Auto Loans: Lax Lending Standards?
Submitted by
CalculatedRisk on Wed, 01/16/2008 - 1:07pm (157 comments)
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At least all this crap is contained to planet earth.
Cerberus really timed it right with Chrysler. Tighter standards will do wonders for demand and price.
But the biggest problem in car loans will be in subprime. If you have poor credit and buy a used car, you may be forced to pay over $1,000 to have a GPS device installed that tells the repo man where the car is. It doesn't cost that much, but that's what you pay and it's built into the loan. 12-16% interest is typical for people with poor credit who buy used cars.
The other problem is that in a weak economy, the resale value of the repo isn't so good.
For quite awhile, ethnic marketing has touted "no/low money down, sign and drive" regardless of credit.
Yes, but auto loans are : (a) Smaller on average than mortgages by a factor of 10 or 20; (b) Repo'ed cars are much easier to get value from than foreclosed houses.
While it isn't good news, car loans are a whole lot less worrisome than mortgages.
Aheadofthecurve, true. Housing will be the biggest problem, but the credit problems are widespread - CRE will probably see some huge write-downs too.
Best to all.
"Repo'ed cars are much easier to get value from than foreclosed houses."
Easier to sell no doubt, but depending on the age/condition of the vehicle versus the actual size and length of the the loan the percentage recovered can be much less.
It is true that car loans are of less consequences to the total economy than home loans. But what about the personal economy of the family involved. When people lose their transportation and can't get any finance for new transportation, it does affect them overall. Their Job and mental state at the least. I wonder if this state of mind of these people (by the masses)will also eventually trickle back down into the broader economy.
Metrics,
Yes - particularly in a market that is saturated with used cars due to consumer belt tightening (get rid of car note, swap out vehicle for reduced mileage, potential avalanche of other repo'd vehicles...). I imagine the loss severity assumptions will be tested and reset - I mean, who coodanode?
Besides than mortgage, auto loans, and credit cards, the next one would probably be furnitures on credit.
Collective insanity - I think that will be the historical judgment of 2005-2006.
Damn, was there anything you couldn't get a 100% loan for a year ago? I wonder if I could get one of those loans to start my alpaca ranch?
At least all this crap is contained to planet earth.
Not so fast.
At least all this crap is contained to planet earth.
Not so fast.
Shnaps | Homepage | 01.16.08 - 4:42 pm | #
Well, there goes "gold-pressed latinum" credit card offers for the Martians.
I somewhat disagree Aheadofthecurve.
I suspect the issue is going to be the sheer volume of possibly repo'd cars and the percentage amount of loss that each car will represent. If a car was bought new, as many were recently with all the zero down/rebate specials the dealers were giving, it will have lost up to 1/2 or more of it's book value in the first year alone. Many households have two or more vehicles and let's not forget the jetski and other financed accoutrements of lifestyle. I suspect that even the most bubblicious housing markets you'd have to try real hard to lose as much as quickly on as potentially high a volume.
What each loan lacks in size could possibly be made up for in percentage of loss on each loan and sheer number of loans.
I suspect the issue is going to be the sheer volume of possibly repo'd cars... -Andrew
Good point, what will a 2006 Hummer be worth in six months?
Andrew beat me to it, but I'll spin off a bit.
A car that's repo'd within the first year or two - given today's nothing down/5 year payment plans - is going to have the lender -- or whoever bought that debt -- eating a loss. They won't get back everything they loaned (or more accurately, paid to the dealer). Those notes that were bundled and repackages won't pay off what they were going to originally pay. So on and so forth, it's housing on a faster cycle.
damn i just covered my Carmax short yesterday...think that'll be going back on soon...
I think it could be even argued that because of the rapid depreciation experienced with new cars that new car loans (100% LTV) will be the most prone to loss of value.
A 2006 Hummer wont get more than 75 cents on the dollar of the new price...
I wondering if transactional costs as a function of loan balance are just as high for autos as they are for houses?
Macklowe?
Broken/shattered PE deals?
Pier loans stuck on bank balance sheets?
This wasn't contained to the hoi polloi, either.
I don't know. 30 days behind on a car loan is a few hundred bucks. Cut out your daily latte for a month and you're there.
Also, the solvent folks may keep their cars, thus increasing used car prices relative to new. I believe that has happened in past recessions. car loans are a concern, but well down the list IMO.
However, what is potentially more disheartening to me is the inevitable credit backlash that may happen if all these consumer loans come crashing down. When lending to consumers becomes synonymous with loosing it (this is what happened in the 1920's Florida real estate boom, the source of the old saw of "if you believe that I have some land to sell you in Florida") no-one will be willing to make these loans and the consumer will not be able to (easily) secure credit to buy things. If this happens the consumer lead portion of the economy could come crashing down.
But the biggest problem in car loans will be in subprime. If you have poor credit and buy a used car, you may be forced to pay over $1,000 to have a GPS device installed that tells the repo man where the car is. It doesn't cost that much, but that's what you pay and it's built into the loan. 12-16% interest is typical for people with poor credit who buy used cars. - Rich
Is that really true? Damn, things really went over the edge...
"I don't know. 30 days behind on a car loan is a few hundred bucks. Cut out your daily latte for a month and you're there."
Or: Stop paying the mortgage, and (eventually) move to renting. Then you're fat with cash. In most places, you pretty much need a car to live/work. But any shelter will do.
Andrew-I dunno. I've always bought my cars new for cash and driven them until they croak, so what do I know?
I suspect lenders will tighten standards back to 2004 levels, but keep lending . After all, if they don't lend, how do they make money?
Or: Stop paying the mortgage, and (eventually) move to renting. Then you're fat with cash. In most places, you pretty much need a car to live/work. But any shelter will do. callous
True enough, but you don't need a $25,000 SUV to get to work, a $5,000 used Civic will do the trick.
2007 CPI = 4.1%
2007 CPI real hourly wages = -0.9%
Current 3mo Treasury Yield = 3.08%
(2.00% after taxes of 35%)
Current Real after tax 3mo Treasury Yield = 2.00% - 4.1% = -2.10%.
Negative real wages and yields. This is a disgrace. Worse yet, futures predict lower rates are coming. Any more questions on how we're going to pay for these shenanigans???
Those wall streeters really earned their bonuses! We need to remove the word "investment" from investment banker.
Thanks FED.
"solvent folks may keep their cars" -- This will probably be the long term effect, however, short term people are going to be jingle-mailing the keys to that BMW or Hummer with the expensive payment to cut expenses and trading down to the used Honda. As dryfly is fond of saying, when cash is tight people will do anything to minimize outlays and preserve cash flow.
Is there any reason anyone ever needed an SUV, unless they live 3 miles up a dirt road?
Aheadofthecurve,
you ain't living with J6P who has two cars going with the overclocked lifestyle and just lost one of the two jobs keeping them above subprime.
Gotta have one car to get to one job from that apartment or small rental house.
Not two. Not new. No way.
What this means is that we are facing 1929 and it is going to be a very long long long time before folks are willing to spend much money.
My folks just picked up a fancy pair of Klipsch speakers (less than 2 y.o.) that were selling on ebay for $200 for $50 at the moving sale of a neighbor. They probably overpaid, but what the hey, they got sound.
This is going to be a very bad moment in history by the time it is all over.
Good luck to y'all, I got my cash raised and am going to hunker down.
Someday this war's gonna end...
" ....I don't know. 30 days behind on a car loan is a few hundred bucks. Cut out your daily latte for a month and you're there."
Are you kidding, people don't have payments of a couple hundred bucks anymore, try north of $500.
True enough, but you don't need a $25,000 SUV to get to work, a $5,000 used Civic will do the trick.
How unAmerican is that.... Bob you're not a pink-o are you? (jk:))
I wish people would cut out the use of J6P. It's patronizing to generalize about people you don't know.
JMO
Aheadofthecurve I lived up a dirt road (2 miles) drove a 88 Mercury Marqui....
Made it home every time
"True enough, but you don't need a $25,000 SUV to get to work, a $5,000 used Civic will do the trick."
But you're underwater on the vehicle, you can't sell the SUV without a cash outlay.
ahc- I do know them, they are my cousins thank you, and they surely do struggle.
They have been totally left behind by the last great boom, and they are mighty unhappy they have to pay for the stupidity of bankers and wall street.
Wait until they rock the vote in 2012 after this really hits bottom.
A lot of folks who think they are rich are going to find out they are subprime when the dough stops rolling in...
Someday this war's gonna end...
My question to each person pounding his or her chest (not to mention patting themselves on the back) and chiding the Fed for claiming the credit problem was merely a subprime housing problem is this:
What should the Fed have said?
Look, I'd be willing to bet the Fed knew (and if somehow it didn't then, it certainly knows now) that everything got out of control and that the housing problems has and could further spread through the broader economy.
But what would you have had them do?
Issue a statement that the end is near, that credit is blowing up and that nobody is safe? How would that have gone over and how would it have helped the situation? How would it go if they did it today?
Do we really want a Fed that always says what it truly thinks, especially consdiering how difficult (if not impossible) forecasting macro trends is and knowing that the Fed statements are at least somewhat self-fulfilling?
And what would we have heard if in 2004 or earlier the Fed had stepped in and stopped the party before it got to this point.
People would have screamed bloody murder claiming either too much government intervention (looking to my right) or that the Bush administration was evil for preventing lower income people from buying houses (looking to my left).
So I guess I got two questions: What did you want them to say? What do you want them to say now?
Allen- No dispute regarding the stupidity of WS, banks, Greenspan, Bush, bernanke and anyone else you care to name. However, no one held a gun to anyone's head to force them to take out a mortgage, car loan, credit card or anything else.
Aheadofthecurve -"I dunno. I've always bought my cars new for cash and driven them until they croak, so what do I know?"
LOL, in that case my friend you don't match the conventional American consumer profile.
The dealerships and manufacturers form their business plans on their regular customers having a replacement cycle of 2 to 5 years, I think. About the length of an average lease.
If it makes you feel any better, I buy used and drive them 'til they croak. But then again I'm a bit of a nutcase (and backyard mechanic).
What'll happen in a downturn is that these regular buyers will just do what you do and put off replacing until more time has passed. The "ponzi" buyers will liquidate their high end rides that they suddenly can't afford, giving an initial surge of repo'd and used cars of the market. The dealers and manufacturer's will then have to sit out a long dry spell until this surge of used cars dissipates and the rolling stock of regular customers deteriorates to the point where people need to buy again and feel they have the cash to do so. If times are still tight expect that cheap "stripper" economy cars and trucks will be the ones mainly bought until consumers feel richer.
But you're underwater on the vehicle, you can't sell the SUV without a cash outlay.
(1) People will do it anyway if they believe it will let them save the house. They'll shoot first and ask questions later.
(2) Those for whom the cash outlay would be significant won't bother to sell it. They'll just stop making the payments and wait for the repo man to show up and haul 'er away.
zidane,
The Fed should have acknowledged the bubble and moved to rein it in as soon as they recognized the problem. That's their job. Sure, they would have taken a lot of heat. But that's their job. Now they will take a lot of heat for not doing their jobs properly.
Tough job -- but somebody's got to do it...
Bernanke's proper first move was to acknowledge the excesses first off. It scares the crap out of me that someone so brilliant didnt see the housing bubble for what it was, and didnt understand the magnitude of the credit bubble and the stupidity it was based on. Just shows me that no matter how many seminal papers he wrote, and how many A+s he got, he was in the tower far too long.
"(1) People will do it anyway if they believe it will let them save the house."
Saving the house is so 2006. I like to think that, as a society, we will get good at making these kind of shrewd financial maneuvers. You know, like all buying into the biggest housing bubble in history.
Don't fool yourself. Bernanke knew what was happening. He knows what's going to happen. What he tells the public and congress is something entirely different.
Detroit Dan--
I hear you, and think that's right to an extent, but when was it a bubble? 2003, 2004, 2005, 2006? When should they have stepped in? And if they are going to err (and they are going to err), should they err early or late?
Is it really better in the long run that the Fed shuts the party down early and we forego growth then or is it better for overcapacity to build up, we hurt for a while and grow into it?
I dunno myself, but I think it's a real question.
I know Greenspan takes a lot of flak for the quote, but there is something to the idea that you don't know it's a bubble until its over.
Just like there's always bulls out there claiming good times around the corner, there's always bears saying we're this close to driving off a cliff.
I've found both are right about as often as they are wrong.
Andrew- You're probably correct. However, I just bought a new Hyundai Sonata this fall and it comes with a 10 year warranty, so I guess they think many people will keep them 10 years. I certainly will. Interestingly, as far as inflation, I paid exactly what I paid for my previous car (a Ford Taurus) in 1996 and the Hyundai is at least as good a car.
Zidane,
The fed is in charge of bank regulation and lending.
Ensuring prudent lending is all that was necessary. No doc loans, neg am loans. Ludicrous.
Now the prudent will be forced to subsidize the foolishness.
--
One has to be blind to facts not to have noticed a simple and consistent truth about the US financial system pushing debt on households, at a rate far in excess of the incomes, without regard to future losses. Since the Crooks who are pushing debt are taking no personal risks they have no incentive not to do not only what is wrong, but to do outright evil for the society as a whole.
People have no understanding of the real free market system where there are personal consequences of bad decisions, investments, etc.
We are dealing with an economy in the jaws of Crooks, helped by the Fed. Bad incentives lead to a bad system and invariably such a system gets controlled by Crooks. We have been there for at least few years.
Jas
Well spoken, MAB...
Zidane,
I will fall back on William McChesney Martin's quote:
The Fed's job is to take away the punchbowl just as the party really get going.
Jas Jain for President.
What happened to Banker????
Geoff--
That's my point. Do you really think he didn't know or just found very little utility in coming out and saying we're screwed after it became apparent?
Does acknowledging excesses after the fact really help you going forward and helping to order a more ordered correction? I guarantee (okay, I just really strongly believe) that if he had acknowledged and pointed out the depths of this problem 6 months ago, the fallout would be worse than it is today.
This worries me far more than housing because my job's in the auto industry (not the lending side thankfully).
I can always find another place to live. It's not easy to find a new career, however.
If not J6P what should we call them?
Victims?
/sarcasm off
Memorable quotes for Repo Man (1984)
Bud: Credit is a sacred trust, it's what our free society is founded on. Do you think they give a damn about their bills in Russia? I said, do you think they give a damn about their bills in Russia?
Otto: They don't pay bills in Russia, it's all free.
Bud: All free? Free my ass. What are you, a fuckin' commie? Huh?
Otto: No, I ain't no commie.
Bud: Well, you better not be. I don't want no commies in my car. No Christians either.
You shouldn't call "them" anything. Just like you shouldn't generalize about black people, Asians, Jews, Hispanics, etc. Cite facts if you'd like, anecdotes about actual people you know if you want, but to pretend 360 million people can be summed up by 2 letters and 1 number is foolish.
Geoff, Bernanke probably didn't want to be accused of crying wolf. One of the dirty secrets of economics is that you only know what happened with 20/20 clarity long after it happened and everyone agrees on it. Divining the immediately current state of affairs is like having to describe an object while in a dark room and wearing a pair of heavy inch-thick oven gloves; any guesses you have aside from general trends are probably wrong and you're better keeping your mouth shut and making serious mutterings on the subject until someone turns on the light and whatever it is becomes obvious. This is particularly the case if you want to be taken seriously as a Fed Chairman.
MAB--
Look, I'm a 30-year fixed guy who was only willing to take on a loan less than my annual income, and I was visiting housing crisis websites before they were cool.
But the types of loans you describe existed before the big run-up (well, maybe not the no-doc), and they actually serve a purpose.
I don't know how comfortable I am relying on the Fed to determine every type of loan that can and can't be made. Cause remember, just as they erred here not stepping in, they're gonna err the other way by stepping in too much (see eg the FDA). And there are real financial (and personal) costs to that.
WE aren't in this alone - warm fuzzies!
U.K. Housing Market Was Worst Since 1992 in December (Update3)
By Jennifer Ryan
Jan. 16 (Bloomberg) -- U.K. real-estate professionals said December was the worst month for the housing market since the aftermath of Britain's last recession in 1992.
[snip]
Andrew - Ive been in economics a very long time...that isn't exactly true. If anyone had cared to look at the credit standards out there that existed well into Bernanke's term and in fact, still exist in some parts of the market, they would have seen the problem. Unless said person was naive enough to believe that asset prices only go up, then they willingly did more eventual damage to the economy by not reining things in sooner.
Concern trolls deserve a headbutt to the face.
zidane,
The personal and financial costs of the excess that are unwinding will far outweigh those due to 'burdensome regulatory oversight'...and save the straw man arguments on regulating every single loan.
I think the truth about forecasting economic conditions is somewhere between Andrew and Geoff.
But determining what would have caused the most damage is hindsight-driven.
I agree that the bubble was obvious. I thought that in early '04 when few did.
Maybe I was early, maybe I wasn't, but say I wasn't, is that when Ben should have stepped in? How would he have known then, whether shutting it down then was better or worse than letting it go and popping?
energyecon--
I think you knew what I meant; I mean, hell, I said "type" of loan.
pt 2...i know a lot of people in the profession who thought the whole credit bubble would ease and incomes and rents would catch up with housing prices etc, but that is because they didn't understand the basis on which the loans were being made. This was unsustainable a long time ago. Bernanke just didnt want to make it look like he was the reason things fell apart. I can show you research I did nearly four years ago that said this would lead to an inevitable bust. Now being in the business, you cant say that directly, so you leave out the conclusion and present the evidence, and ask the question, is this sustainable? Ive gone back and looked at that paper, and you could see even before the lending got really really out of hand, that their was no fundamental basis for the housing bubble to be able to keep inflating for too much longer. Now I wasnt sure how many years it could go, because I couldnt really imagine in my wildest dreams that lending could have gotten so lax. So, my call was for a peak more than a year before the actual. But then, once I got people to agree to a peak, the next trick was convincing people that once prices even flatten, they MUST go down, because of the very reasons for which they continued going up longer than expected (ex 1, foreclosures turning into refis)
So, look, before even taking the job, Bernanke should have known he'd have an extraordinary problem to deal with. But he chose to deal with it by poo-pooing it. I find that kind of irresponsible.
Hello folks!
Reading this is fun..not so much for the families involved. But as John Paulson might say ... how do I short this bubble? Any concrete suggestions?
Thanks and Good luck to all,
Zidane, what you are saying is, fraud is ok, as long as it spreads the pain over a shorter period and redistributes it? Uhhh, hullloooo??? This is absurd. Now, that may not be your argument, but that is what perpetuating the madness amounts to. If they cut it off when they should have, well, the pain would have likely been more concentrated on those who needed to learn a painful lesson, the very people who participated in the lunacy. Now, we are going to see everyone pay the price. Once again, socialize the losses. Ick.
Zidane,
According to your rationale, the fed shouldn't ever enforce basic underwriting standards or perform their chartered duties because they might make a mistake.
The fact that you and dozen or so blogs foresaw this train wreck years in advance only underscores my point. This WAS easily recognizable.
If we're going to have a lender of last resort backed by treasuries (public money) then they damn well better enforce prudent lending.
Good grief
j6p stands for 'joe six pack' right? Now we can't say joe six pack! I can't believe I spent time looking up this great insult 'j6p'
mbagrad,
people don't buy cars when they are hurting in the pocket book, and when the market is flooded with cheap used cars. On the bright side we now have international markets for our used cars. Maybe we can send the surplus down south.
zidane,
Straw man - type implicit in my response, apologies - just get off the 1% gas and quit pimping ARM's to the masses ala Greenspan.
I can see very clearly how the lenders would get into this mess.
In a moment of weakness I looked into getting rid of my old car and getting a new or late model used car. I was offered a loan that would have been financially crazy for me to take on. The payments would have been hard on my budget (and I only drive 3000 miles a year...but I was thinking I could get a car that I'd keep for a long, long time) and anything more than a minor financial setback could have been a disaster.
Since 2005 at the latest, lenders of all types lost touch with reality.
I wonder if the guy pushing ABK this weekend, on this blog, jumped out his office building?
He said his whole fortune was riding on it...
NobleOthello = Rip Van Winkle
Geoff--
I've said nothing of the sort. Fraud is fraud, but there is nothing about the over-extension of credit in and of itself that is fraudulent. A bad idea, yes, but until you add the shennanigans of the bubble (brokers faking income, altering applications etc), not fraud.
As I've said before, this party should have been shut down long ago.
I'm just pointing out that people are awfully confident that they would have done differently at the time.
I mean, you said your research was 4 years ago (so late '03, early '04) and that you had no idea how long it would last. What if it had gone 6 months longer and stopped, would we have really had such a disaster? And would it have necessitated the Fed coming in and removing access to homes for a big chunk of people?
Easy to say now. That's all I'm saying.
Repo'ed cars are much easier to get value from than foreclosed houses.
Not when they are char-broiled. Both have about the same value then.
Looking on the brighter side of things, at least it won't take 8 years for used car prices to come down properly like used house prices.
What did I tell you yesterday about newbies looking for shorts?
Yep, this is the place to get your shorts. A hundred short ideas a day.
But first, you have to put $100 in the tip jar. No tip, no shorts.
Sorry Geoff, I need to remember that others here are more formally educated in economics than I am before I go making flip statements like that.
However, that's one of the nice things about this forum, people get called on their leaps of faith and get educated. I guess I'm about to eat some crow.
I did not mean to imply that Bernanke is without insight as to what is going on. From what I understand, the Fed has invested lots of time developing real time metrics and as up to date statistics as possible - It's their job to try to understand what's currently going on and try to steer it. Bernanke also would be aware of current regulatory practices and lending standards that could help and/or aggravate the situation, its one of the Fed's main tools on the financial markets aside from interest rate policies. What I was trying to imply was that even with all this real time and policy knowledge the economy is such a complex thing with so many inputs and nuances that it is almost impossible to see exactly what current conditions actually are and absolutely know how they are going to affect future outcomes. I've been told that economics is an inexact science and I've personally read as many economic commentators in the last several years saying things are going dandy and the free market will save us all as I've read those that say that things are going to heck in the proverbial hand basket. Now one of those two sets of commentators are going to be wrong and it's looking like it's the "don't worry be happy" crowd currently.
I was just saying that the Fed and its chairman has a tradition of not doing much, or saying much, until they see the smoking white hot breath (and facts) of an actual economic downturn or inflationary overheating. I've always understood this to be partially because they "don't know" with 100% certainty and partially because they want to be taken seriously when they do speak and act. This is very similar to the Supreme Court's tradition of not commenting on law or case hypotheticals until the actual controversy shows up in front of it.
MAB--
And I'm the one that gets called out for creating a strawman argument. Yep, that's what I should have said, the Fed shouldn't do anything ever. Thanks for the helping me pare down my arguments.
energyecon--
Don't know what 1% gas is and told all my friends to avoid ARMs like the plague. Never sold a mortgage in my life and wouldn't know how to.
Geoff - "So, look, before even taking the job, Bernanke should have known he'd have an extraordinary problem to deal with. But he chose to deal with it by poo-pooing it. I find that kind of irresponsible."
Now that I do agree with. Just because you don't know, doesn't mean you can't take out insurance on contingencies. That part is in his job description (and was also in Greenspan's for that matter).
The FED, zid, the FED - that is who we were discussing I believe - you averred they should not get involved which appears to be contrary to observation (though on the pusher side of the debt deal) and 1% FFR fueled the bubble.
It seems to me that there had to have been plenty of red flags raised in the shops off all types of lenders. Would not the economists on staff and as consultants have at least suggested that, perhaps, just maybe, prices of houses had long past sustainable levels making all the creative leverage a high risk proposition? It leads me to conclude that they were all pretty much rolling the dice.
econ--
Finally something we agree on. The 1% FFR and the length of time rates were so low was indeed one of the big reasons for this mess.
OT - An article on CNN/Money about rents stagnating.
As home prices fall, rents flatten - Jan. 16, 2008
"NEW YORK (CNNMoney.com) -- Home prices dropped last year in most cities around the nation, and now rents are flattening out in many of the markets worst hit by the housing downturn.
According to data from Rentometer.com, supplied exclusively to CNNMoney, the median monthly rental bill for a sampling of 10 metro areas all around the United States rose just 0.5 percent in 2007 from $1,457 to $1,465.
..."
"Would not the economists on staff and as consultants have at least suggested that, perhaps, just maybe, prices of houses had long past sustainable levels making all the creative leverage a high risk proposition?" - Ed
Ed, peer pressure and golden goose killing. The same reason why stock analysts that tell the unvarnished truth and/or give negative ratings tend to lose their jobs.
You don't need to go to the middle of the lake to find water.
Repo man: 'Hello, Mr(s). Realtard/Broker/Contractor, I'm coming over in a few minutes to reposess your vehicle.'
Realtard/Broker/Contractor: 'OK, I'll put on a pot of coffee.'
.
Trucking industry observer tells me that the biggest increase in freight hauling in mid west at this time is moving in stock for Rent to Own Funiture Stores, They are going great guns. Talk about a leading indicator, or maybe a lagging one. Rent a couch for five years and then own it!
zidane,
Yes, and that FFR policy for an extended period of time PLUS the Chairman of the Fed publicly proclaiming the benefits of ARM's for the American homeowner seems to be some serious enabling and involvement - exactly the wrong kind as you say - but in my mind it makes it difficult to credibly argue the Fed should not be 'laying hands' on the economy for fear of doing damage when in fact they seriously stirred the pot in a way that got things boiling over big time (MMI alert!).
"And would it have necessitated the Fed coming in and removing access to homes for a big chunk of people?"
Zidane (great player, by the way)-I question whether access to homes meant shoe-horning moderate income people into over-priced houses using toxic mortgages. When the GIs came home in 1945, Levitt and others built houses that were affordable to average families with a 30 year fixed rate mortgage. The houses were plain, but over time poeple added on and remodeled and Levitttown is still there. Who built houses like that in the last 20 years?
Really, where is it written that the American Homeowning Dream = big ugly drafty McMansions?
I mean, my God, how DID people raise 2.5 children in a 1,300 square foot home back then?
aotc,
You will probably still be driving that Sonata when Jeb makes his bid for the White House.
No Beryl, I think his brother has ended the family's lease on that dwelling for all time. Jeb must want to strangle George, I suspect.
I do hope to be driving it when Hillary hands off to Chelsea, though.
I think the big picture is that Mr and Mrs Sixpack are running shy of cash (or credit which ever works). It was natural to see cars following houses. I'll bet we will see a lot more revisions on the food side (some have already lowered guidance) then its entertainment (movie theatres, news subs, mag subs).
The difficulty with a recession with credit concerns is the sudden force that it all happens with. Unlike a jobs led recession that unwinds over time, k can and is being shutoff fast, at every spigot. I suspect that the Feds are placing heavy pressure on the banks to keep credit lines open and loans available.
Got a friend that manufactures mountian bikes. Does under two million a year. Been profitable since day one. His Bank has since informed him that they are "revising" their business customer base and are now trying to move to "larger, more well positioned companies". So, they did NOT drop his business but raised his credit line by 300bp...he needs this line to secure materials..he is now looking for another lender and having trouble. This is just a small guy. I suspect its happening a lot.
Good grief
j6p stands for 'joe six pack' right? Now we can't say joe six pack! I can't believe I spent time looking up this great insult 'j6p'
My neighbors and I are all J6Pers - its okay to call us J6P... especially if you bring a six pack to share.
Just sayin'...
I mean, my God, how DID people raise 2.5 children in a 1,300 square foot home back then?
Ellen | 01.16.08 - 6:42 pm | #
Many still do - you just don't see them in 'Parade Of Homes'...
aotc,
Yes, maybe the Bushes can all wind up in the "Big House."
Barley- Oddly enough, I bet your friend is a better credit risk than Citi.
"Is there any reason anyone ever needed an SUV, unless they live 3 miles up a dirt road?"
Come to New Hampshire. I drove to work in white-out blizzard conditions Monday. I will again in another storm Friday and they're predicting big snow for Sunday. I've got a manual transmission, low-range transfer box and I use them from November to May.
BTW, my SUV is 10 years old, paid for, and I run it only 4,000 miles a year. Should last a long time with use like that.
ahead of the curve--
I agree on zidane. And I agree that there were people that bought homes that shouldn't have in this chaos.
Those poor kids,..how are they going to get into Harvard? Might as well quit right now.
They will have trouble as Hrvd has had a huge spike in applications...any thoughts on why?
"On the bright side we now have international markets for our used cars. Maybe we can send the surplus down south."
Like used Hummers and we keep the Civics? Sounds like a plan!
MAB has it right on what should've been done... regulation. Instead we had either no regulation, lax regulation or de-regulation. Like repeal of Glass-Steagall
...
And cap gains tax cuts that favor RE over other 'investments'... (during Clinton admin.)
And then threw on a 1% FFR so the terraists wouldn't win... left it on waaaaay too long.
And we are wondering why we got a mess now?
Come on zidane - that's a pretty hollow bitch saying we have no reason to complain about past practice...
Now where do we go from here? That's tougher... you don't get to just go backward... no mulligan's in economics. It's sort of like trying to unscramble a scrambled egg.
"Cerberus really timed it right with Chrysler. Tighter standards will do wonders for demand and price"
Last I heard this junk was still not placed...
Barley-Might be their proposal to limit tuition to 10 % of family income for those under $ 200K. I give them a lot of credit for that.
Ellen--
For some it is, for some it isn't. That's kinda the point of the American experience
It's certainly not for me as I hate the mcmansion as much as you, believe me, but subprime loans didn't just buy mcmansions.....in fact I'd bet that a vast majority weren't.
Ed The CEOs were not having the economists build risk models they were otherwise engaged in building fee models and revenue models.
I drove to work in white-out blizzard conditions Monday.
I delivered pizzas in white-out blizzard conditions several times last winter. My VW Passat did just fine.
Dryfly made me lol.
I didn't get "j6p" when I first saw it. I can see how it could be used cruelly.
But this isn't really a j6p problem is it? This is "we're all subprime now."
Jeez, we hear crazy stories of $200K incomes, zero net worth, and maxed out credit. I think basically it was risk-takers, and risk misunderstanders, right across the board.
dryfly--
What the hell are you talking about? I've never held bitching about Fed practice against anyone--i've railed against everything you've said.
In fact, my original comment was more in the spirit of your last paragraph in chiding those that were claiming the Fed to be dumb for not realizing that further spillover was likely? Once we were in it, what did you want them to say? "We're all screwed!!!!"
Do you really think that would have been the best tactic?
i am joe six pack
6ps are getting expensive too, speaking of inflation (and possibly ethanol policy effects).
You know, I think if I have to take a few percent hit this year from inflation it will hurt, but it might still be less than the broad stock market will suffer.
And we know gold will bubble, it's just a question of whether this is shoulder or head.
A good time to take small lumps and avoid big ones?
The fed is in charge of bank regulation and lending.
Ya think?
The Fed has been actively churning out papers that there was no housing bubble (available online, go to the FRB site and search for housing) eg. In December 2004, the New York Fed in a paper declared that no bubble exists.
The Fed had enough power to regulate mortgages, they refused to use it.The Fed was given the power to regulate abusive mortgage lending in 1994 under the Home Ownership and Equity Protection Act (HOEPA). For 13 years, that authority sat on the shelf unused. Till Dec 07.
That bum Greenspan - and that is an insult to bums everywhere - is in favor of, yes, a government bailout. Cash is available, he says meaning taxpayer money and we should use that in larger amounts, as is necessary, to solve the problems of the stress of this. Now he has joined Paulson's hedge fund, which is making a killing off the subprime debacle.
All this was the stupidity and ignorance of the Fed? No way. This act of behaving like bumbling idiots caught unaware by all this is just that. An act. It was a well orchestrated plunder of wealth upwards. And these bums just had to do nothing to making it happen, just do nothing.
It was a deliberate policy of turning a blind eye while the bankers and Wall St brokerages raked in their bonuses by the millions.
That J6P got credit on easy terms and the hole-in-the-wall mortgage broker minted money was an accidental byproduct of this orgy of looting by the bankers and financiers.
"Silence in the face of evil is itself evil: God will not hold us guiltless. Not to speak is to speak. Not to act is to act." Dietrich Bonhoeffer
"We're all screwed!!!!"
Do you really think that would have been the best tactic?
If they then followed it up with proper regulation - saying "If we DON'T do this now... then yes we'll all be screwed!"... then 'ya' that would have been a good start.
But AG didn't BELIEVE in regulation or in 'popping bubbles'... even when they were obvious to a great many people. See 'irrational exuberance'... he was right & still shrugged off the obvious.
There is no excuse for them not pointing out what was clearly happening and then enforcing the regulations they control and badgering congress to add or tighten regulations where the fed has no jurisdiction. Same applies to the executive branch via executive orders.
No excuses - do their job.
If they tightened regs early enough they wouldn't have had to jerk the FFR all over and back again. And those worst loans wouldn't have been available - or if available only to those who really qualify.
Much of this was a failure of oversight - period - a failure on the part of public servants who were charged with a task they failed at. If the task was too difficult then they should have stepped aside and let others take a swing at it. Everyone can't be an astronaut... everyone can't be a fed governor either. Some just aren't qualified.
I don't give all blame to the fed - congress & the executive have plenty of finger prints all over this too. But its all their jobs to legislate, regulate & govern and they failed. If they had called out about the risks earlier and did something to avert them... at least then you could say 'well they tried - it was too big of a problem'.
They don't even have THAT excuse.
It was a broad failure in society.
In Irrational Exuberance, Robert J. Shiller notes that it wasn't even limited to American society. Debt and housing booms spread to ... what did he say, jet-set cities around the world? Any city with an international airport? Something like that.
It's broader than the fed, broader than the US.
Aheadofthecurve car loans are a whole lot less worrisome than mortgages.
Hahaha. You should take that on the road as a stand up comic routine.
The problem is that a lot of people have been underwater on their car loans for 2 or 3 cars. You've got people who are 10-14K underwater when they drive that baby off the lot. GAP insurance will cover a certain amount, but other those insurers have limits in there or they will go bust.
In the last 10 years, the terms of auto loans extended way out, and once that happened, when people wanted to trade in they were way underwater. Auto sales were only sustained by rolling over the excess principal to the new car loan. After you've done that a few times, you've got a 9 year car loan with high payments, and after a year or so the principal balance is double the net repo value.
The auto loan securitizations are going to break too. The theoretical save on the auto loans was that when people got far enough underwater, they'd refi their house to get back to zero. Fat chance now.
dryly--
So, you're now on record that neither Greenspan nor Bernake were qualified to be fed governers. Fair enough.
Look, i agree that there is a lot of blame to go around here, but as for wanting public servants to step in when ever they "see" things getting out of hand, I just am pointing out the downside of that, too. The pendulum, just keeps swinging.
Wish I could stay and play, but gotta go.
Best of luck to all during what will certainly be tougher before it gets better.
Is there any reason anyone ever needed an SUV, unless they live 3 miles up a dirt road?
Aheadofthecurve | 01.16.08 - 5:00 pm | #
I read yesterday Chavez is going to stop shipping asphalt to the US. No link sorry
I wish people would cut out the use of J6P. It's patronizing to generalize about people you don't know
No it's not, it's a descriptive term that is ~supposed~ to be a generalization.
It has nothing to do how much alcohol one drinks but rather the 'average laborer' with a high-school diploma, some college or training, would-be middle class guy that built this country, but would lose his job in a second if he went on strike, and does not have the certifications or specializations to have wage bargaining, nor the ability to tap economic rents.
If Bernanke & Greenspan were renters, then maybe they would have stopped the bubble
Moral: All FED Chairman must rent, or lease w/ purchase option.
Like used Hummers and we keep the Civics? Sounds like a plan!
We're gonna need a bigger wall. . .
According to a recent equifax report I ordered, the average auto loan payment in the US is $424. The average loan balance is $12,065.
Old Russian worker saying, "They pretend to pay us and we pretend to work".
21st Century US worker saying, "they pretend to pay us and we pretend to pay them back".
The following is something I posted on an architecture software forum back in November, 2005, in response to questions about a potential housing bubble. This is a forum populated by people who are far less financially sophisticated than those here, yet they could see a bubble. If someone then could not see what was coming he was not an expert. If he was an expert and didn't see it, he was lying.
Chieftalk
Post #14 11/05/2005
"The stock market crashed in '29 because of stocks being bought on margin by speculators with no financial staying power. When the stocks went down the margin loans began to be called thus forcing the sale of more stock which further depressed the stock value thus producing more margin calls, etc.
This is the current condition of a large percentage of the real estate market. Never have so many high loan to value ratio loans been made to so many borrowers with substandard credit and income. I say substandard (wildly so) by any reasonable historic measure.
We have an alphabet soup of so-called subprime loans made to borrowers with credit ranging all the way from chronic late payments all the way to recent bankruptcy and foreclosures. We have many loans in which it is not necessary to verify either income or liquid assets. We have loans of 100% over a $millions and even over 100% on smaller loans.
In the last few years, at least 35% of the real estate sales were made possible by such loans. This has created the bubble, for sales cannot occur without the money. Take out 35% of the potential buyers (who also happen to be the one's who are willing to pay the highest prices.) and you would have had a market which would have slowed significantly over the past 3 years. When new money is no longer available to fuel the spiral the marketing times will increase thus triggering widespread foreclosures as homeowners find they cannot sell without coming out of pocket with money they don't have. Foreclosure is no longer a social stigma, nor is bankruptcy, and homeowners will not hesitate to walk away from properties if they no longer have any financial upside. They did this in droves in the last recession. This time they won't even think twice about it.
Once foreclosures begin the media will jump on it and it will become big news. Somewhere in this process the regulators of Banks and lenders will come under fire and congressional hearings will commerce as politicians seek to direct the blame elsewhere.
We have housing market which can make the savings and loan crisis look like pocket change. The regulators have turned a blind eye to loans which the greatest S & L renegade executive 20 years ago could never have dreamed could be made. When this comes home to roost, all of these loan sources will immediately dry up and even the good old regular 30 fixed rate loans will face tightening of underwriting standards."
zidane,
Obviously you're new here.
Have you ever read about the changes occurring in bank reserve requirements these last 20 years? Do you happen to know what "sweeps" are? Do you really understand REPOs, TOMOs, and POMOs? How about MZM, M1, M2 & M3?
The Fed not only didn't "take the punchbowl away", they've intentionally spiked it and pressed glasses into everyone's hands.
There's lots of material on the web detailing the Fed's malfeasance.
Polonious (may I call you Polo?) you had me at "Ya Think"
J6P is a lot more politically correct than the term it replaced - Redneck.
Jim
zidane, because you asked:
Bernanke should have slightly RAISED rates to induce fever and save the patient last summer, with appropriate speech and spin.
The pain would have been sharp but vastly briefer than what we now face; and more importantly, would have transpired on the Fed's terms instead of the headlights of the pickup truck that's about to smash us into recession.
So, you're now on record that neither Greenspan nor Bernake were qualified to be fed governers. Fair enough.
Not it at all. What I'm sayin' is they FUed. They blew it - well at least AG did. BB is still there - maybe he'll be right, I have by doubts.
Point is these guys are pros at the highest level - our futures rely on their good judgment and even better execution. If they blow it we ALL suffer.
They get no slack. Either do the job, do it well or go back to teaching, consulting or even BLOGGING.
So when you come in here and suggest we're being a little tough on the old chap's... I mean what would WE do... that's also fair to ask but reality is we don't get to make any of those calls - they do - and as a result they get the blame or praise. This time they get blame... lots of it.
Car loans stretching
The average amount upside down was $4059, the highest negative equity average on record.
clarionledger.com | Jackson, MS | The Clarion-Ledger
Dryfly,
Re Dryfly's Fed failure rant: what he said, in spades.
J6P is a lot more politically correct than the term it replaced - Redneck.
Or worse... like 'white trash'... 'trailer trash'... etc. Up in the north woods they are called 'jack pine savages'... Down by me along the Mississippi River we're known by the rest of the region as 'river rats'. Along the Iowa border we called each other 'gunny sackers'.
Whatever.
Those are nice compared to the Northern New England term popular in my youth, "Maggots".
re: dryfly's Fed rant.
Mega dittos from me.
lama's not a big TV guy. I just saw Larry Kudlow tonight. Here's what I learned:
1. Middle class people should not get a tax break because they'll just use it to pay down credit card debt.
2. Rich people should get a tax break because they spend all their money.
3. Never smile.
4. The economy cannot be in a recession because current government published data do not indicate we are in a recession.
Is FED stupid or too sinister to be truthfull?
I would vote for the second.
New cars that are fully loaded -- with debt
New cars that are fully loaded -- with debt - Los Angeles Times
This website suggests that you can get any loan for auto car or home using this product http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!!! Now we are BAILING OUT THESE CROOKS....SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!
Everyone likes to talk about poor old Joe Sixpac but nobody mentions me. Is it because I drink more?
mbagrad,
people don't buy cars when they are hurting in the pocket book, and when the market is flooded with cheap used cars. On the bright side we now have international markets for our used cars. Maybe we can send the surplus down south.
michael l | 01.16.08 - 5:54 pm | #
A rumor I heard over the holidays was that some illegals are going back on vacation with their vehicles, and not planning on coming back. Don't know if it's true or not.
London Times
Government's court order plan will allow people in debt to keep their creditors at bay
Government's court order plan will allow people in debt to keep their creditors at bay - Times Online
A rumor I heard over the holidays was that some illegals are going back on vacation with their vehicles, and not planning on coming back. Don't know if it's true or not.
Disempowered Paper Pusher | 01.17.08 - 12:04 am | #
Difficult to do but possible IF they have completely forged identity... rock solid, passes initial security screen, etc. If they got that then they show their forged passport and pass across the border with 'their' vehicle - no problem.
On the other hand if the papers and/or identity are not so good... then they have to sneak BACK across like they came in and are lucky to be able to take a backpack with them.
That's been one of the problems in the Great Plains States where a lot of illegals came to work factories - when the INS started cracking down they found they had as much difficulty going back as they did coming here.
Again - if the papers & identity are solid - then no sweat but I don't think a lot of them have that solid a cover.
In December 2004, the New York Fed in a paper declared that no bubble exists.
I suspect it took a while to write the paper, and then a few months more to get it through a formal review process for publication approval -- and that the data used in it was some months old when they started analyzing it. So the paper was probably based mostly on data from 2003, when the market was strong but not yet obviously a speculative bubble.
Alas, once they'd published that paper, it would have been very difficult for them professionally to have written another a few years later saying the exact opposite.
zidane, here is a different take. I believe the very institution of the Fed has been exposed this time. Ron Paul is starting to look more and more prescient (and he has been saying these for years, so give him credit).
Greenspan, Bernanke etc. are very "smart" as measured by conventional IQ. But they face the institutional problem that they are bureaucrats in charge of price fixing - an impossible job.
No moral person should acquiesce in that - in my book, they are not that different from the "smart" Soviet commissars faithfully executing party dogma.
Alas, once they'd published that paper, it would have been very difficult for them professionally to have written another a few years later saying the exact opposite.
jm | 01.17.08 - 12:56 am | #
Au contraire... I had a crusty old biochem prof I did research for tell me once that was one of the tricks to mastering 'publish or perish'...
Do research, write a paper, submit for peer review, publish with intent to defend (at conferences & journals & such).
He said the minute you turn it over for peer review go back in and try to find the oversights, omissions and plain old boo-boo's. They'll be there - even the smartest miss stuff or lack data. Just beat your critic's to your own errors and spin it as genius and they are always one step behind you. (Why you believed what you believed then, what you know now that is different and how it justifies your new thesis).
Cynical yes but very effective.
dryfly,
Though that may be a good strategy in academia, the Fed's more like a large corporation, and my corporate experience has been that once a department has published a document of that sort the management will feel that any subsequent reversal of position calls the department's credibility into question.
No debt is a good place to be right now. We have a 1989 Olds, a 1978 Mustang and a 1980 Yamaha street bike. No loans, paid for long ago and the Mustang and motorcycle have been restored. The Olds is right next to me (on my garage laptop now) and I just pulled the top end off of it to refresh it. Auto parts stores will do well with people like me around.
I rarely buy things new, I prefer to pick things up cheap after the original purchaser has had their fun. Makes paying cash outright even easier. I restore them as needed and slowly drive them into the ground.
I have never bought a new car, and I never plan on doing so. A used car rarely loses any value after you drive off in it. Plus, the restored Mustang and motorcycle draw all kinds of attention. I recently painted the Olds myself, a nice custom metallic opal finish with purple and glass pearl flake in the clear. With the top end job, I figure that I will have over 250,000 miles on it before I have to do anything else to it.
Live cheap, save money. It works.
Are we all subprime? I've never seen anything published that discusses how the debt is concentrated demographically or how/whether that's relevant.
Also: I don't remember Volker's time at the Fed. Was he universally despised by the American public?
Wait... you mean giving out loans with catch phrases of: "No money - no problem!" and "No job - no problem!" "EVERYONE can drive at Screwedup Car Dealers!" is a bad idea?
Why, next we'll hear that we should only lend money to people who can and will pay it back! Who "coodadnode?"
I've never considered J6P to be a pejorative term. "White Trash", "Trailer Park People", "Nappy Headed Ho's" - now there you're talkin'.
There's a parallel here between the real estate complex and the auto sector. Both eventually came to believe their own rationalizations. And both will come to blame irresponsible buyers/borrowers for their present ills - of course, real estate already does.
In the same sense that IBs, who after all hedged furiously, now point to borrowers, domestic auto makers, who have vastly overextended themselves, will accuse borrowers of sabotaging their business.
How many times has there been speculation about the solvency of banks, lenders and brokerages in these comments - while MSM accusations have focussed on upside-down homebuyers? Now, I think we'll see insolvent auto makers blaming their customers as well.
As with real estate, the auto sector won't be able to find a credible poster child. Everybody behaved badly, and no one sees or will accept their own irresponsibility.
I expect to purchase a very nice Jaguar at a very attractive price before very long. The off-lease auction lines are already becoming crowded with cheap, late-model luxury cars.
That should have been "geared furiously".
As with real estate, the auto sector won't be able to find a credible poster child. Everybody behaved badly, and no one sees or will accept their own irresponsibility.
If you think that's bad, wait until the third shoe drops - the major credit card companies.
With the home lenders and (to a certain extent) the auto lenders, they could pretend to justify the massive sums of easy money by pointing to their collateral.
But wait until the banks try to spin why they opened completely unsecured lines of credit, for multiples of people's incomes, at single-digit rates, once they start going sour.
Paging the White House press secretary, please report to the Capital One / BoA / Citi investor relations department, stat!
Oops ... that comment above was me, if it matters.
Someone needs to say something about this! http://www.fakepaycheckstubs.com IS THIS LEGAL? No wonder why we have the subprime mess we have when lenders USE FAKE DOCUMENTATION to help PUSH the loan through Quickly SO THAT EVERYONE DOWN THE FOOD CHAIN (from loan processor to the loan officer to the actual lender) can make the commissions they "WERE" making during the booming 90's!!! Now we are BAILING OUT THESE CROOKS....SOUNDS LIKE the good ol' 1980's Savings and Loan BAILOUT DAYS to me! http://www.fakepaycheckstubs.com see it with YOUR OWN EYES!
If anyone had cared to look at the credit standards out there that existed well into Bernanke's term and in fact, still exist in some parts of the market, they would have seen the problem. Tactical Flashlights
r c helicopter
video game
For me its true that nowadays, loans are getting worse and worse. And after all debtors are getting more and more, who didn't pay their debts properly. And that's a big problem if few of them will pay the loans, I'm sure that many sectors who are engaging in lending will loose and also their capital as well.
Peace! that's only my opinion.