Wednesday, August 26, 2015

Subprime II

No, not in housing, although it is way too early to make a definitive statement about loan losses tied to poor credit borrowers. This problem centers on auto loans. Yeah, just when the stock market falls into correction territory, Sebastian gives us another broken shoelace which could lead into the second shoe dropping. Hey, he's just a messenger of truth that gives you, dear reader, a heads up. It is something to keep in mind when the shills tell you to "buy the dips."
Subprime Not Dead
It almost died with the housing crisis, but gamblers knew the Fed would cover their backs. They found a new home in car loans. Subprime home loans now only account for a tiny fraction of mortgage loans at .25%, however they now make up 26% of all auto loans and rising.
As stated in a earlier piece, the car loan borrowing term has been continually extended with the continually rising price of a new car. The problem defies the lies that there is no inflation. It is so bad that average age of cars on American roads is at a record of eleven years young.
The hawkers still want to shout on late night TV, "Need a car? C'mon, down! Just $99. down and $99. per month...No credit? No problem.." They only can do that because in the 70s with a term that was 36 months. In the 80s, it went to 48 months. Now, that new car will have 200,000 miles on it when you pay the check at 84 months.
Car sales will most likely tally 17 million sales in 2015 and that is great for the economy, but you are straddled with that extra bill for the next seven years and one miss, one dental visit, one layoff and you are basically bankrupt. The gamblers realize that and that is why they moved into this market.
60 Minutes
and the US government hounded the Mafia over loan sharking, but they hold the door open for companies like Springleaf(LEAF). This jewel specializes in subprime auto loans and they charge as much as 27%. They are twice as bad as my pisans. They are the real crooks!
Things are stating to look cloudy. If they get worse, I plan to short LEAF and this is my indicator.
released a study which showed auto loans in delinquency. It is high and approaching 7% of the $16.8 billion market backed by subprime. The loans are tied to bonds which recalls the expression, "Can you say, swaps?" These gamblers are lowering the loan standards to gain market niche, but life happens: one toothache, one car repair or new tires, new brakes or layoff and the clouds will open and rain will fall.
Critics decry us who call to mind life as we see it and they never see the crisis until it happens. I see this situation as another way to a crisis and if it develops, our economy will be stuck in second gear.