> The investors can earn relatively high returns on securities that the rating agencies have deemed low-risk.<p>Last time I checked, the most senior (AAA) tranches of subprime auto abs deals are priced at libor + 20. That means that the investor is willing to accept libor (essentially risk free rate) and 30 basis points on top of that. Is this a high return? Sure, if you compare it to prime auto loans that are priced libor + 20 but not compared to other securitized products. For instance, the senior tranche on collateralized loan obligations are being priced at libor + 160 on new deals.<p>Overall, this article is especially poorly written in that it does little other than stoke the flames of hatred against wall street. The writer claims that people are being exploited but then profiles an unemployed woman who cosigned a $30k loan on a car for her teenage daughter. The dealership almost certainly should not have lent her the money but the owners of these securities will pay the price, at least the equity tranche that absorbs all the initial losses. After not paying for a while, the car will probably be repossessed and resold.<p>The reason there is such appetite for these products is because of the low interest rate environment. Investment managers are desperate to earn a slightly higher return that the risk free rate. This is driving demand which explains why you saw the issuance of subprime abs explode over the last year and spreads tighten (spreads have widened later in the year though). Credit standards have probably degraded to try and meet the demand of abs securities, but that's inevitable.<p>At the end of the day, the investors will pay the price. There could be another financial crisis and a massive bailout at the tax payer expense but I doubt this is the product to cause panic. Unless the default rate on auto loans reaches 30-40% a year and the market for used cars drops a similar amount. I think the value of an auto is a lot more objective than that of a home.<p>I think it's interesting how high interest rate risky loans can be considered as sleazy while giving opportunities to the less fortunate is considered an admirable goal. These two are two sides of the same coin. Would it be better that people with less than perfect credit or generally considered higher risk not get any loans? Or the risk of those loans be picked up by tax-payers?
The ease with which huge amounts of credit are given to people who clearly shouldn't receive it is quite scary. When I was 18 I had a decent enough job as a fledgling software developer making above average for my age but still not great. My car broke down and I decided to get a new one and as a stupid 18 year old with access to some money and credit I of course set my eyes on a nice shiny, new off the lot, convertible. $20k in debt later I drove off the lot. And they were nice enough to throw in a brand new Bank of America credit card with a $10k limit on it too! It of course didn't take long for me to nearly max that out and end up with a crash course in credit that I wish I'd had beaten into me years earlier or that I was smart enough to figure out sooner.<p>At 18 and making around $35k pre-tax I already had close to $30k in debt and the scary thing is that that situation lead to me getting bombarded with mail offers for more credit cards (including many different Bank of America cards) that I was supposedly pre-approved for. Now that I keep very little debt, besides my mortgage my 2 open cards have a balance of $0 on them 6 days out of 7, I get basically no offers. Education would go a long way to preventing what happened to me from happening to others but I can't help but suspect a healthy dose of tighter regulations, or restrictions, or ... something, should be put into place too.<p>I now know I was a stupid kid who made stupid mistakes. I've also learned from them. But I was also someone in one of the few industries that's still growing and was able to recover fairly easily and never really felt any pain from it. The average person isn't that fortunate.
I find debt to be interesting, I think having debt, affects your decision making and your risk taking.<p>Personally i have 0 amount of debt. No car payments, nor house payments. This has allowed me to move jobs if i was not happy, even without something concrete. Also a startup.<p>I look at my peers, who were in a similar position as me. Some who have taken on home loans etc. they end up with the 'golden cuffs'.<p>Though you could argue i have no assets to show. Other than a varied work experience, and ability to move into many different roles.
"This package of loans returns N times the risk free rate of return but is just as safe, according to ratings agencies!"<p>Do people really not remember 2008? Jesus. The problem of course is that a conflagration in one sector of the financial markets all too easily spreads to others (remember when it was just subprime mortgages that were in trouble? then when it was just mortgages? then when HOLY SHIT THE APOCALYPSE IS EXTREMELY NIGH, SELL EVERYTHING AND BUY SPAM/AMMO?), e.g. through highly leveraged and interwoven networks of derivatives. If (when) this goes tits up I hope there are enough risk analysts being listened to at the Too Big To Fail orgs that counter-party/swap risks are minimized to just the direct players in this market.
this is a good thing. all I see is that someone who would normally not have the ability to drive a BMW be able to enjoy the use of one - however temporarily. I do not believe I have the moral superiority nor the arrogance to determine what constitutes a "responsible" decision for another person, or make a value judgement for them without appreciation of their values, let alone forcing them on such a path. here are two parties - one who needs a car (and all the intangible satisfaction in excess of the basic utility that comes with it), and another who is willing to take extra risk on their capital for a bit more income. how presumptuous it is to stand between their relationship.
The way bankruptcy laws are, 20% is probably pretty reasonable considering that the vehicle's value decreases pretty rapidly.<p>I'm curious whether companies like Affirm will figure out ways to improve upon this.
> Dane Carpe, of Creswell, Ore., lost his 2008 Dodge Charger when he could not repay the $17,116 he borrowed at a 23.74 percent interest rate. Credit Carl Kiilsgaard for The New York Times<p>What?! 23.74%? That's nearly as bad as credit card debt. And for an auto loan?<p>It's one thing to pay higher interest rate for credit risk, but totally another to not understand basic financials - if you already have bad credit, you want to build up your finances, not dig a deeper hole by purchasing things you cannot afford, at interest rates you cannot afford.<p>A good case to improve financial literacy amongst the masses?<p>I think this is equivalent to money-lenders in India fleecing poor, illiterate farmers who don't even understand the interest rate they are paying.
I'm all for it. The winners here are the poor who get behind reasonable wheels, so they can improve their lives. The losers are some greedy suckers who believe in the future performance promises of some mutual fund.<p>"I bought into an investment backed by a loan to some poor people to get cars ... boy did I get taken for a ride!" :)
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