On Dec 30, 2007 8:59 AM, Jim Devine <[EMAIL PROTECTED]> wrote: > [Fasten your seatbelts, it's going to be a bumpy night!]
I dunno, the seats of a Cadillac Escalade have to be a reasonably soft place to sleep when your mortgage gets foreclosed. Leigh > > http://www.latimes.com/business/la-fi-autoloans30dec30,0,4315064.story?coll=la-home-center > > Los Angeles Times > > New cars that are fully loaded — with debt > Americans are rolling over loans, often ending up owing more for the > vehicle than it's worth. > > By Ken Bensinger / Los Angeles Times Staff Writer > > December 30, 2007 > > 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. > > [that's much too much! -- JD] > > ... 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?" > > [EMAIL PROTECTED] > > Copyright 2007 Los Angeles Times > > -- > Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own > way and let people talk.) -- Karl, paraphrasing Dante. >
