Just as subprime mortgage loans helped precipitate the 2008 financial crisis, will the current boom in subprime auto loans precipitate another blowout?
Perhaps not, but one troublesome element of the current boom concerns auto title loans, in which the borrower gives the lender title to their car as collateral.
The loans, which can carry interest rates up to 500 percent, are blowing holes in the personal balance sheets of middle-class and poor people who are borrowing, forcing them into heavy debt and often leading them to lose their cars,
The New York Times reports.
A total of 1.1 million households had auto title loans last year, according to the FDIC. And about 17 percent of these borrowers get their car repossessed, according to the Center for Responsible Lending.
It works out pretty well for the lenders, of course. "The threat of repossession turns the borrower into an annuity for the lenders," Diane Standaert, director of state policy at the Center, tells The Times.
Concerns are rising about the explosion of subprime auto loans in general.
Earlier this year, the
Office of the Comptroller of the Currency said in a report that "signs of risk in auto lending [are] beginning to emerge," with looser underwriting rules and a "substantial" increase in lenders' average loss per vehicle.
But investors desperate for yield in a low-interest-rate environment are jumping at bonds backed by the loans. "It's a dynamic reminiscent of the subprime mortgage bubble that helped cause the Great Recession," a
Washington Post editorial states.
Indeed, The Times notes that private equity firms are investing in lenders.
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