Ritholtz: Subprime auto loans very different than subprime mortgages

Will not cause yet another financial crisis

While investors are worried that there will be yet another financial crisis, many are saying subprime auto loans are the new subprime mortgages, according to one recent expert blog.

According to Bloomberg View columnist Barry Ritholtz, author of Bailout Nation, "there are many reasons why this is wrong, even though there has been a troubling surge in subprime auto defaults. But consider this big, crucial difference: In some states, it can take three years for a foreclosure to be completed. If you default on a car loan, the repo man and his tow truck might show up in three hours."

While car sales increased in 2015 by 5.7%, according to Autodata research cited by Ritholtz, data from the Federal Reserve Bank of New York shows how the total amount of car loans outstanding was more than $1.1 trillion in the fourth quarter of 2015, a 30% increase from pre-financial crisis levels.

Here are Ritholtz four points, taken verbatim, on why it's very easy to repo a car and sell it again, be sure to read the whole column for complete answers.

1. GPS equipped cars will be found

"Subprime loan underwriters often require borrowers to have their cars equipped with a device that allows the lender to remotely disable the ignition."

2. Say Cheese

"Photographs are taken of “millions of plates a day, with scanners mounted on tow trucks and even on purpose-built camera cars whose sole mission is to drive around and collect plate scans." 

3. LPRs will find you

"License-plate-readers, or LPRs as they are known, are now commonly found at mall entrances, mounted on utility poles, parking lots, toll plazas, and at major highway entrances." 

4. Drones are everywhere

"Some repo companies are using drones to track vehicles and repossess cars; they also can track drivers via their own mobile phones."

So while subprime auto loans are for people with bad credit are why they are able to get auto loans and mortgages, it doesn’t mean that the banks are going to fall again, it just means the rise in repossessed cars may end up increasing car sales, Ritholtz concludes.

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