From the article: car loans, credit, and person loans (payday loans). Mortgages are highly regulated since 2008's financial crisis. Those subprime lenders exited the mortgage business and jumped into high interest used car loans. And I'm right there with you on the anal probing I had to practically get to qualify for a mortgage.

worth mentioning: the auto lending market in the US is a 1.6 trillion dollar time bomb and has been ever since Cash for Clunkers saw two rounds of federal funding.

the average period for an auto loan in the US is over 64 months. any disruption to the paycheck-to-paycheck living of 64% of americans could have a catastrophic effect on the ability to service this debt.

> auto lending market in the US is a 1.6 trillion dollar time bomb

It was a time bomb. Cars are easier to seize than houses. Given the present shortages, re-selling them at close to the loan balance shouldn't be an issue.

It's still a tale of personal tragedy. I know people on the new-car-every-two-years bandwagon who will get screwed when they have an income interruption. But it's not a broader risk, at least not at this time.

while it seems that way initially the reality is more complex. waves of repossession means waves of employees who cant get to work anymore. repossessions arrive on your credit history as a major blemish, meaning you cant get credit for a new car. your credit card interest goes up as a result, unemployment ticks steadily up as well until the market reacts parasitically, and eventually the car you picked up for loan balance cant go for even a fraction of that because of the surprise 1.6 trillion dollar recession you triggered.

its more palatable to subsidize these dicey loans (as we did in 2008) then come to jesus with the grim reality of following the letter of the lender instead of the spirit of the loan.

So you're saying it's all a house of cards? (/s ... kind of)

> It was a time bomb. Cars are easier to seize than houses. Given the present shortages, re-selling them at close to the loan balance shouldn't be an issue.

Will there still be vehicle shortages if a significant number of cars are seized for resale and potentially a significant number of would be buyers are not able to obtain loans?

Most likely yes, considering the major supply chain interruptions with the craziness that is going on in China, oil uncertainty with issues in Russia, e.t.c.

There is also the issue of raw materials, which can be reused.

I thought that most of the people on the new-car-every-two-years bandwagon were leasing?

and the auto loan business is shady a.f.

We ended up invovled with the state A.G.'s office investigating our dealer. They 'accidentally' put a typo in my wife's SSN when pulling the credit report. That justified a higher interest rate - which they offered us without explaining why.

We weren't super worried because we were going to pay the car off in a couple months anyways, we just wanted the financing to shift some cap gains taxes to a different year. Then we got a letter in the mail from the lender explaining why our interest rate was so high.

We called the dealer - and almost no questions asked they offered to send us a check for the difference. Red flag raised we filed a complaint with the state A.G., and it turns out it was a common practice at that dealership.

NEVER finance through a dealership. They will never give you the best rates. Often they will get a rate and add their own points on top or include additional fees. Even promotional interest rates don't make sense because they're always offered with an alternative discount. The discount + a traditional loan works out cheaper than 0% interest.

> NEVER finance through a dealership

Never is a strong word. Dealerships make their money on financing. Refinancing afterwards is straightforward. Negotiating poorly on the dealership's financing, using that to win points on other fronts (e.g. price, maintenance commitments, trade-in value, et cetera) and then repaying the loan a month later, once you've lined up your preferred financing, is perfectly acceptable and often worth the time and trouble.

Agreed. And here credit unions are your friend.

>> NEVER finance through a dealership.

They have this awesome thing called negative equity financing. It might have a better name now, but they will pay you X for your old car which is less than you owe and then finance the difference with your new loan. In other words, your loan balance on the new vehicle may be higher than its value but this is glossed over by focusing strictly on monthly payments and "what you can afford". Re-read that, this is not a practice they'd use on people with bad credit because to repo the car will not get them their money back. It's a rip-off for people with good credit and more dollars than sense.

Never say never. If you have great credit, you can get some awesome manufacturer incentives.

- I got a 0% APR loan on a new Ford via Ford Motor Finance in 2016 and didn't even have to put much cash down.

- I got a 0% APR loan on a new Hyundai Palisade in 2021 (yes, even after COVID!) by paying for almost half the car in cash as a down payment.

No other finance channel would have ever offered me 0% APR.

You paid half the car off on the lot? That’s not a great use of cash. I mean in most markets. In most markets cars depreciate not appreciate like they have and the stock market rises not falls like it has. So I guess good move!

True but consider cars aren't a significant purchase for many people. At least to justify the maneuvering to maximize gains. Is it really opportunity cost if you didn't have another use for the cash and could replenish it fairly quick?

The point being made is that if you have 10-20k sitting around that you "have no use for," you should probably invest it in an asset that appreciates in value.

My point is that it's not always worthy of an investment at all. It's just a purchase. It's coming from operating funds. The maneuvering to take out the loan, choose which investments, tax consequences, when might you need that liquidity available again (do you really want to lock it up until retirement?), establishing investment accounts that may not already be established, and all these decisions are, or can be, such an over optimization. Especially if this is a rather immaterial amount of money to you personally. And even if that is a material amount of money for you, you're probably actually better off with the non-ROI producing peace of mind of having your transportation ownership be secured and out of reach of creditors. So, it's hard to make a blanket statement like that.

Exactly

Re-read what I said. They always offer 0% or a discount. The discount + standard rates works out to cost less.

I got 1.9% on my Golf 4 years ago with absolutely $0 down. Even the plates and registration got rolled into the loan.

That isn't always the case. After getting up to leave several times when they said they couldn't sell it to me for my offer, they got within $40. I was prepared to pay cash for it. Then they offered 0.9% financing which I took on the assumption that inflation would be greater than 0.9%. Turned out to be a reasonable assumption.

We got a 0% 5-year loan on a minivan. Was pretty much a no brainer even though I could have paid cash.

I’ve always gotten better rates from the dealer. That’s after checking with the credit union and Capital One. Thads both with CarMax (multiple times) and a new car dealer.

Yep. I bought a car within the last year. I went to the dealership with a capital one financing quote and the dealership offered me a better one.

One time I went to buy a car with a guaranteed loan in hand from my bank. The dealer made us wait for over two hours as they tried to find a better deal that they could do, and then finally failed and grudgingly sold us the car with our financing. That was Nissan (my car).

The next time we went to buy a car with a loan in hand from our bank, it was for my wife. We showed the guy the loan we had, he took one glance at it, and said he couldn't do anything better. He didn't waste any of our time. That was Lexus.

Suffice it to say that I'm willing to pay a higher price for a better quality vehicle with better quality service. I really don't want to buy from anyone else.

Toyota/Lexus is definitely of better quality than Nissan(and better dealer service) Back in the day I would have said that the Nissan would have been just as reliable despite but that is not true now. It feels like cars made now are just so forgettable and also disposable and Nissan is leading the field here.

Get a quote. Get multiple quotes. Several times in my life the dealer had APRs of < 1% APR, which was better then available elsewhere.

Very well researched, and enjoyable investigative journalism on this topic by John Oliver: https://www.youtube.com/watch?v=4U2eDJnwz_s

I'll bite, what does 3 billion in federal funding for car loans from more than two 64 month cycles ago have to do with it?

It doesn't. Dude's riding his hobbyhorse into a wall.

Most cars that left the road were the oldest and heaviest. New cars bought under that program tended to be economy cars and are already a decade+ old. To suggest that it took inventory off the road affecting today's markets doesn't hold water.

The biggest issue is that car companies make more money off reselling the loan than they do off the car. Years ago we tried to buy a Subaru in the NYC metro area in all cash and were continuously turned away. Dealers didn't make money off the cash sale, they were spiff'ed off the loan. We had to take the loan and then pay it off in order to get the car.

Since then it's gotten worse. Expensive cars (luxury, trucks) are sold with 72 month loans and are underwater shortly after purchase. It's been a race to the worst terms and empowering the worst purchases to the worse equipped buyers. I'm continuously amazed it's gone on as long as it has.

Ironically, luxury car dealerships will have no problem taking your cash. There are lots of people that are rich enough to insist upon buying a new car with cash, but those people generally don't drive Subarus.

Surprised to hear you were turned away. Usually they will take your money, just not give you any sort of deal. Either way, I think these days it makes little sense to buy new cars of the lot. If you want a new car, just go on the website and build out what you want, pay, and it's there 2-3 months later.

What I was told by a friend at an OEM is that lower-end the demand for lower end Subarus and Hondas was so high in the NYC area that it made sense to turn down the all cash offer as they'd likely sell the car with a loan the next day.

That's so frustrating. I'm in NYC and had a crappy experience shopping for cars as the pandemic was taking off. The dealers seems dis-interested, but they would certainly sell a car for their asking price. I ultimately ended up going with a cheap old used car that I bought directly from the previous owner. If I get to a point where I want a new car, I think I'll just order it.

>Most cars that left the road were the oldest and heaviest.

Pure fantasy.

Old commuter cars and family haulers were what was removed. Stuff like 90s Suburbans and F150s got turned in at a much lower rate than things like Cavaliers and Tauruses.

Remember, times were not great back then, trucks and SUVs are useful vehicles. You're not gonna get a lot of people who have old ones trading them in on a Camry because that's a net downgrade in capability. And the SUV craze was new enough that the trucks and SUVs that had been bought frivolously were still mostly worth enough to be unaffected.

>To suggest that it took inventory off the road affecting today's markets doesn't hold water.

It definitely put the used car market into a state it could have not otherwise gotten into. Whether it ever "recovered" is a matter of opinion. Many people say the private party shitbox market has never been the same but I personally think that's rose tinted glasses.

There are no affordable used cars now, or at least not nearly as many as there would have been, driving up price and the need for a loan.

Under 700k cars were exchanged as part of the "cash for clunkers" program, or roughly one out of every 400 the cars on American roads. Emphasis on exchanged: most people went out and bought new cars with the rebate.

Plus, all of this was over a decade ago. It's irrelevant on both axes.

I agree it's not relevant today but "1/400" is a really dishonest way of framing "removed the bottom of the market"

All the cheap beater cars that people just getting on their financial feet would have bought evaporated overnight.

> All the cheap beater cars that people just getting on their financial feet would have bought evaporated overnight.

I don't think this is true. If you look at the cars that were destroyed as part of the CARS program, they don't have a large overlap with popular used cars in the US. The top CARS trade-ins were mostly 4WD SUVs and minivans; the most popular used cars a decade ago were (and are) mostly 2WD sedans.

Another way of thinking about it: the entire point of the CARS program was to incentivize car owners to prematurely (from their perspective) buy a new car by offering them credit for their old one. Combined with the disconnect between the cars traded in and the actual used car market in the US, I think it's safe to say that most of the cards exchanged in the program would not have entered the used market and therefore did not meaningfully impact it by going to the scrapyard instead.

>I don't think this is true. If you look at the cars that were destroyed as part of the CARS program, they don't have a large overlap with popular used cars in the US. The top CARS trade-ins were mostly 4WD SUVs and minivans; the most popular used cars a decade ago were (and are) mostly 2WD sedans.

Here's the top ten list:

1. Ford Explorer 4WD

2. Ford F150 Pickup 2WD

3. Jeep Grand Cherokee 4WD

4. Ford Explorer 2WD

5. Dodge Caravan/Grand Caravan 2WD

6. Jeep Cherokee 4WD

7. Chevrolet Blazer 4WD

8. Chevrolet C1500 Pickup 2WD

9. Ford F150 Pickup 4WD

10. Ford Windstar FWD Van

Everything on that list is prime shitbox, except arguably the trucks (because they cost a little much to feed).

What do you think happened to crappy vehicle prices as soon as the program was announced?

Anything that moved and qualified got listed for sale at approximately the same price as the rebate. Hence no more "$500 beaters" (not really $500 by that time but you get the point).

You see the same thing today where the scrap value of catalytic converters drives up the price of the cheapest cars because that's the alternative way of monetizing those vehicles

More precisely, it removed the portion of the bottom of the market belonging to people who were on the fence about upgrading and making their cars available, so in that way it's similar to EV tax credits going to wealthy people to subsidize their consumption, but with the added hardship on the people down market.

I sympathize with the would-have-been sellers. I spent probably 8 hours recently to sell a 16 year old car for $4,200, and it would have been easier to do it the cash for clunkers way. But people buying that car are unable to get something newer or want to get their feet under them financially.

72 million passenger cars have been sold in the US since the program so I don't follow how the <0.7 million scrapped in 2009 (valued to be worth less than 3 billion dollars back then) for newer cars have a noticeable impact on any of this 1.6 trillion dollar loan market 13 years later.

You can repossess a car a lot quicker than a house, so there is less of an issue than mortgages.

Widespread repossession and resale would probably damage the resale value for all used cars.

resale value for all used cars could use some damage right now

Chill out, let me get mine traded in first before that happens.

Sounds like the type of thinking that won't get you that quarterly sales bonus!

Seriously though, just like mortgage originations pre '08, anyone who had qualms about that kind of thing left that industry a long time ago, or never joined.

These lenders make money on bad and even failed loans. Why sell a car once when you can sell it 3 or 4 times.

"buyer of the 1999 Oldsmobile Intrigue at Auto World Auto Sales in February.

A 26-year-old single mother of three, she needed a car to get to her new job as a home healthcare aide. She agreed to pay $3,899 — roughly double book value — and put down $1,200 cash on the deal.

As the due date for her first installment approached, Fields realized she’d need a few extra days to scrape together the $220 payment. The dealership wouldn’t wait. It repossessed the car a week after the payment was due"

https://www.latimes.com/business/la-xpm-2012-aug-15-la-fi-bo...

So I understand the point of the story, but by my reckoning "a few extra days" is less than a week.

I'm sorry for her but it was her fault. $2700 at $220 per installment is 12 installments. Such a tight schedule is unusual. You should always try to get the most flexible arrangement that you can afford and pay it off sooner only when you actually have surplus money left over.

FYI there is a non trivial amount of sumprime auto with terms of 96 or 108 months.

Should federal reserve bailout the auto loan market?

Depends how many pension funds are invested in its financial derivatives.

This is something people don't realise. Those bailouts are there to bail out the lenders not the borrowers.

The Greece bailout was actually bailing out German banks for example.

Wondering if it is hitting the installment tech companies like Affirm and Afterpay.

Only 28% of sales are to first time buys, and 25% of sales are all-cash. Sales of affordable houses under $250k are down 30% YoY

> Sales of affordable houses under $250k are down 30% YoY

..because those houses are selling for over $250k now?

In part because of continued pressure on prices because of zoning, and in part because people commit chart crimes not adjusting for inflation.

Also, did the Trump Administration relax a bunch of regulations around predatory loans? I recall the auto and payday loan industries were very happy.

I think subprime just means you just get offered a higher mortgage rate. You still have all the documentation mandates. No more NINA or NINJA[1] loans.

[1] https://corporatefinanceinstitute.com/resources/knowledge/cr...

The amounts that mortgage originators will hand out are still pretty incredible.

I bought a house a few months ago. The mortgage payment is right around what the more conservative rules of thumb suggest is affordable.

After the lender had all my information I asked, out of curiosity, what was the maximum they'd lend me. They came back with a number that was more than triple what I ended up borrowing and suggested there was room to go higher if that was something I was interested in.

Perhaps subprime borrowers face lower limits but it's still possible to take a risk stretching your budget to buy a house. That may be OK or even good but I'm concerned the perception is that lenders won't approve a mortgage that will be very difficult to keep up with when they absolutely will.

I got 0% financing (first x months) on my kitchen. They checked absolutely nothing on a 5k€ purchase.

If you want to be depressed, go to Los Angeles and tune into a radio station that caters to people living in poor neighborhoods. Every 3rd or 4th ad is for a loan shark.

Part of Dodd-Frank, which was created in response to the 2008 financial crisis, was repealed in 2018.

https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re...

I'm not sure how that's directly related to the issue of subprime borrowers but in my recollection this was a good change. It was a regulation that was costly and difficult for smaller banks to constantly adhere to while larger banks already had the capability to do this. Much like how the mortgage moratorium policy ended up forcing smaller landlords to sell to larger property holding companies, this particular bit of regulation was causing many smaller banks to sell themselves to larger ones.

Margin loans. They let you bypass mortgage borrower requirements and are behind many "cash offers" on houses. Borrow and spend $400k in 45 minutes: https://www.mrmoneymustache.com/2021/01/29/margin-loan-ibkr-....

Can't find a link to it, but someone on WSB wrote a long report on how margin loans will be behind the next housing crash.

I got denied a mortgage despite have assets in excess of the value of the house I wanted due to insufficient income (wasn't working at the time).

Same thing happened to me. I got denied because as a founder/owner holding more than 25% of a company they consider the P&L of the company as your personal income(loss).

Credit score impacts interest rate but debt to income ratio that is above 50% can completely disqualify you from a mortgage. Thats where the founder ownership can skew your personal DTI.

You can go to asset based lenders who evaluate and secure the loan against your existing assets (cash, etc) rather than based on your W2 income and DTI.

Same, kinda. Wasn't denied, but would have to pay a huge risk premium over conventional, regardless of how much I put up as a down payment, like the home's collateral value didn't matter. Earlier post:

https://news.ycombinator.com/item?id=31000286

Did you provide the assets as collateral for the loan? I imagine a traditional mortgage may not have this as an option, but a different kind of loan may have been possible. However, you can probably only borrow up to a portion of the collateral value.

The scrutiny may be higher, but the amounts they are approving people for is insane. Like who thinks it's a good idea to approve someone with an $80k income for a $450k mortgage?

The relevant ratio for mortgage underwriting is monthly income to monthly payment obligations. This means that the highest available mortgage amount depends on the interest rate. You get a very different answer if rates are 2.5% instead of 5.0%. That means a person with $80k is getting approved for a much smaller loan today than six months ago.

Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate.

"Rules of thumb like “mortgage amount should be less than 3x income” don’t make much sense because they ignore the interest rate."

They're fine as a rule of thumb. The individual should still run their own numbers to see if their limit is higher or lower.

Even at 2.5% interest, I have a hard time seeing anyone being able to responsibly buy a $450k house on $80k income. They might be able to swing it, but they'll be screwed as soon as a large unexpected expense comes up. Even a 2% property tax will eat close to 10% of their gross income. There's no way they could save for an emergency fund or properly fund a retirement account.

At 2.5% interest, the monthly payment on a 450k home is $1,778.

At 9% interest, the monthly payment on a 240k home is $1,931. Mortgage interest rates were higher than this throughout the 1980’s. They got as high as 18% which would yield a $3,617 monthly payment.

This means that the person who followed the “3x your income” rule in the 1980’s has a harder time paying the bills than the person who bought the home for 450k with a low interest rate.

This is a badly-formed rule because it ignores a key variable - the interest rate. Sometimes, it will prevent someone from buying a home they can afford. Other times, it will cause them to buy a home they can’t afford. There’s no need for such a rule, because mortgage payment calculators that take into account the interest rate are easily available. It’s like picking a shoe size based on how much you weigh instead of measuring how big your feet are. If it gives you the right answer, that’s out of sheer luck.

Of course, it’s necessary to also take into account factors like taxes and other expenses which vary from place to place and person to person, but a simple mortgage payment calculator is a good place to start.

And mortgage calculators can ignore many other variables, or would require additional research to fill them in. They also ignore a key factor - the person's income. It calculates cost, not affordability.

>There's no way they could save for an emergency fund or properly fund a retirement account.

I assume that is simply the way 80%+ of people in the US expect to live since it has been their reality for decades.

those numbers have also been in use for quite a while and have not adjusted for the inflation of other parts of basic living expenses.

Also, do the math on what happens if interest rates do anything but go down - it instantly means a huge swath of buyers can't anymore and the market dries up.

I was making $80k when I bought my house and was shocked when my bank told me I could buy a $450k home. I bought something for $260k instead.

This doesnt tell the whole picture and it isnt that simple. The lender is looking at your total carry costs for the home (property taxes, insurance, debt service), your non-home recurring costs (e.g., student loans, medical debt on monthly payment schemes, car payments) and your total income.

They dont usually care about wealth, they care about cashflows in vs out.

I had no other debt apart from a $15k auto loan and <$500 balance on my credit card, and $450k still felt like an enormous stretch. I was also only going in with 3% down.

That was my situation as well.

I’m not aware of any mortgages that allow that debt to income ratio for a mortgage. Unless it’s a rental and then the down payment requirements are insane.

A little while ago, when 3% loans were still a thing, a $450K loan over 30 years was a $1,900/month expense. An income of $80K with a $1,900/month in debt is a 29% DTI which is comfortably below the DTI limits for a conforming loan (43-45%).

Even at 5.5%, it's still "only" 38% DTI ratio.

- No one making $80K is going to have money for a $90K down payment so you have to add PMI - $300/month.

- you’re also ignoring property taxes and insurance. I pay another $400 a month for that in a relatively low cost of living state and I have a $5K deductible.

That 1900 adds up to $2800/month real quickly.

Because there is money to be made.