.
I worked as a receptionist a very long time ago in the car biz. People would trade in perfectly good cars because they wanted the latest SUV or minivan with the DVD players/TVs in the back for the sproggen to watch...or just to have it because someone else's moomie has that vehicle. Don't get me started on idiots who bought the first Hybrid because they wanted to be the first person to have such a vehicle without realising how much the thing cost. And...those morons who keep on wanting newer cars.
Same goes for homes. It seems that on an average that most homebuyers move every five years. Instead of being able to pay off their mortgage in a reasonable time with manageable payments, these "I want everything now..." folks are into horrible adjustable rates and are refinancing the house for all sorts of stuff that is not needed.
The people who wanted to "flip" houses and apartments-converted-into-condos are the biggest assholes. Rentals and sales prices got too inflated where I used to live yet no one can sell their homes. Rentals have not come back down. Those who worked to stay in their means were forced out of their apartments when the owner sold to an investor who flipped them for condos. It was insult to injury when some greedy motherfucker bought a unit and turned around to rent it out at almost three times the previous rental. But...that is kicking these greedsters in the ass as they found they were not going to get rich on their "investment".
I am so against assistance for those who are in foreclosure. What about helping the CF out who don't have medical insurance or cannot afford a decent place to live. I doubt the wannabe-socialists would be for any of that...not that I am asking for anything. I would rather go without medical insurance than show up at the welfare office trying to get on Medicaid. I could not feel good about myself.
'Nuff out of me...:scr
I literally got a headache the first time I financed a car. I was like, "I am indebted to the bank for the next four year..." I often made double payments. When that car tanked out, my payoff was really low when I went to lease a car. I had manageable payments because of that ($170 a month). I cannot imagine how people pay over $200/monthly for their auto loan. Put insurance on top of that as well as maintenance and fuel, it makes it even more costly to drive.
I worked as a receptionist a very long time ago in the car biz. People would trade in perfectly good cars because they wanted the latest SUV or minivan with the DVD players/TVs in the back for the sproggen to watch...or just to have it because someone else's moomie has that vehicle. Don't get me started on idiots who bought the first Hybrid because they wanted to be the first person to have such a vehicle without realising how much the thing cost. And...those morons who keep on wanting newer cars.
Same goes for homes. It seems that on an average that most homebuyers move every five years. Instead of being able to pay off their mortgage in a reasonable time with manageable payments, these "I want everything now..." folks are into horrible adjustable rates and are refinancing the house for all sorts of stuff that is not needed.
The people who wanted to "flip" houses and apartments-converted-into-condos are the biggest assholes. Rentals and sales prices got too inflated where I used to live yet no one can sell their homes. Rentals have not come back down. Those who worked to stay in their means were forced out of their apartments when the owner sold to an investor who flipped them for condos. It was insult to injury when some greedy motherfucker bought a unit and turned around to rent it out at almost three times the previous rental. But...that is kicking these greedsters in the ass as they found they were not going to get rich on their "investment".
I am so against assistance for those who are in foreclosure. What about helping the CF out who don't have medical insurance or cannot afford a decent place to live. I doubt the wannabe-socialists would be for any of that...not that I am asking for anything. I would rather go without medical insurance than show up at the welfare office trying to get on Medicaid. I could not feel good about myself.
'Nuff out of me...:scr
Rusky
Re: Another credit crunch January 04, 2008 |
Renting condos is a loss because you are going against major apartment complexes.
Moving from house to house every 5 years is a looser unless you paid the place off! If you did not pay it off, the only person who makes money is the bank! It is not an investment if someone else owns it - they charge fees and make you pay!
Moving from house to house every 5 years is a looser unless you paid the place off! If you did not pay it off, the only person who makes money is the bank! It is not an investment if someone else owns it - they charge fees and make you pay!
Ketchup
Re: Another credit crunch January 05, 2008 |
Cars are the biggest money pits next to houses and kids. We gave up our car months ago and I couldn't be happier. Yeah, we have to take the bus (OH THE HORROR 
) but it beats the crap out of shelling out $1000 every few months for repairs, plus car insurance and retardedly expensive gas. We now walk, bus, and bike ride everywhere and apart from rude assholes in cars who act like pedestrians are invisible, we are very happy being car-free. I highly recommend it to those who don't absolutely need a vehicle.
) but it beats the crap out of shelling out $1000 every few months for repairs, plus car insurance and retardedly expensive gas. We now walk, bus, and bike ride everywhere and apart from rude assholes in cars who act like pedestrians are invisible, we are very happy being car-free. I highly recommend it to those who don't absolutely need a vehicle.Sorry, only registered users may post in this forum.