Cheap money, lax lending standards – I’m getting deja vu here

 Cheap money, lax lending standards – I’m getting deja vu here

moneyweek.com/cheap-money-lax-lending-standards-financial-crisis/

The subprime car loan pile-up

Meanwhile, there’s another chunk of woeful debt building up in another sector. Apparently subprime car loans made in 2015 in the US could end up being the worst performing such debts ever, according to ratings agency Fitch.

Net losses on these bonds are expected to hit 15% – that’s higher even than bonds written in 2007. One problem is that lenders have been lending over a longer period of time, which means that by the tail-end of the loan period, there’s been a big drop off in the car’s “equity” value, potentially leaving the borrower owing a lot of money.

These loans have been parcelled up and sold on to investors, just as with the last subprime crisis (you know, that one with the mortgages that caused a minor kerfuffle in the economy a few years back). And just as with the last subprime crisis, demand from investors for stuff to invest in has seen lending standards plunge across the industry.

Notes Bloomberg: “Wall Street has rewarded lax lending standards that let people get loans without anyone verifying incomes or job histories.” And as a result, a lot of those loans are now going bad.

The biggest difference here is that the scale is not considered large enough to disrupt the entire financial system. And I’m sure that’s true. On their own, car loans are not going to bring the financial system to its knees.

What concerns me is that there’s such a dispersion of bad debt either bubbling up or just waiting to happen. How many dominoes need to tip over before a really important one spills?

As long as investors feel flush and are desperate to chase yield, the dancing can continue. But that’ll change. And I expect to see quite a few casualties when it does.