[weimar]

I work in auto finance for a large financial institution and have noticed a few trends recently. First, less business overall compared to last year. Second, many of the new loans we do are customers bringing in negative equity of 1000-5000 into the new loan, and stretching the term to 84 months, the longest that we do.

Viewing the credit reports of these customers as compared to their stated incomes on their credit applications is truly disturbing. We will qualify customers up to between 10 to 17% of monthly gross income for a car payment, based on their income and credit.

What I can not comprehend are households with a combined income of 60-75k carrying over half a million in total liabilities trading in a 2004 model SUV for the new 2007, just rolling the outstanding debt on the trade-in into the new loan. I don't set our underwriting guidelines, I only adhere to them. 720+ credit scores are the green light as far as my company is concerned.

I don't personally know anybody who lives like this, I live below my means as do most of my friends who can, if they're not just scraping by. The article about people torching their cars in the basin of the Los Angeles river seems to be a harbinger of things to come. I drive a used Honda CR-V and drive less than 7000 miles a year. The only time I have used the AC on it was when I bought it to make sure it worked. Everywhere I look I am surrounded by brand new massive Ford, GM, Chrysler SUVs, their license plates indicating a 20, 30, 50 mile daily commute, all sealed up in the 90 degree weather with the AC cranking. Who are these people? And how do they pay for it? And what will peak oil mean to them?

I like to tell people that $3 gasoline will soon be a fond memory, and that after $4 and $5 gasoline comes no gasoline. Think Soylent Green.

[azreal60]

For a second post, that was suprisingly insightful. Thanks for the inside scoop.

[duke3522]

Thanks for the inside info. Great post.

Around here the car dealers are advertising "Upside down on your car loan? We will pay it off for you no matter how much it is." I hear this ad everyday on local radio.

Are these people so dense that they really believe the car dealer is going to pay off the loan for them? Shouldn't being upside down in a car loan be a sign of poor financial management and red flag the loan? I guess not. Only in America.

[DesertBear2]

$this->bbcode_second_pass_quote('ohanian', '
')Give me a new SUV or
give me DEATH. That's the
American Way.

[gg3]

Weimar, very interesting post.

Seems to me that you embody the virtues of the oldschool Main Street banker: prudence and diligence, conservative management, sense of responsibility for capital assets, and so on; and also a willingness to say "no" and call for discipline where needed, and a willingness to walk the talk and play by the same rules in your own life. Good to see that some oldschool bankers are still around, they will have a significant role to play in rebuilding the economy after the energy & resource collapse.

I thought that in the past, some people would routinely trade in their cars every year, despite the loan not being paid off. This was supposed to be a going joke in the 60s, about planned obsolescence and people having a new car every year. Did that work the same way? Did the dealers find a way to make it a viable transaction? And did it carry the same risk exposure for lenders?

[dukey]

i've read this before about GM especially taking people regardless of their credit ratings almost.

The truth is, it is desperate times for Ford and GM. They will do anything to move inventory. 0% finance, employee pricing .. 'incentives' etc etc. It is going to end in one big ugly mess.

[dub_scratch]

$this->bbcode_second_pass_quote('weimar', '
')I like to tell people that $3 gasoline will soon be a fond memory, and that after $4 and $5 gasoline comes no gasoline. Think Soylent Green.

[TommyJefferson]

$this->bbcode_second_pass_quote('weimar', '.')..many of the new loans we do are customers bringing in negative equity of 1000-5000 into the new loan, and stretching the term to 84 months, the longest that we do.

[rostov]

Weimar,

Folks in Singapore have been living (or rather, those with cars) upside-down-loan lives for the past decade or so. They may not own SUVs or large cars, but a 1.6L sentra costs S$(5-digits > 50000).

That's how they live their lives : factoring a % of their income on servicing loans for cars already not owned.

[o2ny]

Socialism isn't what allowed the ridiculous terms of these loans to come into existence though... auto makers trying to get more customers and using whatever tricks they can think of to make sure the customer 'thinks' he can pay for the car. That's capitalism right there. Unregulated greed.

So as a result, auto makers were able to offer these toxic loans to people with little foresight. Socialist measures will be needed to bail us out, I suppose. Either raise taxes or let the economy collapse when these people can't drive anymore.

[NTBKtrader]

$this->bbcode_second_pass_quote('TommyJefferson', '')$this->bbcode_second_pass_quote('weimar', '.')..many of the new loans we do are customers bringing in negative equity of 1000-5000 into the new loan, and stretching the term to 84 months, the longest that we do.

[dinvinci]

I don't understand the lending industry AT ALL.

Last year I got a mortgage at good rates --it was for a very modest home, but OTOH I had significant outstanding debt and a pretty measly income. Exactly 3 months later I filed for bankruptcy. This wasn't exactly a premeditated plan, but when I went to see a financial counselor about how to work out the payments for everything (over $50K in consumer debt and medical bills, it's a long story and please save the flames, I really did the best I knew how to do in dealing with this) anyway this financial guy was just horrified and told me to stop throwing good money after bad--just go ahead and file bankruptcy and start over. So I did, all of the consumer debt was discharged, and I kept the house as my payments were current and my equity was within the exemption limits for my state.

I discharged about $10K owed to Capital One. Six months later, I get at least one piece of marketing in the mail from them DAILY, if not more, pitching new pre-approved credit cards. WTF?

Meanwhile -- now that I'm carrying no debt other than my mortgage and a pretty low student loan payment, and I just started a new job with a 50% salary increase, I went to my mortgage lender to see about refinancing (want to change from ARM to fixed). Lender says no, my credit score is too low.

Does this make any kind of sense? I can afford WAY more in terms of mortgage expense now--with a higher income, and far less debt--than I could a year ago when they made the first loan. But NOW they say no? Again, WTF???

[rogerhb]

$this->bbcode_second_pass_quote('dinvinci', 'I') went to my mortgage lender to see about refinancing (want to change from ARM to fixed). Lender says no, my credit score is too low.

[Tyler_JC]

$this->bbcode_second_pass_quote('rogerhb', '')$this->bbcode_second_pass_quote('dinvinci', 'I') went to my mortgage lender to see about refinancing (want to change from ARM to fixed). Lender says no, my credit score is too low.

[ozkrenske]

My suggestion is,
If you have seen a 50% increase in salary dump most of the increase into the loan, assuming you have advance payment capabilities on the mortgage. This will at least allow you to build an equity buffer and you will still be able to easily readjust your lifestyle if you suffer a loss of income.

Just don't fall for the lets go buy crap trap. you survived without it before the pay rise, you can survive without it now.

[weimar]

$this->bbcode_second_pass_quote('dub_scratch', '')$this->bbcode_second_pass_quote('weimar', '
')I like to tell people that $3 gasoline will soon be a fond memory, and that after $4 and $5 gasoline comes no gasoline. Think Soylent Green.

[Euric]

$this->bbcode_second_pass_quote('weimar', 'I') work in auto finance for a large financial institution and have noticed a few trends recently. First, less business overall compared to last year. Second, many of the new loans we do are customers bringing in negative equity of 1000-5000 into the new loan, and stretching the term to 84 months, the longest that we do.

[TommyJefferson]

$this->bbcode_second_pass_quote('Euric', 'I') can't imagine what a mess you will be in when Fannie and Freddie give up the ghost.

[cube]

Perhaps an argument can be made that the most visible effect of PO will not be a rise in gas prices (contrary to popular belief) but instead the end of cheap credit.

A $5 / gallon rise in gas would be very dramatic. But a 5% rise in interest rates would actually CRUSH most Americans considering how deep in debt they are. With today's prices it's not uncommon for a home "owner" to be $400,000 in debt. 5% of that would equal an extra $20,000 per year in payments.

Basically you'd spend the rest of your life working as an indentured servant to the banks.