They are giving new cars to people who were driving old clunkers. Most of These people obviously couldn’t afford a new car without the Government hand out. What happens when these people cant make their car payments? The auto’s will, in essence, be under water just like the expensive houses were. They will be worth far less than their purchase price when repossessed. Will we be bailing out the finance companies?
Fortunately this seems to be a one-time blowout, not a continuous subsidy like that enforced under the Community Reinvestment Act. So I don’t see a long-term bubble coming around.
99.9% of car loans are under water at some point.
there is no expectation of an automobile appreciating when you purchase it, unlike a home, which is why the two are not analogous.
My vote is no, for two reasons.
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A big chunk of the real estate debacle was the result of the banks providing loans to people that should not have qualified. People with single and double digit credit scores. There was a lot of later stuff where those loans were falsely labeled and re-sold to investors, but for now the point is to avoid auto loans to people with bad or no credit.
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Cars depreciate, new cars depreciate REALLY fast, and so car loans are designed around that concept. The real estate debacle occurred because house prices were appreciating, in some cases insanely fast. So mortgages were written as if the house price would go up. So people were taking out loans for 125% of the value (instead of a typical 80-90%) expecting that in a year the house price would double and they’d be able to refinance. Instead, house prices fell and they found themselves even further underwater. I’m not sure that you could get a car loan for 125% of it’s value.
I know you didn’t ask, but a better question would be, “is the 8,000 new home buyers credit going to cause another real estate debacle?” And to that I would give a resounding yes.
Wait, now it’s people who wouldn’t be able to afford the cars without the program who are buying them? I thought it was people who were going to buy anyway, and that poorer people were left out of the program.
You guys need to get your story straight or the facts are going to overwhelm the spin efforts.
This is a lot of assumption about what is “obvious.” First off, not everything that qualifies as a “clunker” is an old, literally clunking vehicle, and a car that’s been beautifully maintained and well-kept qualifies for the program just as well as a beater. Not everyone who drives an older car does so solely because they can’t afford a new one, and not everyone who drives an older car lets the car’s maintenance go to pot.
Second, no one is giving anyone any special arrangements for financing, it’s just a rebate program. If your credit score doesn’t meet the cut, you’re not going to get a loan, so you’re not getting a car or a rebate unless your finances are in some order to begin with.
Last, there a lot of people who are taking advantage of this program who wouldn’t be getting a car right now, not because they can’t objectively afford it, but because of the instability of the economy. They don’t want to extend themselves in the present market for the typical cost of a new vehicle. But when you knock $4,500 or $3,500 off of the price, the monthly payments are lower and less of a commitment.
If you drive one of the qualifying cars and can afford the payments, it’s a folly not to take advantage of this program. A several thousand dollar rebate isn’t going to happen again any time soon.
I look at this deal and say, “If I took the $4500 my wife’s POS is worth I could flip it into a new car for her, a nice-ish used car for me, and one of my daughters could have my non-qualified, but with 150K miles, Taurus.” But since I do not qualify for any but the most criminal car loans, it’s pretty much moot. sigh
That didn’t make any sense, what were you trying to say? Does your wife qualify for a normal car loan? As an aside, there was some weird conditions in the C4C program that dealt with co-owned cars, shared by husbands and wives.
It sounds like what you’re trying to say is that your wife has a car that qualifies. So she could turn it in for a new car, and you could use that $4,500 rebate to offset the cost of a used car for you, so your daughter could have your old car?
I’m speechless. Well almost. Let’s take this little gem apart line by line.
Nobody is giving anyone anything. They raised the trade-in value of the old car. If, to make a deal a salesman pays more for a trade-in than it is worth, is he giving the new car away? So, the first sentence doesn’t look too hot.
Cite? I drive a 12 year old Saturn, because I’m cheap, because it is still in good shape, and because I’m curious if I can get it up to 200K miles. I assure you I could afford a new car very easily.
What, not checking credit is a part of the program? The answer is, about the same if they can’t make car payments when buying a car $4500 less expensive. In fact, if the program helps them buy a dream car for less money, the probability of them making the payments goes up.
My esteemed colleagues in this thread have already handled this one. If you aren’t aware that car values always go down, I must conclude that you’ve never bought any means of transportation more expensive than a tricycle - or maybe running shoes, which probably go for more these days.
Tsk, tsk. A redundant line. They’ll also be worth less if not repossessed.
We didn’t bail out Countrywide either. Any evidence that car companies made subprime car loans, or didn’t check credit records?
My hats off to you, sir. I’m quite a proponent of terse, densely packed writing, (though I don’t practice it) and this OP is more densely packed with illogic and usubstantiated claims than any I have seen in many years of Doping - and on Usenet before. I edit a 500 word column, and if my authors packed as much information into a small space as you pack misinformation, I’d be a happy man.
I wonder what Crow and Tom Servo could do with this post. It makes the heart flutter, it does.
The initial question has been answered, but I figured that this comment shouldn’t slide by without being challenged. The CRA had nothing to do with the subprime crisis. But don’t let the facts get in the way of blaming poor minorities for tricking all those earnest ivy-league investment bankers and getting us into this mess. :dubious:
It wasn’t just the poor minorities, it was also Barney Frank. Together, they were unstoppable.
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
We were on the verge of winning the real estate war and then Barney Frank stabbed us in the back!
No you aren’t. You are brainless . . . well almost. I refer to the gov. as the giving party. Not the car dealer. You see if the government allows someone to transfer a commodity to another party and that party receives more money for it than it is worth then wouldn’t you say that the government subsidized the trade thus giving money to someone?
That’s called a subsidy.
Well good for you. But if you will take another look at what I wrote I purposely started with the word “most” That would mean - not all.
How bout if I change that offensive word to “some”.
Doing a quick calculation using $3,000,000,000.00 as a base (That’s what the Gov. will end up donating to this giveaway) and $3.500. as the average reward. I come up with around 857,142 deals. Do ya think that at least “some” of those folks aren’t as fortunate a you. There will be defaults. Many defaults.
If you aren’t aware of this I can tell you from experience. I’ve bought and sold many houses. It’s my business. The applicant’s credit is checked more thoroughly when applying for a mortgage than it is when applying for a car loan. They default, foreclosures happen.
I believe that by the term “under water” is meant to say that the product is worth less than the price paid for it. How bout we take away the term “under water” and replace it with another that maybe you and your esteemed colleagues can better understand. Lets use the term “depreciate” The houses depreciated therefore went under water so as the cars will depreciate therefore go underwater. Get the connection here?
Ditto.
No we didn’t bail out Countrywide but I think we shot a little money over to Fanny Mae and Freddie Mac. And no there is no evidence that car companies made sub prime loans to anyone yet But remember that didn’t become evident for years after they were given. A good example is Chris Dodd. When did we find out about him? Give it time sir . . . give it time.
Oh and BTW. I don’t know who Crow and Tom Servo are but if you need help here please, in the words of a great American, BRING IT ON.
You claim to have bought and sold many houses, but you have failed to prove you understand both the Mortgage Melt Down of 2008 and the concept of buying a car. I say this because you specifically referred to a car loan as being, “under water.”
A car is guaranteed to depreciate, a $20,000 car bought today is worth about $15,000 after you drive it off the lot and will continue to lose about $1000 a year (these are very rough numbers, feel free to provide actual data).
So let’s run through the scenario you are proposing: the person buys the $20,000 car using the C4C program meaning they paid $15,500. Are we assuming they put zero down? And can we assume that they didn’t take out a loan for MORE than the value of the car, on the false premise that the car would gain value? Can we at least agree on that point? ’
They get the loan, buy the car, drive it off the lot, and then default. Wake up the next day, realize they don’t have the money they said they did, and tell the loan issuer they cant’ pay.
What do you suppose happens? World wide financial collapse?
No, the car is repossessed by the lender and then sold to cover the cost of the loan. Keep in mind, that the car’s resale value is now at least close to the value of the loan. Or said another way, the loan was collateralized by the value of the car. Crisis averted.
But I’m being slightly gracious here, let’s assume there is an “under water” component. The car started at $20,000, the loan was for $15,500 and now it’s worth what? What is the worst case scenario? $12,000 for a brand new car? The lender can now easily sue the borrower for the $3,500 which they could probably cough up. If they can’t, the lender might take a loss of $3,500.
In the housing situation, people were buying $200,000 houses, by taking out a $250,000 loan, assuming the value of their house would be at least $275,000 the following year. The reality was that the house lost value, so they now how had $250,000 loan on a house worth $150,000. THAT is an under water mortgage. The person who got a zero down mortgage has no conceivable way to cover the difference, and the lender was faced with a $100,000 loss. Do you see the difference?
I also need to point out that the program was set up for a LIMITED number of cars (in the 250,000 range) and has since been expanded. So at most, worst case scenario, there are about 750,000 potential losses of about $3,500.
Is your car worth less than you paid for it? I will assume yes. Are you concerned that your car has lost value since you bought it? My guess is no.
Is your house worth less than you paid for it? Since you’re in the real estate business, I’m guessing you made a wise investment, and the answer is no. If you did have a depreciated house, would you be worried about it? My guess is, hell yes.
I’m sure you also realized that the problem with the housing market was that many houses were overvalued when people bought them. I’d like to see any evidence you have that cars are so overvalued so that lenders cannot expect to recoup their expected losses if a loan goes bad.
Under water means that you have negative equity in an asset - meaning that your debt obligation is higher than the value of the collateral securing the debt. It doesn’t mean that an item is worth less than the price paid for it.
You can believe all you want, however, but your use of the term “under water” is just wrong.
Watch the language, Chucko. You said the government gave cars, not money. If you can’t express your thoughts accurately, it’s not my problem. If I get $5 off dinner, the restaurant is not giving me dinner. If I take a business meal off my taxes, the government isn’t giving me free lunch.
And it happens all the time.
Just giving an example of how someone with an old car isn’t on the verge of bankruptcy. And your contention is still unsupported by an evidence. As for some, I’m sure one or two of the 250,000 car buyers is in trouble. If you can’t demonstrate that anyone is at risk from a large number of buyers with bad credit, you might want to retract your claim - or maybe you’ve already done so.
Some, sure. Many, not so sure. Enough to put any financing company at risk, certainly not, and you need to provide evidence to the contrary. This is similar to some of your pals claiming that the program was worthless environmentally because it was possible to tradeup to a truck getting only a few MPG more than the old one. Whether true or not, on the average the increase in MPG from the trade-ins was far higher than expected, making the fact that some people got no big boost unimportant.
I hope your two year nap has been restful. If you had been awake you’d know a good part of the mortgage crisis came from brokers selling subprime loans to people whose credit they did not check, quite deliberately. Obviously people default on all kinds of loans (I’ve seen “Repo Man”); the question is whether the default rate on this program would be worse than normal. Since credit is so tight, I’d think not. You are welcome to offer some evidence that the C4C buyers are worse risks than normal buyers.
The housing bubble was build on the assumption that houses would not depreciate, and that someone in a balloon loan could get another on the house with a higher appraised value before it exploded. When this assumption proved false, things fell apart. No one assumes a car will appreciate, so no one writes balloon car loans with low teaser rates.
Fannie had a better portfolio than average, though they did sin due to pressure from Wall Street to sell the kind of high yield AAA rated paper the other mortgage companies were selling - thanks to subprimes mixed in with regular mortgages and misrated. Any indication that the auto loan companies are giving incentives to sell subprime loans? Given recent history, any finance company so incompetent to set interest rates and credit limits so that a high number of defaults is expected deserves to fail. But your unsupported assertion that they are doing so is not very convincing.
MST3K. How you have managed to hang around the Dope without picking this up is beyond me.
Just to be picky about this one point, I’m not aware of this sin being committed by mortgage brokers (except in a few cases where they were in league with corrupt assessors.) Mostly the problem seemed to be buying a house with little down, affordable under the teaser rate not the real rate, under the assumption that the house would appreciate enough so that a new teaser loan could be taken out when the old one was ab out to balloon. Some wrote in big penalties for refinancing, but that was an added turd on the pile. Anyhow, this made buyers very sensitive to reductions of value of the house, so when it did drop they could not get a new loan (being under water) and were screwed, unable to make the new, higher, payments.
If you’ve got examples of people getting a bigger loan than their house was worth, please share.
You’ll have to give me an hour or so, but I was just reading an article about credit unions in Minnesota and the article specifically references loans at “125% of the house value issued in 2002.” I’ll get the exact article to you soon.
Wow, my google-fu is strong today: http://www.startribune.com/business/51633817.html?page=2&c=y (scroll waaaaay down)
"By 2002, a credit union founded to promote thrift was allowing customers to borrow 125 percent of the value of their homes. When housing prices fell, “a lot of those people simply didn’t pay,” said George Savanick, 71, a retired physicist and former volunteer member of Fort Snelling’s three-person supervisory committee, which analyzed a small sample of the credit union’s loans each month. “And we were too small to absorb the losses.” "
I don’t know specifically where they got that data, or what sort of Pinko-commie-rag the Star-Tribune is, but that was the type of loan I was refering to.