It's not just mortgages
Lost in the shuffle of a diving Dow, soaring gold, and $100 oil last week was this unsettling news:
Late payments on a cluster of consumer loans, including those for
autos, home improvement and certain home equity loans, climbed in the
summer to their highest point since the country's last recession in
The American Bankers Association reported Thursday that
the delinquency rate on a composite of consumer loans increased to 2.44
percent in the July-to-September quarter. That was up sharply from 2.27
percent in the previous quarter and was the highest late-payment rate
since the second quarter of 2001, when the economy was suffering
through a recession.
One of the key factors in this figure is a type of auto financing that makes no-doc neg-am mortgages look in comparison like paragons of lending virtue. The basic idea is this: Whatever you owe on your two- or three-year-old car now, you can roll into a loan on a brand-new car. The result is much like one highlighted recently in the Los Angeles Times:
When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last
year for a shiny new Ford F-350 turbo diesel with an extended cab, it
seemed like a great deal. Even though they still owed $9,500 on their
SUV after the trade-in value, they didn't have to put a penny down.
The dealership, near the Posts' home in Victorville, made it easy; it
just added the old debt to the price of the new truck and gave the
couple a seven-year, $44,276 loan.
The Posts were a little worried about taking on such a long obligation,
but they couldn't pass up a monthly payment under $700. Now they're
"I didn't realize how much debt was in it," said Jennifer Post,
who has since moved with her family to Iowa. Now, she'd like to get rid
of the truck but can't, because there's so much debt that she'd
literally have to pay someone to take it off her hands.
"We have no options," she said.
Maybe I lead something of a sheltered life. I knew you could get car loans for up to five years, but my mind boggled at reading the average car loan these days is five years and four months. And 45% of the loans written now are for six years or longer.
At the same time, the amount of money drivers owe on their cars is
soaring. In October, the average amount financed hit $30,738, up $3,500
in just a year and nearly 40% in the last decade, according to the Fed.
More troubling, today's average car owner owes $4,221 more than the
vehicle is worth at the time it's sold — up from $3,529 in 2002,
according to industry analyst Edmunds.
The longer loans are directly related to the higher balances. By
extending the length of loans, lenders keep monthly payments down. But
because these loans take longer to pay off, a much larger piece of the
principal remains unpaid at the time the car is traded in.
The response of the automotive finance industry? Extend loans further
and allow the indebted customer to roll what he owes into a new loan
with little, if any, effect on his new monthly payment. In effect, the
driver is paying a loan on two — or more — cars at once.
And yes, these junk loans get packaged up and sold as securities just like junk mortgages:
Among securitized auto loans, two-thirds have terms longer than 60
months, a fact that Standard & Poor's, which rates auto debt for
sale on the secondary market, calls a "credit concern."
This month, S&P reviewed its ratings on $113.5 billion in auto loan
securities it rated in the last two years out of concerns over growing
losses. It didn't make any downgrades but predicted that "rising losses
will continue into 2008 across all segments of the auto loan market."
True, delinquencies on auto loans aren't anywhere near the level they are on mortgages, but give it time, give it time. And while you chew on that, don't forget the trouble in the mortgage market is nowhere near over.