No, Subprime Auto Loans Are Not Like Subprime Mortgages
In the years since the financial crisis, investors have been treated to a parade of warnings that a replay of the 2008-09 debacle was in the offing. We have heard everything from forecasts that a 1987-like crash was inevitable to predictions that a derivatives disaster will consume the financial world. One of the more annoying and misguided claims making the rounds is that subprime auto loans are the new subprime mortgages.
There are many reasons why this is wrong, even though there has been a troubling surge in subprime auto defaults. But consider this big, crucial difference: In some states, it can take three years for a foreclosure to be completed. If you default on a car loan, the repo man and his tow truck might show up in three hours.
A bit of background for some context.
Car sales have been surging. In 2015, 17.5 million cars were sold, a 5.7 percent increase from 2014, according to researcher Autodata. Federal Reserve Bank of New York data show that the total amount of car loans outstanding was more than $1.1 trillion in the fourth quarter of 2015, a 30 percent increase from pre-financial crisis levels.
That makes some people nervous. As Bloomberg News reported:
What's drawn particular attention: auto loans to people with credit scores below 620—borrowers with the poorest credit—have increased more than 150 percent from the market bottom six years ago, compared with a 98 percent rise in overall auto lending in that period. Loans made to those borrowers still comprised a relatively small share of all originations last quarter at about 22 percent, up from 17 percent in 2009.
The big increase in subprime mortgages during the early and mid-2000s, of course, provided the fuel for the financial crisis. According to a 2008 report by the Joint Center for Housing Studies of Harvard University, subprime mortgages were less than 5 percent of the total originated during the 1990s. They began rising in about 2001, and by the middle of the decade accounted for about one out of every five mortgages.
But cars are not houses. The legal process surrounding the recovery of defaulted auto loans is world's apart from the foreclosure process with defaulted mortgages.
The process that is set in motion by a home loan in default -- depending on state laws -- can be long or tedious or both. Consider the four states with the most foreclosures after the financial crisis: According to data from RealtyTrak, it took 194 days to complete a foreclosure in Arizona; 335 days, or almost a year, in California; 520 days, or about 1 1/2 years, in Nevada; and 858 days, or almost 2 ½ years, in Florida. By way of comparison, in New York it takes 1,072 days to foreclose on a residence.
Meanwhile, as the foreclosure process grinds on, the property is often neglected or abandoned, leading to neighborhood blight and declining values for neighboring properties. Once the lender regains possession, the property has often lost a great deal of value, which can send ripples throughout the financial system.
But default on your car payment, and you can expect to have your car repossessed almost immediately.
How is this possible? In a word, technology. The modern repo man uses a number of devices to find, track, disable and reclaim automobiles:
- Subprime loan underwriters often require borrowers to have their cars equipped with a device that allows the lender to remotely disable the ignition. GPS technology in the devices also lets a lender track a cars’ location and movements. Knowing where the vehicle is, and being able to remotely disable it, makes repossession a snap.
- Photographs are taken of “millions of plates a day, with scanners mounted on tow trucks and even on purpose-built camera cars whose sole mission is to drive around and collect plate scans. Each scan is GPS-tagged and stamped with the date and time, feeding a massive data trove to any law-enforcement agency—or government-approved private industry—willing to pay for it” according to Car & Driver magazine. The license-plate acquisition system called Vigilant, adds 100 million photos a month.
- License-plate-readers, or LPRs as they are known, are now commonly found at mall entrances, mounted on utility poles, parking lots, toll plazas, and at major highway entrances. According to the site Consumerist, the database of scanned license plates contains “over a billion sightings of individual cars ready for companies to mine.” One company, MVTRAC, has 8,000 fixed cameras, and many more mobile cameras mounted on vehicles, constantly scanning plates.
- Some repo companies are using drones to track vehicles and repossess cars; they also can track drivers via their own mobile phones.
With delinquent subprime auto-loans, the repossession process is so much faster it doesn't have the same drag on the local economy. The cars are too easy to find, repossess and resell, mitigating the losses on loans gone bad. A surge in repossessed cars may end up increasing the number of used cars for sale, but other than that, don't expect to see the huge write-offs by mortgage lenders that caused so much harm to the financial system and broader economy.
So, no, subprime auto loan don't have the makings of the next subprime mortgage crisis.
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