Meet the new subprime / by kevin murray

The housing subprime crisis had a humongous rise up and a massive meltdown.  One sincerely doubts that the thinking that created the subprime crisis and the repackaging of those loans into credit derivatives markets could ever really go away.  I mean, greed just doesn't simply disappear and evaporate.  So, no doubt, the sharpest minds in the room, said to themselves, that there had to be another area that could be exploited just as well and they came up with it: our vehicles.


The biggest material asset that the typical person purchases in their lifetime is their home, and the second biggest material asset that people purchase is their vehicles.  However, there are a few important points to make: one is that a significant portion of the population will never purchase a home and therefore that means their most significant material possession of their lifetime will, in fact, be their vehicle.  Secondly, there are some people that actually spend more money on their vehicle than they do on their housing.  Thirdly, a vehicle is a very important component for most people that have a job.  If you take all of these attributes together, you will recognize that there is a huge underclass of people that need a car, that don't have good credit, and will pay whatever it takes to purchase a car.  That leads to innovation and/or exploitation.


What lenders like about cars as compared to homes is that cars are stable as compared to homes which are extremely illiquid, with home pricing that can crater a significant amount in a very short time period, so that when a home goes bad you are looking at the potential of a substantial banking loss, especially with a low down payment on that home.  Vehicles on the other hand are sold in the thousands throughout the entire United States, their historic pricing is consistent, their resale value is consistent, and with GPS being well-nigh universal, a car is very easy to find, retrieve, re-possess, store, or re-sale for reasonable fees.  The other important factors about vehicles are that they are fairly expensive and the volume that is sold each year is huge.   With all those factors taken together, cars are the prime place to be to work that subprime magic.


For General Motors Financial and its 2nd quarter of 2013, the credit worthiness of their customers was staggeringly poor, to wit, 97% of the loans were to people with credit scores of 659 or less.  While GM Financial is only about 10% of the GM loans in aggregate within its retail financial transactions,  the credit worthiness of these customers is pathetic, and the monies involved is not trivial.  In fact, according to Experian Automotive for the first half of 2013, 27 percent of loans for all new vehicles went to subprime borrowers, that is, people with credit scores of 670 or lower.  According to, at the end of 2012, there were 6.6 million borrowers of subprime loans.  The total dollar amount of these loans for 2011 that was sold to investors was $11.7 billion, in 2012 it was $18.5 billion, and for 2013 it should rise even higher.


Greed hasn't gone away, it's only been repackaged.  It's a shell game, or perhaps a game of musical chairs, but it will too end poorly, the economy is sputtering along, and money is extremely tight in most households.  America lives and double-downs on borrowed money, unfortunately the fat lady is getting ready to sing.