[NYTr] Crashing Economy: The looming auto loan crisis

[All the News That Doesn't Fit]

[It's not a housing loan crisis, or an auto loan crisis, or even a
credit crisis -- It's a worldwide banking crisis, of course. But here's
another part of it. The house of cards is falling down. - NYTr]


sent by Steven L. Robinson -activ-l

LA Times - Dec 30, 2007
http://www.latimes.com/news/local/la-fi-autoloans30dec30,1,2767577.story?coll=la-headlines-california

New cars that are fully loaded - with debt

by Ken Bensinger, Staff Writer

When Jennifer and Bobby Post traded in their 2001 Chevy Suburban last
year for a shiny new Ford F-350 turbo diesel with an extended cab, it
seemed like a great deal. Even though they still owed $9,500 on their
SUV after the trade-in value, they didn't have to put a penny down.

The dealership, near the Posts' home in Victorville, made it easy; it
just added the old debt to the price of the new truck and gave the
couple a seven-year, $44,276 loan.

The Posts were a little worried about taking on such a long obligation,
but they couldn't pass up a monthly payment under $700. Now they're
having regrets.

"I didn't realize how much debt was in it," said Jennifer Post, who has
since moved with her family to Iowa. Now, she'd like to get rid of the
truck but can't, because there's so much debt that she'd literally have
to pay someone to take it off her hands.

"We have no options," she said.

Americans haven't just been taking out risky mortgages for homes in the
last few years; they've also been signing larger automobile loans for
significantly longer terms than they used to.

As a result, people are slipping into a perpetual cycle of automobile
debt that experts think could lead to a new credit crunch extending from
dealerships to driveways and all the way to Wall Street.

Gone are the days of the three-year car loan. The length of the average
automobile loan hit five years, four months in October, up more than six
months from 2002, according to the Federal Reserve. And nearly 45% of
loans written today are for longer than six years. Even some staid
lenders owned by the carmakers, such as Toyota Financial Services and
Ford Credit, are offering seven-year financing. And a few credit
unions, particularly in the West, are tinkering with the eight-year
note.

At the same time, the amount of money drivers owe on their cars is
soaring. In October, the average amount financed hit $30,738, up $3,500
in just a year and nearly 40% in the last decade, according to the Fed.
More troubling, today's average car owner owes $4,221 more than the
vehicle is worth at the time it's sold -- up from $3,529 in 2002,
according to industry analyst Edmunds.

The longer loans are directly related to the higher balances. By
extending the length of loans, lenders keep monthly payments down. But
because these loans take longer to pay off, a much larger piece of the
principal remains unpaid at the time the car is traded in.

The response of the automotive finance industry? Extend loans further
and allow the indebted customer to roll what he owes into a new loan
with little, if any, effect on his new monthly payment. In effect, the
driver is paying a loan on two -- or more -- cars at once.

Richard Apicella, head of Benchmark International's auto finance
division, published a report on car loans last month that called the
ever-lengthening deals a "dangerous" problem. Combined with Americans'
desire to drive new cars every few years, he said, the effect "is like
a drug. Once you get hooked on it, it gets harder and harder to break
the cycle."

 From the point of view of those who sell cars and car loans, long-term
loans are good for business and good for buyers.

"The job of a successful dealer is to find a funding package that's
acceptable to the customer," said Paul Taylor, chief economist of the
National Automobile Dealers Assn. "These loans allow them to get a
luxury car rather than a more modestly priced vehicle."

Cindy Gerhardt has rolled over so much debt on successive vehicle
purchases -- five in three years -- that she now owes almost $43,000 on
two trucks worth no more than $29,000 and, she says, perhaps as little
as $22,000.

Faced with car payments that exceed her monthly mortgage, she tried to
trade in the pair for a single vehicle. But with so much unpaid
principal on the vehicle loans, the only offer she got from the dealer
was to trade in one truck on yet another new vehicle -- and increase
her debt by another $25,000.

"It's our own fault that we traded in vehicles so many times, but we
never thought it would get to this," said Gerhardt, a secretary who
lives with her husband and two children in Clinton, Okla. She recently
tried to refinance her mortgage, she said, but was declined because her
car payments were too high. "Not one dealer ever said this was a
problem. Ever. I never had a dealership say no."

It's not just individual consumers who are at financial risk.
Nationwide, an estimated $575 billion in new and used auto loans are
written every year by auto manufacturers, banks, credit unions and
other lenders. About 30% of the loans that are originated by banks, and
100% of those issued by automaker financiers, are, like mortgages,
repackaged and sold as securities, according to the Consumer Bankers
Assn.

Analysts warn that just as investors didn't comprehend the risk
inherent in some of the more exotic home mortgages in recent years,
they aren't considering how risky these car loans are. If longer loan
terms allow debt on the loans to grow too large, many drivers may
simply default, leading to expensive repossessions.

And even those who keep paying their bills may reach a point, like
Gerhardt, where they simply can't afford another car. That could send
vehicle sales down the drain, a nightmare scenario for an industry that
has already taken a hit this year from slower consumer spending and
higher gas prices.

It could also lead to serious losses among financial institutions that
have invested in car debt. Among securitized auto loans, two-thirds
have terms longer than 60 months, a fact that Standard & Poor's, which
rates auto debt for sale on the secondary market, calls a "credit
concern."

This month, S&P reviewed its ratings on $113.5 billion in auto loan
securities it rated in the last two years out of concerns over growing
losses. It didn't make any downgrades but predicted that "rising losses
will continue into 2008 across all segments of the auto loan market."

S&P has found that delinquencies of more than 60 days on car loans
issued this year to borrowers with the best credit are up 20% compared
to those issued last year, while delinquencies on loans issued this
year to subprime borrowers increased by 16%. Delinquency rates on car
loans are still far lower than on mortgages, but there is growing
concern in the financial services industry. Indeed, Tom Webb, chief
economist of used-auto analyst Manheim Consulting, said he expects the
tally for 2007 repossessions to be up by 10%.

Mark Pregmon, executive vice president for consumer lending at SunTrust
Bank, is among the concerned. "Any time you extend the maturity of the
loan, you take on more risk. The question is whether there's enough
assessment of that extra risk," he said. "Obviously, it's a problem.
It's a house of cards."

In the 1970s and '80s, car loans hovered between 36 and 48 months, and
drivers typically kept their cars longer than the life of the loan. A
number of factors changed that.

One key was interest rates, which fell from a high of 17.8% in the early
1980s to lower than 5% today, according to the Federal Reserve. Another
was affordability. According to an index tracked by Comerica Bank, cars
have steadily gotten more affordable -- as compared to median family
income -- since the late 1990s.

With cheap money at hand for more-affordable cars, the temptation to
keep buying became huge. Today, according to Pregmon, financed cars are
typically turned over in 24 to 36 months.

At the same time they were extending loan maturities, lenders, competing
with one another, began offering more money and requiring smaller down
payments.

Today, most lenders offer financing on 100% or even 125% of the sticker
price, and some offer the most credit-worthy buyers loans for twice the
value of the vehicle they're purchasing. Last year, the average amount
financed for new cars reached 99%, according to the Consumer Bankers
Assn., up from 95% in 2005.

Lenders are beginning to brace themselves; many have said they intend to
tighten standards and require larger down payments.

Despite warnings from S&P, the Consumer Bankers Assn., Lehman Bros. and
others, there is little sign that the automobile industry is willing --
or, with consumers demanding low payments, even able -- to reduce the
lengths of the loans they issue.

"For banks, it's a matter of meeting consumer demand: no money down and
extend the term," said SunTrust's Pregmon. "But as a lender, you've got
a moral obligation as well. Are we putting the clients in loans they
can't afford?"