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Sadly Consumers (and Wall Street) Haven't Learned

Americans lust for things they cannot afford continues as credit usage has rebounded since the height of the credit crisis however, with the Fed's current zero interest rate policy (ZIRP), the ongoing use of credit is not necessarily a thing for concern.

After all, if you were able to refinance your home from 6% down to 3%, that's a good thing, right?  Ditto for your credit cards which may have been 9.9% prior to 2008 and now down at much lower levels.  Indeed ZIRP has aided corporations and individuals to grab historic, once-in-a-lifetime opportunities to restructure existing debt and issue new debt for acquisitions for almost nothing.

In that respect, I guess Obama's statement "we're much better off than we were" would ring true here.

What does bother me, however, is the enormous recovery and usage of subprime lending.  Those loans for many autos, payday loans, title loans and credit cards for those with less than a pristine credit FICO score.

While working in mortgage banking, we saw a unprecedented jump in second mortgages and HELOCs in the 90's as consumers drew upon their home's equity for major purchases (second homes, home improvements, appliances, etc).  Also witnessed was a huge influx of subprime lending with higher interest rates of up to 40% which many to this day, consider predatory to consumers with poor FICO scores.

Today the subprime lending market has not only recovered, but is skyrocketing in the area of auto purchases which begs me to question if this lending is sustainable and "healthy" to the auto sector over the longer term.

Pointing to higher auto loan balances and longer repayment periods, the ratings agency Standard & Poor’s recently issued a report cautioning investors to expect “higher losses.” And a high-ranking official at the Office of the Comptroller of the Currency, which regulates some of the nation’s largest banks, has also privately expressed concerns that the banks are amassing too many risky auto loans, according to two people briefed on the matter. In a June report, the agency noted that “these early signs of easing terms and increasing risk are noteworthy.”

For many consumers, it's simply too easy to obtain credit rather than drive a "beater" with no monthly payment.  Like giving away "free" candy to children.  There's always a longer term risk of obesity and/or cavities which they ignore......but the piper will be paid.

I was long Ford throughout much of the recovery however have closed that position.  I just have to wonder, with a greater percentage of new jobs being created at the LOW end of the scale:

  • How long until auto sales hit the saturation point (maybe overseas sales will help them?)
  • At what point, will defaults on these high interest subprime loans come back to haunt auto makers when rates begin to rise; if at all. 

Buyer beware.  Repossessions are executed much faster than foreclosures.  You could be walking to work much sooner than you think......if you took the subprime bait.

Hat tip to Houseofdebt.org and Dealbook

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