January 12, 2015

Quote: Another subprime catastrophe in the making

Perhaps you thought that the subprime catastrophe in housing (and the consequent Global Financial Crisis, as the Aussies call it) would have taught the financial industry and its regulators a lesson.

Not so much.

From the New York Times:

Rise in Loans Linked to Cars Is Hurting Poor

The automobile is at the center of the biggest boom in subprime lending since the mortgage crisis. The market for loans to buy used cars is growing rapidly.

And similar to how a red-hot mortgage market once coaxed millions of borrowers into recklessly tapping the equity in their homes, the new boom is also leading people to take out risky lines of credit known as title loans.

Title loans are an increasingly prevalent form of high-cost, short-term credit in subprime finance, as regulators in a number of states crack down on payday loans.

And how can both lenders and borrowers fall into the same ruinous pattern so soon after the last?  Because of this:

Propelling this lending spree are the cars themselves, and their centrality in people’s lives.

In most parts of the country, a car is vital to participating in the work force, and lenders are betting that people will do virtually anything to keep their cars, choosing to make auto loan payments before paying for just about any other expense.

The title lending industry, perhaps more than any other facet of subprime auto lending, thrives because of the car’s importance.

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