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Are too-easy car loans the next subprime disaster?

A woman walks past a firm offering cash loans, which use your car as collateral in Los Angeles on February 02, 2011.

Subprime loans are back. Just as we recover from the damage done by subprime loans for houses, the auto industry is loosening credit restrictions. A new report from Experian shows borrowers are getting bigger loans for longer terms. And more loans are being made to subprime borrowers.

Back before the recession, about a quarter of the loans for new cars were considered subprime.

“And now it’s about 27, 28 percent. So it’s not only recovered, it’s passed its pre-recession levels,” says Lacey Plache, chief economist at Edmunds.com.

She understands why people might hear about an increase in subprime loans and fear that history is repeating itself.

“That’s what it looks like at first glance is that -- Oh man, you know, we didn’t learn our lessons. You know, we’re right back in the soup," she says. "But I think really it’s certainly too soon to have that fear."

She believes the standards for auto loans had gotten too tight. And that’s left many consumers side-lined, because they couldn’t get a car loan. These are borrowers who might have some dings on their credit, but otherwise have jobs and represent good credit risks.

Plache says, “these people are now getting access to the market again.”

Those consumers aren’t as risky as might expect. Research shows most folks will pay the car loan before other bills. If worse comes to worst, they can always sleep in the car.

But what about the housing market? Could the trend in auto loans point to more home subprime loans?

“It’s non-existent in the mortgage market today. It has not come back at all,” says Sam Khater, deputy chief economist at CoreLogic, where he analyzes real estate trends.

In terms of subprime housing loans, Khater says, “ten years ago, they were at about ten percent [of the market]. And then they peaked about 15 percent. Today, they are under one-half of one percent, and not increasing.”

In terms of housing loans made in the last year, Khater says they’re the best performing loans on record. That suggests to him that the toxic loans have mostly been flushed out of the market. Next year, new mortgage rules will make it even harder for subprime loans to trigger another meltdown.

Khater expects another housing bubble some day, but he highly doubts it will be caused by subprime loans.

About the author

Jeff Tyler is a reporter for Marketplace’s Los Angeles bureau, where he reports on issues related to immigration and Latin America.
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In a word, no. Wall Street-traded debt securities of all kinds are fuel for the next sub-prime financial disaster. The first three segments of this program all have the same thing in common: securitized debt bubbles. Whether in housing, health care, car loans, student loans; whether initiated by Democrats or Republicans, each for their own agenda, costs pumped up by investors, which are not allowed to come down and are instead bailed out with taxpayer money after collapsing (coupled with monetary policy that rewards moral hazard) is a formula for more financial disaster. Wages will forever be chasing runaway prices caused by debt bubbles if nothing is done to change the motivation to speculate in the financial industries, and people will continue to take on debt because they can't afford current prices. If sub-prime is no longer the threat that it was in '07, it's only because investors have bought up huge segments of the housing market and now mean to securitize that; namely, with CDO's packed with rental obligations and inflated property prices backed by Fannie and Freddie. Financial leaders (like Larry Summers) insist that rescinding Glass-Steagall had nothing to do with the '07 mortgage meltdown. If that's true, then why are they so reluctant to reinstate it? Forget nitpicking around with the Volcker Rule---reinstate Glass-Steagall and separate Wall Street from Main Street permanently.

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