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Housing Needs Hired Goons

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August 20, 2012 – Comments (5)

You may need a subscription (or even a prescription) to read this:

http://online.wsj.com/article/SB10000872396390444042704577587502012856254.html

A pretty fascinating take though, “A Green Light for Car Loans” tells us about how banks are boosting lending for cars of all things. Even better, those car loans are of course being securitized and sold off as investments. I mean what can go wrong?

There was $725 billion outstanding in auto loans at the end of 2Q2012, almost 6% higher than a year ago and the highest since early 2009. One quote from Jim Lentz with Toyota, "We are seeing more 'subprime,' which is good." Oh really Jim? Good for whom?

Well, this may shed a bit more light on what he means. When prioritizing, it appears that borrowers will miss the house payment before the car payment. At first glance anyone can be forgiven for saying, “What the hell did you just say?” But it’s true and the reason is quite simple (though astonishingly absurd). What’s easier to repo, a car or a house? Beep! Time’s up. The answer is car of course. All it takes is a repo crew to sneak up on the car at the crack of dawn or middle of the night and take it. A house though can’t be driven away. And as we’ve now come to find, apparently one can skip out on paying their mortgage and live in the house for a year or even longer.

The proof is all over the place on that one; there are examples as far as the eye can see. And before you even think of muttering “Foreclosuregate” let’s all agree that a missed payment is a missed payment no matter what. I’m not asking for reasons. Missed is missed whether it’s mortgage or rent. It’s like the sun coming up, you damn-well know that payment is due. No matter what, you need a place to live. So whether it’s rent or a mortgage payment, you in theory need to be forking over something every month unless you’re living with your parents or own your place outright.

“The availability of financing has helped drive up auto sales. Year-over-year, total sales rose 8.9% to 1.15 million new cars and light trucks in July, maintaining an annual pace of 14.1 million vehicles, according to industry researcher Autodata Corp. Annual sales could hit 15 million, said Paul Edelstein, economist at IHS Global Insight, who says consumers are more willing to borrow money to buy cars than other items.”

Well of course it has. And you know what’s made the financing more available? It’s not jobs and it’s not higher wages either. It’s longer loans. We’re talking 5, 6 and even 7 year loans on freaking cars! Yeah, I love where this is headed.

But I digress; back to the whole defaulting on houses first, cars second. It’s total BS that this happens and I wonder if the solution isn’t so simple as to basically make the repo process the same for the house as it is for the car? You’re 60 days behind, 90 maybe on your mortgage payment. You get a knock on the door. Who is it? Hired goons. LEGAL hired goons. It’s hired goons here to take your house. You can leave peacefully or it can get ugly. Either way hit the bricks because it’s obvious you either aren’t interested in paying or can’t. It sure would hasten the process and I bet that given the fact that you get the “homeowners” out so early in the process you probably save a lot of damage that the house would otherwise incur when “homeowners” become nothing more than really squatters. Then the house might not require so much repair just to get back on the market again. Sounds like it could save a lot of time and money. Betcha it would make someone think twice about which to default on first. Hell, it might even make them think twice before making the purchase in the first place.

Sure, this is partly in jest. But it’s also partly not. That someone can rationalize missing house payments before car payments thanks to the repo process means the repo process is broken and in dire need of repair. But then I guess we all (at least most of us) already know that.

Foolish best,

Jason

5 Comments – Post Your Own

#1) On August 20, 2012 at 11:47 AM, Teacherman1 (62.19) wrote:

Jason

I was unable to get the entire article to come up, so I don't know if this is applicable or not.

Does this refer only to loans on new cars, or does it include used cars.

I learned a peculiar lesson many, many years ago while in banking.

It is better to finance a used car dealer than a new car dealer.

There are basically five reasons for this.

1. You usually will have a "dealer reserve" set up, where you can dip into it if you are unable to collect from the borrower. Since this is money that comes out of the dealers pocket, they will usually be very proactive in making sure that payments are collected, and if not, to get the car back and sell it again. Since their customers are usually repeat customers who do business with them over many years, they are very familiar with them, and can usually find them much quicker and easier than the bank.

2. The "bank" usually has provided a much smaller credit line, so they are able to finance more dealers.

3. The actual value of the collateral (i.e. the car/truck) is usually much closer to the amount of the loan than on new cars.

4. The loan is at a much higher rate.

5. The loan is for a much shorter duration.

While it is true that the "top tier" of new car buyers are much better credit risks, as you add more and more, the gap in credit quality between the new car buyers and the used car buyers is much less.

That is one reason that companies like CARMAX, etc, make a lot of money.

I realize this has little or nothing to do with what your blog is about, I just thought it might be an interesting aside to learn about on this mostly sideways, slightly down for no real reason, market day.

Have a good one.  

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#2) On August 20, 2012 at 12:48 PM, dcgatlanta (43.59) wrote:

A quick foreclosure process will make banks even more reckless.  Wells Fargo, Bank of America and their ilk will churn through borrowers and foreclosures while collecting fees all the way through the painful process.  How about a column about abuses by the TBTF banksters under the current rules?

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#3) On August 20, 2012 at 12:53 PM, TMFJMo (71.05) wrote:

Great stuff Teacherman1! The article is referring primarily to new car loans. So they are lower rates and longer terms. And to your points above, they certainly seem to put the banks at a greater risk as the cars have more value to lose. That they are happy to see growth in "subprime" is concerning to say the least and the fact that these loans are all getting securitized and sold off means that more parties are potentially at risk.

Thanks for reading and posting!

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#4) On August 20, 2012 at 2:52 PM, TMFJMo (71.05) wrote:

@dcgaatlanta

I sincerely doubt that would be the case in an already very highly regulated process such as buying a home. And don't get me wrong, I'm not standing on a perch here saying the banks are great and not complicit for their bad behavior. But if you live in a house that you bought, signing documents to buy it and agreeing to pay your monthly payment and you stop paying, drawing out the process helps absolutely nobody except the homeowner-turned-squatter as it gives them a free place to live for as long as taking advantage of the law allows.

To be clear, when banks have committed fraud and a buyer has signed a contract that is not legally binding, then of course the homeowner has a right to contest that. That's not the point of this as most homeowners do not sign fraudulent contracts. They simply don't. Slinging mud at the banks is like shooting fish in a barel.

Foolish best,

Jason

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#5) On August 20, 2012 at 4:37 PM, leohaas (35.73) wrote:

Housing already has its goons: they are called lawyers. Thank God the law in many states favors those who live in the house over those who bought the securitized mortgage.

Car loans are up because the economy is up, there clearly was a pent-up demand (during the crisis responsible folks did not buy a new vehicle--but they may do so now) and because interest rates are down. If there are folks stupid enough to buy securitized car loans, that is their fault, not the car company's or car buyer's. Car loans can be longer because new cars last longer. Nothing wrong there (although I myself would prefer a short loan--my car and my wife's are paid off).

If I had to make a choice between paying my car loan or my mortgage, I don't know what I'd do. I have never been in that situation and hope I'll never be (I am a responsible person, so I take all possible precautions), but please don't turn what ought to be a financial decision into a moral one!

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