Looking at the car market now, the only question is when it crashes and a lot of people upside down on their cars get repoed. And dealerships cannot sell their cars now since they are horribly overpriced.
Back in 2008 with something similar in the housing market, there were credit default swaps on these mortgages and those that shorted the mortgage market made huge profits. Now for the FQs
If there something similar on car loans? Is that even possible?
How would someone invest for the coming crash? Put Options on car companies are possible, but how to take advantage of repos.
Car loans are so different from home loans (and the wider markets that make those loans possible/attractive), it’s hard to even know where to start. But the biggest is that a car is expected to depreciate while a home, all things considered, is a lot more stable if not rising in value.
People definitely made some very poor car-buying decisions during the pandemic ($90,000 RAV4 Prime anyone), but I can’t see that the car market “crashing” will make those loans less viable than they ever were. The economy in general, yes. Lose your job and that $900/month payment isn’t happening. But it doesn’t make sense to walk from a car because you could buy its replacement for less than you owe–with what credit? I don’t really know, but a repo has got to crash your credit score.
With occasional exceptions, a car is not an investment that increases in value over time. Most owners are ‘underwater’ as soon as they drive the car off the lot.
But this term is commonly used in a more restricted sense, to mean that the loan balance owed exceeds the current residual value. If the owner defaults, the loan-holder can (probably will) repo the vehicle, sell it, and present the current owner with a bill for the difference.
If this starts happening on a broad scale (as some predict) it’s a potentially serious hit to the economy.
A key difference, which the esteemed @3AxisCtrlalmost said, is that back in the day a LOT of mortgages in the most wildly appreciating markets were so-called “no recourse” mortgages. Meaning the lender’s sole option for recovery when the debtor stopped paying was to repossess the collateral = foreclose on the house. If they later sold it a huge loss, well, that was the bank’s problem, not the former homeowner’s.
With a “recourse” mortgage or with a car loan, the borrower still owes the finance company whatever loan balance is unpaid after the house / car is sold.
That greatly alters one’s willingness to walk away from a loan you can’t reasonably pay. Lotta folks walked on no-recourse mortgages who could have paid, but just chose not to. Which made the problem much larger than it should / could have been. For some reason very few no-recourse home loans have been written anywhere since.
Switching gears, and taking the OP’s predicted future as a given …
AFAIK, nobody is building CDOs out of car loans as such. I admit that’s not my area of specialty, but I do pay some attention to the “non-traditional investable assets” area.
Is to “coming crash” I’d ask: what is going to crash? If you think the economy is going to crash, don’t short car loans, short the S&P500. If you think suddenly lots of people can’t pay their car loans and lose their cars but meanwhile the economy (and stock market) are humming along just great, then what third thing is supporting that dichotomy?
Cars are a big biz in the US, and car finance is a hefty chunk of the financial industry. But both pale compared to housing and mortgages.
Car loans are definitely collected into asset-backed securities of all types – prime auto loan ABS, subprime, auto lease ABS. No one, as far as I know, is collecting the senior tranches of those and re-securitizing them (creating the CDOs you mention), which was one of the big problem during the Great Recession.
To the OP, also as far as I know, there really isn’t a good way to take a short position in auto ABS. I guess your best bet, if you think a crash in car prices is coming, would be to short the car company stocks.
The reason for the title is if there is a car crash (ha ha) I predict it would be like 2008. The common person get’s their car repoed when they can’t make payment (like home foreclosures) and the car manufacturers (mortgage investors) get taxpayer bailouts cuz they’re too big to fail (like Chrysler under Iacocca in the 80s)
Looking at figures from the NY Fed for Q3 2024, mortgage debt in the U.S. was $12.59 trillion and car loan debt was $1.64 trillion. So presumably any impact would only be a fraction of that during the home loan crisis.
This is the essential point being missed by the o.p. and more generally in this discussion. What caused the financial collapse in 2007/2008 wasn’t just the mortgage bond market itself or even collecting the subprime mortgages in collateralized debt obligations (CDOs) to mask the poor quality of bonds issued against them (aided by ratings companies that did not investigate or correctly rate the bonds) but all the leverage that was placed on the mortgage bond market, which amplified the ‘real’ money invested in mortgages by ‘insuring’ those mortgages with complex derivative instruments compounding CDOs and creating “synthetic” CDOs from credit default swaps, which essentially creates ‘money’ out of speculation. The film actually does a pretty good job of explaining the issue in brief:
The failure would have occurred at some point whether borrowers defaulted on their mortgages or not, because there was more money betting both ways than actually existed in the realized value of the mortgages themselves. The lack of regulation inhibiting such completely unsustainable speculation-fueled investment is a major problem with the repeal of Glass-Steagall acts and associated financial sector regulation, and is why even when people are telling you how great the ‘economy’ is (based primarily on market performance) you should look them straight in the eye and say what Jack Burton always says at a time like this: “I’m a reasonable guy. But, I’ve just experienced some very unreasonable things.”
There is no such market for auto loans, and because they are of such short duration (typically no more than 60 months) there is no real way to drag all of this out for decades, so while a massive default on car loans would be bad for carmakers, loan institutions, and the economy as a whole, it wouldn’t have the same dramatic impact upon large financial institutions like investment banks and the companies insuring them. There is, however, such a market on the ~US$1.6T of private student loan debt, which is part of the reason there is such objection to the federal government granting ‘forgiveness’ on that debt (i.e. purchasing it and paying it off directly), and given that a significant portion of that debt is going to die with the borrowers, it’s a real hidden tsunami waiting out there.
Except nobody is likely to give you a huge short position on automotive manufacturer stocks because it is pretty evident that they are struggling, and credit ratings agencies aren’t inclined to cover for automakers the way they do for investment banks because they aren’t financially tied at the hip to them.
I’d link more explanatory clips from the film but frankly it does a great job of explaining all of this in an engaging fashion, and to the extent it uses composite characters and rounds some of the edges on the story to make a flowing narrative, it both acknowledges this and still explains the essentials behind the market failure. It is well worth your two hours of time and even a repeat viewing to understand not only what happened but why it caught people ‘by surprise’ even though all of the indications were out there for everyone to see (and in fact a lot of people did see and profit off of it). Without financial regulation it will happen again, or even worse we’ll have enough debt leveraged against stock market overvaluation of companies that there won’t be a way to recover by just bailing out investment banks and insurers because it will literally be the entire financial sector instead of just mortgage lenders.
Wait until the market crashes, buy 12 vehicles cheap (new or used), and rent them all out as Turo vehicles. At least that’s what a fellow in the next neighborhood over is doing now. Although I don’t suppose the cybertruck in his fleet was cheap.
Of the ‘Big Three’ American automakers, the best credit rating is BBB+. I’m sure you can find a short position that somebody will take on their stock but not any major investors. TSLA is massively overvalued and seemingly ideal to short but somehow it keeps increasing in stock valuation even though it could never generate enough revenue in decades to realize that valuation, and is not, despite claims to the contrary, “a ‘tech company’ that builds cars”.
I’ve given up understanding anything about how the world works beyond the level of statistical mechanics, and even then I’m starting to have some doubts.
