Auto sales increase along with subprime loans
Before the sun rises, Jay Johnson drives around in his truck and searches for cars to take away.
The cars are not broken. They are being repossessed by lenders because their owners have not made their loan payments.
“I never thought there was as much work as it is,” said Johnson, who owns United Towing Repossessions in Penn Hills. Johnson said he makes about three repos a day. Most of them involve defaults on subprime loans made to people with credit scores below 620.
Easy credit drove American auto sales to an eight-year high in June, a sharp turnaround from the financial crisis that slashed sales and dried up financing for borrowers who didn't have pristine credit. The growth underscores lenders' willingness today to make riskier subprime loans.
Rising delinquencies, relaxed standards and stepped up competition among lenders have sounded faint echoes of the housing collapse. The Federal Reserve Bank of New York highlighted growth in subprime auto lending in a report issued on Thursday, and in a blog post said it would “continue to monitor” the situation. Federal authorities are scrutinizing collection practices of subprime lenders and the quality of these loans, which are bundled into securities and sold to investors just like risky mortgages that helped spark the Great Recession.
Since the recession ended in 2009, millions of Americans with poor credit have been able to finance car purchases even as they have been shunned for mortgages and credit cards. Subprime auto lending is on track to top $100 billion this year and approaching 2007's pre-recession level of $107.6 billion, according to credit-scorer Equifax. More than a fifth of car loans are subprime, up from 15 percent in 2009. And to make these loans more affordable, lenders are requiring lower down payments and are offering longer repayment periods — 72 to 75 months.
With tougher mortgage underwriting rules and new consumer-focused financial laws denting revenue, banks are forced to squeeze more money from other sources. They see subprime auto loans, which carry high interest rates, as very profitable despite the default risks. Those risks are more palatable because advances in technology, such as global positioning systems, allow lenders to easily recover a car or remotely disable its ignition if a borrower defaults.
“If you've got a GPS locator, your leash is very short. You're past 30 days, I'm in your driveway,” said Johnson, who tracks cars using a laptop inside his truck. He said repossessing cars with GPS was “like shooting fish in a barrel.”
At Route 51 Auto Sales, which works with about a dozen different lenders, flags hang outside promising “guaranteed approval” for people with bad credit.
Sales executive Brenda King said she has had customers with credit scores of 300 and a record of repossessions get approved for financing. The loans may be expensive, with interest rates as high as 21 percent, but basic proof of income is enough to get a car loan. “There's always a way,” she said.
Analysts have raised concerns about competition leading to riskier loans, and thus problems for borrowers and losses for investors. Delinquencies spiked 21 percent at the end of March, compared to a year ago, Standard & Poor's Ratings Services analyst Amy Martin said in a July 22 report. The loan portfolios and securities tied to subprime auto lending remain mostly stable, but “caution is warranted for market participants,” she said.
So far, the market seems to be ignoring the warnings. “Deep subprime” loans, or those whose borrowers have credit scores lower than 550, are the fastest growing segment of auto lending. In the first quarter, deep subprime volume was up 51 percent for new cars and 21 percent for used, according to Experian, a company that rates consumers' creditworthiness.
“The subprime market has greater profits than the prime market,” said Melinda Zabritski, senior director of Experian Automotive Finance. Delinquencies are certain to rise as subprime lending grows, she said. But that doesn't mean that lenders are repeating the mistakes of the housing crisis.
Still, the Justice Department has taken notice. It is investigating General Motors' financing unit for subprime automobile lending going back to 2007. GM said the department has subpoenaed documents on underwriting criteria, as well as how loans were represented to those who bundled them into securities that were sold to investors.
GM spokeswoman Chrissy Heinke said in an email that the request “is focused on the subprime auto finance space in general” and that the company “is cooperating with the request.” The company declined to comment further. Representatives of Ford and Chrysler said they have not been contacted by Justice Department officials.
Subprime lending in auto is “a different animal” than for home mortgages, Zabritski said. The losses during the recession from subprime auto loans weren't as great as they were in the home market. In 2007, subprime auto loans were less than half the size of the $270.4 billion market in subprime mortgages, according to Equifax. Since the recession, subprime auto lending not only has recovered more quickly, but surpassed subprime mortgage lending.
There are concerns about lenders taking advantage of car buyers with these high-interest loans, said Chris Kukla, senior vice president of the Center for Responsible Lending. Ally Financial, the former credit unit of GM, agreed in December to pay $98 million to settle Justice Department claims that it helped car dealers inflate the cost of auto loans to minority borrowers.
The opportunities for abusive lending practices grow as cars become “a vital lifeline” in people's lives, Kukla said.
And seizing a car from a delinquent borrower can happen in a matter of minutes. Johnson, the repo man in Penn Hills, had taken two cars in just two hours on a recent Wednesday morning before setting out on his third.
The Ford Taurus that Johnson was searching for had GPS. The owner owed $8,000 and moved to a new home, but Johnson found the car easily on his laptop.
After a quick check of the vehicle identification number, Johnson backed his truck to the front of the car. He flipped a switch, extending a hydraulic lift on the back of his truck beneath the Taurus' front tires, hoisted it up and drove away, gone in minutes.
“Hook and took,” Johnson said. “That was a perfect repo.”
Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or firstname.lastname@example.org.