# Subprime auto loan securitization. Haven't we seen this movie before? **URL:** \ **Category:** Great Debates\ **Created:** [November 2, 2011, 3:52pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635 "2011-11-02T15:52:32Z")\ **Posts on this page:** 17\ **Page:** 2
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [November 3, 2011, 6:36pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/21 "2011-11-03T18:36:54Z")
> [@redtail23](#): > > And that’s exactly the point, and the problem. > > These lenders are NOT taking on the risk of default. They’re pawning that risk off onto others as AAA-rated investments. > > Just like the mortgage companies did, with the compliance and assistance of the financial industry. IANA Rating Agency, but it I had to guess, the individual loans in the package is not what makes the whole package rated AAA, but the predictability of repayment. To use very crude numbers, if I invest in car loans that are at 100% interest knowing that 45% of them will default in the year, then that’s a good investment. Never mind that the underlying investments are garbage products bought by terrible credit risks and defaulted on at alarming rates. What is AAA is the model of the overall profitability of the system. The minority of people who actually pay the atrocious terms make the system as a whole a good investment risk. Yes, they got it wrong with houses because the assumption was that they would never decrease in value. As others have said this assumption is not built in to this system. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [November 3, 2011, 6:52pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/22 "2011-11-03T18:52:31Z")
> [@jtgain](#): > > Yes, they got it wrong with houses because the assumption was that they would never decrease in value. As others have said this assumption is not built in to this system. As I understand it there were really two assumptions with mortgage-backed securities: 1. Housing prices will continue to rise, or at least not go down. This clearly doesn’t apply to auto loans, and one would assume that those creating and rating these products know this. 2. Individual home mortgages in the pool did not have high correlation between their default rates. I’m not necessarily convinced that this mistake isn’t being made again wrt to car loans (in fact, the OP’s cite seems to indicate it is). So then the question becomes - are car loan defaults highly correlated the way sub-prime mortgage defaults were? One of the causes of correlation with mortgages were ARMs with 2-year locks at super-low rates. Once the 2005 batch hit their first rate adjustment in 2007, the default rates went through the roof all at once. Do we know if there are any adjustable rate shenanigans going on here? ---
**Author:** ![hogarth](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hogarth/32/1773_2.png) [@hogarth](https://boards.straightdope.com/u/hogarth)\ **Post date:** [November 3, 2011, 7:03pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/23 "2011-11-03T19:03:41Z")
> [@Jas09](#): > > I really have no idea how car-loan-backed securities could get a AAA if the quoted default rate is anything like what was stated up-thread. The mortgage-backed ones were rated to fail if something like 2% of the underlying loans failed. In simplified terms, you cut the pool into two pieces (say). One piece (the “equity” piece) is the first to take any defaults, but receives an enormous interest rate in exchange for being incredibly risky. Then only after all of the equity piece has been lost to default is the AAA piece at risk, but the AAA piece receives a low interest rate in exchange for being less risky. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [November 3, 2011, 7:14pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/24 "2011-11-03T19:14:33Z")
Oh, sure, I understand the basic outline and structure of a mezzanine MBS and all that (not that I ever wanted to - thanks Wall Street!). But, at least for the MBS market (and their resultant CDOs) the pricing and ratings assumed that the underlying bonds (and, thus, mortgages) were only slightly correlated. This proved to be wildly inaccurate. And, of course, they did this stacking multiple times (taking a bunch of B-grade tranches from MBS’s and stacking them into a new CDO so that 80% was magically AAA again)… it was a brilliant plan while it lasted. ---
**Author:** ![Jas09](https://avatars.discourse-cdn.com/v4/letter/j/d07c76/32.png) [@Jas09](https://boards.straightdope.com/u/Jas09)\ **Post date:** [November 3, 2011, 7:17pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/25 "2011-11-03T19:17:47Z")
To give an idea of the relative scales, the article mentions $15 billion in car-loan securities over two years. From 2003-2007 $1.6 TRILLION worth of CDOs backed by mortgage-backed securities were created. ---
**Author:** ![Lord\_Feldon](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lord_feldon/32/341_2.png) [@Lord\_Feldon](https://boards.straightdope.com/u/Lord_Feldon)\ **Post date:** [November 3, 2011, 7:22pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/26 "2011-11-03T19:22:17Z")
Well, that explains the two or three commercials I’ve been seeing every hour for a used car dealership that’s pretty obviously marketing itself to people who have trouble getting financing. ---
**Author:** ![brickbacon](https://avatars.discourse-cdn.com/v4/letter/b/898d66/32.png) [@brickbacon](https://boards.straightdope.com/u/brickbacon)\ **Post date:** [November 4, 2011, 3:51am UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/27 "2011-11-04T03:51:07Z")
> [@bump](#): > > Giving someone a car loan on unfavorable terms because of bad credit isn’t really an ethical issue. I disagree. At some point, I think compassion has to come into play. I appreciate that risk should be rewarded, but that doesn’t mean one should always take maximum advantage of someone else’s ignorance or misfortune. I think some of these guys basically operate like drug dealers, selling easy (expensive) credit rather than illicit drugs. The larger issue that troubles me is that everyone else seems to be okay with that. We seem to have become so enamored with easy money that we don’t even think about the collective responsibility we have towards one another to be decent people. Worse yet, our system often increases the number of interactions between people who want to take advantage with those who are more easily manipulated. ---
**Author:** ![UltraVires](https://avatars.discourse-cdn.com/v4/letter/u/ecccb3/32.png) [@UltraVires](https://boards.straightdope.com/u/UltraVires)\ **Post date:** [November 4, 2011, 12:09pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/28 "2011-11-04T12:09:36Z")
> [@brickbacon](#): > > I disagree. At some point, I think compassion has to come into play. I appreciate that risk should be rewarded, but that doesn’t mean one should always take maximum advantage of someone else’s ignorance or misfortune. I think some of these guys basically operate like drug dealers, selling easy (expensive) credit rather than illicit drugs. The larger issue that troubles me is that everyone else seems to be okay with that. We seem to have become so enamored with easy money that we don’t even think about the collective responsibility we have towards one another to be decent people. Worse yet, our system often increases the number of interactions between people who want to take advantage with those who are more easily manipulated. The problem is that compassion will come at the cost of losing your money and creating more expensive interest rates for everyone else. Hell, some of my friends are like this. They are good people, but for whatever reason, they can’t take a piece of paper, or a computer program, and balance their income and expenses each month. Or if they can, they can’t ignore that sale at the mall and just have to have that latest and greatest thing. Consequently when the bills come due, they don’t/can’t pay. They are my friends and I won’t loan them a cent because I KNOW I won’t get paid back. If they were complete strangers, the only way I would think about loaning them money is if I could charge an outrageous interest rate to make up for the fact that a hell of a lot of people like them are going to stiff me. I feel bad for people who have to pay 21% on a car loan, but they are paying that because they have a history of not paying their bills on time. If you make me be “ethical” and loan money at 4%, I won’t do it because I will lose my shirt. I’m not sure what solution you are proposing except to protect people from their own bad mistakes. ---
**Author:** ![Lemur866](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/lemur866/32/434_2.png) [@Lemur866](https://boards.straightdope.com/u/Lemur866)\ **Post date:** [November 4, 2011, 2:35pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/29 "2011-11-04T14:35:17Z")
I think his solution is yours. Either loan at a non-debt peonage rate, or don’t loan. If the loan is so risky that you’d have to charge 25% interest, then to me that looks like a loan that shouldn’t be made at all. Of course, the upside of legal payday loans and suchlike is that they cut out the loansharks. A legal payday loan isn’t going to break your kneecap when you can’t pay. But at some point can’t we decide that only an idiot would agree to certain deals, and therefore if you agree to those deals you are proven to be such an idiot that you shouldn’t be allowed to agree to that deal? ---
**Author:** ![Kimmy\_Gibbler](https://avatars.discourse-cdn.com/v4/letter/k/bbe5ce/32.png) [@Kimmy\_Gibbler](https://boards.straightdope.com/u/Kimmy_Gibbler)\ **Post date:** [November 4, 2011, 3:21pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/30 "2011-11-04T15:21:59Z")
> [@Lemur866](#): > > I think his solution is yours. Either loan at a non-debt peonage rate, or don’t loan. If the loan is so risky that you’d have to charge 25% interest, then to me that looks like a loan that shouldn’t be made at all. OK, **Lemur866** , now explain to Ms. Acevedo why she has to go without the car she needs to get to work (because nobody is lending to her if they can’t do it at high interest rates) in order to satisfy your tender sentiments about eliminating “debt peonage.” ---
**Author:** ![bump](https://avatars.discourse-cdn.com/v4/letter/b/7c8e57/32.png) [@bump](https://boards.straightdope.com/u/bump)\ **Post date:** [November 4, 2011, 6:09pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/31 "2011-11-04T18:09:04Z")
> [@brickbacon](#): > > I disagree. At some point, I think compassion has to come into play. I appreciate that risk should be rewarded, but that doesn’t mean one should always take maximum advantage of someone else’s ignorance or misfortune. A high interest rate doesn’t necessarily mean that there’s predatory lending or anything unethical going on; every bank and lender probably has some computer system that calculates the APR for every loan based on their database of the performance of historical loans and historical loan holders, along with some parameters for risk-tolerance that are specific to their company. In other words, if you’re a single mom working for minimum wage with a credit score of 450, they’re going to assign you a drastically higher APR on that car loan than they’d assign a woman attorney who’s a homeowner, makes $100k per year, and has a credit score of 695, all else being equal. And that’s assuming that anyone would be willing to loan to the single mom. There’s nothing predatory or unethical going on there; the higher interest rate is the way that the lender attempts to compensate for the risk posed by the single mom. What would be predatory would be the implication that the high interest rates are normal or even good, when in fact they’re terrible, or attempts to sell people cars they can’t afford with the intention of giving them a high-interest loan. ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [November 4, 2011, 6:18pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/32 "2011-11-04T18:18:16Z")
> [@Smitty](#): > > Once again, people are not being held responsible for their own actions. These are adults, presumably, that choose to buy a car on these terms. No one is holding a gun to their heads. What is the problem here? > > The investors who are buying the securities certainly know about the housing market implosion are are choosing to buy them anyway. So what’s the problem? > > As long as there are no bailouts if this goes to hell, I really don’t see how anyone has a problem with this. What is your solution for people who need cars but can’t get a conventional loan? Walk? Taxpayer money to buy them a car? Let’s hear your solution. WTF? Is there ANY scam so vile you won’t blame the victim? ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [November 4, 2011, 6:21pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/33 "2011-11-04T18:21:59Z")
> [@puddleglum](#): > > How are rating agencies being encouraged to slap AAA ratings on these. To answer the question, you _buy_ AAA ratings… at least, that’s how it worked pre-2008. Also, securitization of auto loans has been going on for over a decade now - I’m not too sure if this is anything new, or if it’s just a “slow news day” story. Even the article says as much: > [@](#): > > Subprime auto loan issues now represent a larger percentage of all auto-loan securitizations than at any time since 2006, according to Moody’s. Meaning that in the recent past, this (subprime auto-loan securitization) was a bigger market. ---
**Author:** ![Evil\_Captor](https://avatars.discourse-cdn.com/v4/letter/e/f17d59/32.png) [@Evil\_Captor](https://boards.straightdope.com/u/Evil_Captor)\ **Post date:** [November 4, 2011, 6:28pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/34 "2011-11-04T18:28:57Z")
> [@Jas09](#): > > To give an idea of the relative scales, the article mentions $15 billion in car-loan securities over two years. From 2003-2007 $1.6 TRILLION worth of CDOs backed by mortgage-backed securities were created. Yeah, but the problem is there’s no LIMIT and no REGULATION on how much CDOs can multiply. The original value of the auto loans mean nothing because all CDOs are is casino gambling. I can’t believe people are openly defending a return to the casino so soon after going bust. Freaking addicts! Or more likely, wannabe scammers looking to turn over a quick personal profit before everything goes to shit again. ---
**Author:** ![redtail23](https://avatars.discourse-cdn.com/v4/letter/r/3e96dc/32.png) [@redtail23](https://boards.straightdope.com/u/redtail23)\ **Post date:** [November 4, 2011, 6:37pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/35 "2011-11-04T18:37:32Z")
> [@bump](#): > > What would be predatory would be the implication that the high interest rates are normal or even good, when in fact they’re terrible, or attempts to sell people cars they can’t afford with the intention of giving them a high-interest loan. And this is exactly what it looks like they’re doing with these loans. IMO, of course. There have always been the high-rate loans available from dealers for people with bad credit, for at least as long as I can remember anyway. If someone is desperate enough and has screwed things up enough to need that sort of deal, it’s always been available. While IME those dealers are generally double-dealing scum, I wouldn’t ban them. And I’m sure those businesses always do well in a bad economy, so it’s not surprising to see more of them at the moment. But this seems to be a case of ‘more money to loan than you know what to do with so go find someone, anyone, and convince them to take some’. Do you guys defending this practice really expect me to believe that these used car dealers are being truthful and honest and upfront with customers about the condition of their cars and the terms of their loans. Really? REALLY?? > [@LATimes](#): > > Investor money is pouring into the industry from several sources, helping Buy Here Pay Here dealers expand their reach and raise their profile. > … > Dealers are using the flood of cash to move into new territories, add inventory and hire aggressively. > … > Car-Mart’s profit has nearly doubled over the last four years, to $28.2 million for its most recent fiscal year, while its loan portfolio has grown more than 30%. > … > More than $7 billion in subprime auto securities were sold by a dozen issuers through June 30, compared with $3 billion for the same period last year, according to Moody’s Investors Service and Standard & Poor’s Ratings Services. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [November 4, 2011, 7:09pm UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/36 "2011-11-04T19:09:14Z")
> [@redtail23](#): > > And this is exactly what it looks like they’re doing with these loans. IMO, of course. > > There have always been the high-rate loans available from dealers for people with bad credit, for at least as long as I can remember anyway. If someone is desperate enough and has screwed things up enough to need that sort of deal, it’s always been available. While IME those dealers are generally double-dealing scum, I wouldn’t ban them. > > And I’m sure those businesses always do well in a bad economy, so it’s not surprising to see more of them at the moment. > > But this seems to be a case of ‘more money to loan than you know what to do with so go find someone, anyone, and convince them to take some’. > > Do you guys defending this practice really expect me to believe that these used car dealers are being truthful and honest and upfront with customers about the condition of their cars and the terms of their loans. Really? REALLY?? What practice are you asking about - the practice of securitization or the practice of selling used cars? If the first, I don’t see why it matters to the buyer where the money comes from for him to purchase that '96 Ford Taurus (I don’t think it _ever_ mattered to the buyer), if it’s the second, I don’t ever think that any adult expected car dealers (new or used) to have been “truthful and upfront” since about, oh, 1907. ---
**Author:** ![BigT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bigt/32/12044_2.png) [@BigT](https://boards.straightdope.com/u/BigT)\ **Post date:** [November 8, 2011, 11:12am UTC](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635/37 "2011-11-08T11:12:40Z")
> [@Smitty](#): > > :smack: > > You have a problem with a business finding a need and marketing to it? Again I ask, what is your solution for people who need a car and can’t get a conventional loan? Asking the car fairy? According to nearly everyone in this thread, said people can’t afford the car, so they can’t get one. They must live within their means. And if they want people to do that, then they also don’t want anyone creating a market for this. And this is what CP objects to. She states that, since a car is a need, they can charge 10x more than they need to earn a profit. She doesn’t have an ethical problem with providing these people a means of buying a car, just with charging so much for it. Now whether they are actually charging more than they need, I have no idea. But it is unfair characterizing her position as being against the sales at all. [Previous page](https://boards.straightdope.com/t/subprime-auto-loan-securitization-havent-we-seen-this-movie-before/601635.md?page=1)