Investors place big bets on Buy Here Pay Here used-car dealers
Private equity firms are investing in chains of used-car lots, and auto loans are being packaged into securities much like subprime mortgages. They’re attracted by the industry’s average profit of 38% for each car sold[…]
Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.
Although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.
That’s because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.
Some analysts worry that the rush to securitization could lead to careless lending by dealers eager to sell more loans, as happened with many mortgage-backed bonds.
No. Just, no.
Just, fucking stop it, already. Stop the greed, stop the endless need for more more MORE. I am about to lose my shit here, people. Stop coming up with these irresponsible, crazy mechanisms that profit off the misery of financially strapped people because some idiot thinks there’s a pony in that pile of horseshit. Stop the greed machine. If you want to gamble, take it to Vegas, where the only person who gets hurt is you.
And while we’re at it, stop calling those of us who see the inevitable trainwreck up the bend “socialists” already. You assholes are the “socialists” because every time you decide to fiddle around with these complicated toxic assets you privatize the gains and socialize the losses. This time it’s not just no, it’s HELL no.
This:
“It might be an attractive model to investors, but when it’s designed to ruthlessly maximize profit, there’s no way it can’t hurt the consumer,” Keest said.
Have you people learned nothing over the past few years? Nothing at all?
Credit Acceptance combines some of the loans into securities and sells them to investors. The buyers are usually insurance companies, banks, mutual funds and other institutional investors.
What they’re buying, essentially, is the right to collect borrowers’ loan payments, which are passed on by dealers and assorted intermediaries. If borrowers default, investors are stuck with the loss.
Really? You promise, this time? Taxpayers won’t be bailing out some insurance company or bank or mutual fund that decided this was the next big Ponzi scheme profit center job creator because God forbid we should keep our greed in check during the Second Great Depression? Honest?
No tightening our belts, no siree, there’s always money to be made somewhere and none of these assholes ever has to suffer the consequences of their bad decision making.
There is no way this isn’t going to blow up in y’all’s faces and when it does, do not — I repeat do not — come crying to me.
[UPDATE]:
Apparently they’re also gambling on European debt:
U.S. banks increased sales of insurance against credit losses to holders of Greek, Portuguese, Irish, Spanish and Italian debt in the first half of 2011, boosting the risk of payouts in the event of defaults.
Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose by $80.7 billion to $518 billion, according to the Bank for International Settlements. Almost all of those are credit-default swaps, said two people familiar with the numbers, accounting for two-thirds of the total related to the five nations, BIS data show.
Wonderful.
Oh, for the love of Mike. Have these people no shame?
Have these people no sense?
On the other hand – silly me! – I thought that the Vietnam “police action” had cured American politicians of adventuring on foreign soil.
Answers to Nos. 1 and 2.
No.
I don’t know if I can frequent a blog that requires a quiz before posting.
Greed, greed and more of it. The more they have, the more they want.
Sounds like a great deal for the used car salesman. He buys the cars for very little money, gets to sell them for a profit, and then not worry whether or not the dude that bought the car can afford to pay him because he sells the debt too. The car salesman is in a no lose situation.
The investors are pretty stupid if they believe this is really a AAA investment. The rating agencies should be investigated on how they come up with these ratings. Are they suggesting that used car securities are safer investments than US government debt? Anyone can see that it is just plain stupid to believe something like that.
I do agree that when this comes crashing down, there should not be any sort of bailout for the institutions that lose money in this scheme.
The ratings agencies like the S&P? The same idiots who downgraded the U.S. credit rating last August? Yeah they need to be investigated all right. Won’t happen though. It’s a very small circle of insiders who keep feeding at this trough. God forbid we should have any regulations barring banks from gambling on bad securities like this. We could bring back Glass-Steagall but that would be SOCIALISM. Somehow worshipping at the temple of St. Ayn is supposed to make everything okay because the glorious market already learned these lessons, right? Oh wait, they didn’t.
See, this is why Libertarian-style de-regulation is such a farce. There are no walls around corruption when you don’t have regulation. Banks and mutual funds and investment houses gamble in this crazy crap and they own our government, too — the same government that decides they’re “too big to fail” and they need a taxpayer bailout when their stupidity implodes.
I don’t think we need regulations barring private companies from making these investments. We need regulations stating that if they lose money, the government is not going to bail them out. Anything that is deposited into a FDIC insured account should not be eligble to be invested in such a scheme.
I don’t care if people want to risk their own money in this type of investment – it is their money. Just don’t look for a hand out when you lose it all.
As far as the rating agencies go, they do need to be regulated by the government because the general public counts on the credit ratings of various investment choices in deciding where to invest their money.
I don’t care if people want to risk their own money in this type of investment – it is their money.
No it’s not! It’s NOT! Not if it’s a bank, a mutual fund, or an investment house. That’s not their own money. They are gambling with OPM – Other People’s Money. And THOSE losses are the only thing that ever “trickles down.”
SB – if a bank or mutual fund wants to advertise these as investments that people can choose to place their money in, then I am ok with that. If they are taking deposits made into FDIC insured accounts and investing that into these then I am not ok with that.
There is a difference between the two. I have retirement investments with Ameriprise that are not federally insured. I meet once a year with my planner and discuss any changes he recommends to the investment strategy. Ultimately, it is up to me to decide how much risk to take with my investments. I also have a small checking and savings account at a local bank. That money is guaranteed by the FDIC Insurance program. My local bank should not be allowed to invest that in such a risky deal. The feds should regulate those investments since they are guaranteeing them.
Jim I don’t think you understand how investment banking works. For one thing:
They are not offering these bizarre mechanisms to the general public. They’re engaging in what’s called proprietary trading. These instruments are really risky and when they blow up, they burn the whole house down with them. Hence the need for taxpayer bailouts.
FDIC does not insure everything. If your checking account earns interest you are not covered. And it “only” insures $250,000 per individual deposit (and I believe that reverts back to $100,000 in 2013. The increase was part of Dodd-Frank). Things like pension funds are not covered.
…which way is the looking-glass? i wana go back home…
Money and/or power: No amount is ever enough.
JzB
Southern Beale:
I fear that attempting to remediate Jim’s learning deficit in the areas of finance and economics is a waste of time.
Fuck Glass Steagall, bring back the guillotines!
i may not be getting something here….First of all, even if you combined every BHPH note in the country, and sold them in a block, there wouldn’t be enough “loss” there to require much of a bailout. BHPH lots specialize in cars and trucks in the 5000 to 10,000 dollar range. The down payment money is key. It usually covers the cost of the vehicle, or enough of it that there is little initial risk to the dealer. What BHPH lots want is a steady stream of payments, it costs money to repossess and there are always reconditioning costs. Now, 20-30% is loan shark territory to be sure, but what they do is no different from Payday Lenders or Title Pawn or what have you. I doubt big investment money is truly that interested. (By the way, the lenders that specialize in sub-prime car loans have been charging hedge fees to dealers and exorbitant interest rates for decades, and to my knowledge, the idea to bundle and sell them was never seriously considered.)
The concerns per the article is that, as we saw with the mortgage-backed securities crisis, securitizing these risky loans provided an incentive for even more of them. The fear is that there is an incentive to push these risky loans on consumers, exploiting peoples’ desperation and economic hardship, because the loans are now a Wall Street profit center in and of themselves. So the greed machine screams FEED ME and they go out and find more suckers to con. Remember those houses that were “sold” to people with bankruptcies who paid zero money down? It’s the same thing here. To be sure, the $ amount might be smaller, a car is cheaper than a house. But one family can buy four cars more easily than four houses.
Prepare for Corrections Corp. to get into the car repo business. Why the hell not? Could happen. 🙂
But wouldn’t Corrections Corp of America have to place enough intermediaries between themselves and the BHPH people*?
I seem to recall that “legitimate” banks with “good” names did this to get into the stream of payday lenders’ revenue. I expect a rerun of the same.
*Odd thing to worry about, I know. As the old saw goes, “Don’t worry, CCA, there’s nothing you could do which would make me lose any respect for you.”
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I’m sorry, but you are wrong: subprime automotive securitizations have been going on for decades—since the mid to late 1990s. This is absolutely not a new shiny toy for Wall Street to play with. Google Westlake Financial, Credit Acceptance Corp., Santander Bank/Drive Financial, etc—-all of these companies are big players in the subprime arena and have been securitizing their loans for years, and WFS & CAC have been around for almost 30 years. That PE has decided to model both the front end (profit on sale of vehicle) and back end (interest earned on contracts) is neither surprising nor should it be alarming. I’m intimately familiar with subprime ABS, having run two subprime companies in the 90’s-00’s: where do you think the model for Wall Street for bundling real estate loans came from? Simple: the success that they enjoyed with bundling credit card debt and auto debt simply led to the next logical step: bundling real estate loans & securitizing them. The problem wasn’t that the model was bad, it was that the regulators (rating agencies) didn’t know (or want to know) what was actually in the loans they were rating…….in autofinance it used to be referred to as catching the wave—sales reps & the finance guys at auto dealers would jump aboard with whatever autofinance company was offering the best rates/pay/advances, and originate as many loans as the company would take….until either the company grew so big as to become corporate (and became more conservative in its lending policies) or the company blew up b/c in their rush for growth they put on too many bad loans. Most of us from the early days of subprime autofinance KNEW that the real estate bubble, driven by securitizations was going to go bad—we’d seen it happen over & over again in our industry (Google First Merchants Acceptance, Mercury Finance, Union Acceptance Co., CPS, Auto One, etc)—what we didn’t know, or expect, was how widespread both fraud & over-valuation/advancing was in real estate. The wave crashed all right, but instead of some minor damage in a sub-section of a much larger market, this wave was a tsunami that (because of several underlying financial instruments, particularly CDS) threatened to wipe out the entire U.S.
The problem wasn’t that the model was bad, it was that the regulators (rating agencies) didn’t know (or want to know) what was actually in the loans they were rating ….
How is that different now, though? They’re bundling these subprime auto loans together and the ratings agencies are still giving them AAA ratings … at a time when our economy is in the tank and unemployment isn’t budging, and people are unlikely to have the ability to crawl out of the hole they’ve found themselves in which led them into these subprime loans to begin with. How is it possible for a large # of these loans NOT to default? 25% of them fail!
The problem isn’t necessarily the securitization of the loans, the problem is the creation of yet another bubble. These things are ballooning. The number of these used car lots is doubling and tripling. We are creating another bubble.
The used car business is an abusive, crooked business to begin with; there’s a reason we have the stereotype of the sleazy used car salesman. There’s very little regulation in this industry. To have these loans all bundled together and sprinkled with magic free market fairy dust and suddenly they’ve got AAA status is ludicrous. According to the article, even Moody’s warned that we were in the beginning of a new bubble.
From the article:
This is GROWING. It is a shiny sparkly new toy… and when it implodes, those mutual funds are going to tank. Let’s hope people have the good sense to stay away from them.
Profiting off of people in financially desperate straights NEVER ends well. It’s immoral and wrong. It’s another way of exploiting the poor and it WILL come crashing down, these things always do.
While we are likely on the same side of the political fence, your comment that “Profiting off of people in financially desperate straights NEVER ends well. It’s immoral and wrong. It’s another way of exploiting the poor and it WILL come crashing down, these things always do.” leads me to believe we are well on opposite sides of the same pasture.
You are wanting to compare apples & oranges visa-vie ABS mortgages & automobile contracts. Some massive differences:
1. Average value of the individual contracts are SIGNIFICANTLY different—average auto contract is <4 years and < $18k, give or take. Avg mortgage coupon was at least 5x as long, and 10x in value.
2. Most subprime contracts are purchased from the dealership at a discounted value. That discount, which varies from 2-25%, is a loss mitigation known as a reserve. That reserve is structured so that the overall pool of loans (whether in a securitized tranche, or as part of the overall static pool/portfolio)
3. Yields: the average yield on subprime auto loans is probably 10x greater, at least, than that on subprime mortgages. Should the purchase discount (reserve) not be enough to mitigate the overall losses experienced by the pool/portfolio, that excess yield, in most cases, is more than enough to make up for any potential losses….and changing credit criteria/discounts/advances is VERY easily done in autofinance (happens at least monthly in most cases).
4. Collateral: vehicles are depreciating assets. Houses, at least during the go-go days of 2003-2006, were viewed as ever appreciating assets. Lenders in the autofinance arena have been structuring subprime loans for at least 25 years—even longer if you look at BHPH. Its NOT that hard a formula to get correct—and even if you are wrong to the tune of 20% on an overall tranche, the short term of the notes (relatively rapid equity gain by borrower) combined with the high interest rates & the relatively low value of the individual coupons make it relatively easy to absorb even massive swings in one's portfolio. None of the above is applicable to mortgages, as the subprime mortgage model was almost the polar opposite of what I just described.
Back to your final point: your position that "profiting off people in financially desperate straights" is "immoral and wrong" is naive, at best. Are there scumbags in the used car industry? Sure, however there are similar scam artists in almost every industry. And the interesting point about the autofinance business is that it is VERY efficient at policing out the bad apples—NO finance company wants to do business with a used-car lot that is "ripping" off customers. With the reporting tools available, it takes just seconds to generate reports on the pool of loans originated by each dealership, and take corrective action as required. Furthermore, that PE is getting into this business will only legitimize it more—the bad seeds will be further pushed to the sidelines as they simply won't be able to compete with reputable local car lots that provide in-house financing & report to national credit bureaus, facilitating the rehabilitation of most BHPH customer's credit. Now, if you believe that high interest rates are usurious and should be outlawed because the "prey" on the poor/desperate/uneducated……..well, thats a very naive position. Please let me know in what fairy tale land there exists a business model that grants low/no interest loans to subprime customers on the car of their choice? Oh, that's right, it was called subprime mortgage land 2003-2007, and you saw how that worked out.
I think you’re missing my point. During the subprime mortgage crisis we had companies like CountryWide steer their clients toward high cost and unfavorable mortgages that had high fees associated with them, even when they qualified for conventional loans! Why? Because CountryWide was making too much money off of these loans. When the loans become a profit center in and of themselves, it cannot help but end up being exploitive to consumers. And especially when you’re dealing with people who may not be as educated or sophisticated about these loans, there is a good chance people will find themselves victimized by the greed machine. And now here we are a few years later and conservatives are STILL blaming The Poors for the mortgage crisis: “they shouldn’t have taken those loans!” Yeah, easy for you to say!
You say “NO finance company wants to do business with a used-car lot that is “ripping” off customers.” Oh bullshit. “Ripping off” is in the eye of the beholder. I’m sure everyone in this business thinks they’re doing a public service charging 25% interest on a 100,000+ mile clunker to some minimum wage sucker who needs the car to get to work. You know, I kinda remember hearing the same argument from the mortgage bankers and George Bush types, talking about how wonderful it was that we were an “ownership society.”
Plus, some these big used car chains are bundling and securitizing these loans themselves:
This will not end well, I guarantee it. Mark my words. Chickens come home to roost and all that. If this is your business, I’m sorry. Get out before the bubble bursts.
The only group that stands to lose in this deal is the consumer. Banks and lenders charge huge fees to car dealers to purchase sub-prime contracts. Vehicle loans unlike home loans can default at a whopping 50 percent rate and the investors still make money!