The Expert Podcast

So, what is happening in the automotive industry? An article came out this week in the Wall Street Journal showing that subprime borrowers are starting to miss loan payments. This is at the bottom end of the market, where people with bad credit or non-standard loans are starting to default or become delinquent on their loans. It may not have crept up into the standard primary market yet, but does this mean there’s something going on with the economy or maybe the automotive industry? Or maybe it’s something specific to just subprime.

In the last two or three years, the subprime automotive market for loans changed quite a bit. There was a lot of consolidation. Gone are the days of little mom-and-pop dealerships doing “buy here, pay here” or small subprime lenders like Santander or other companies. A lot of this now is driven by either large automotive chains like Carvana or by hedge fund lenders that are portfolioing these loans. The problem with that is, when you don’t have the underwriting at the lower level, it’s almost like the beginning of the mortgage-backed security crisis in 2007-2008.

It’s unknown what the underwriting and vetting of these loans are. In fact, there’s some indication that even at Carvana, the loan underwriting decision was being made at the actual dealership. The dealership that’s trying to sell a car is the one who decides if the person gets a loan, or at least the company itself—it’s not a third-party, arm’s-length decision. If that’s the case, of course, it’s going to be very tempting for that automotive company to try to approve people to get more cars over the curb, especially if you’re having financial problems like in the case of Carvana.

It’s unknown how much toxic loan inventory is in the subprime market or how much of the primary market really is subprime. As used car values skyrocketed in the last three months, it really didn’t matter because you couldn’t be upside down in your car. Even if you owed a lot of money, you could always sell it and pay off your loan. If used car prices deteriorate, some of these loans may now be more difficult and become liabilities.

Even if a lender repossessed a vehicle, they could usually wholesale it out and get all or most of their money back. For example, if you have somebody with a $22,000 loan and their car was worth $24,000, you’re in good shape even after fees, auction fees, shipping, and reconditioning. However, if now that car is worth $16,000 minus $2,000 in reconditioning fees, you could be $10,000 in the hole very quickly.

We’re going to keep an eye on what lenders are doing. Put some comments below and let us know what you think about this. If you’re a dealer, do you have any more stringent requirements for your lenders doing underwriting, especially in the subprime market? If you’re a consumer, what have you seen in the purchase process? And if you’re a lender, are there any changes internally to your approval or funding process with your dealers?