Wells Fargo Puts a Ceiling on Subprime Auto Loans

[deminks]

This is what happens when no one goes to jail.

http://www.nytimes.com/2015/03/02/business/dealbook/wells-fargo-puts-a-ceiling-on-subprime-auto-loans.html?partner=socialflow&smid=tw-nytimes

Wells Fargo, one of the largest subprime car lenders, is pulling back from that roaring market, a move that is being felt throughout the broader auto industry.

The giant San Francisco bank, known for its stagecoach logo and its steady profits, has been at the center of the boom in making loans to people with tarnished credit scores. Wall Street, meanwhile, has been bundling and selling such loans as securities to investors, reaping big profits while allowing millions of financially troubled borrowers to buy cars.

But now, amid signs that the market is overheating, Wells Fargo has imposed a cap for the first time on the amount of loans it will extend to subprime borrowers.

The bank is limiting the dollar volume of its subprime auto originations to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion, bank executives said.

(end snip)

Lets do it all over again, with cars! /sarcasm off.

[DrDan]

1. I think you meant to say "starting with cars" . . . we all know they are not going to be corralled

a fine precedent has been set in terms of bail-outs and prosecutions, one that will only further expand this money-maker.

Wonder how long this $3B cap will stay in place.

[justiceischeap]

2. That makes me feel unwanted

I recently got a subprime loan from Capital One. I've been banking with Wells Fargo for close to ten years now and when I went to finance a car last year, they turned me down. I'm working on improving my credit and they (my local branch anyway) were instrumental in that. Shame they won't subprime me.

[Yo_Mama]

9. They started to draw back last year, honestly.

They had to.

[MarianJack]

3. We had a Wells Fargo car loan.

If the payment was 41 seconds late, we would get threatening calls about turning the matter over to recovery for possible repossession. This included when we were a couple of weeks late for our FINAL payment...Shit!

I'd go to a "buy here, pay here" place before EVER doing business with those bastards again!

PEACE!

[Taitertots]

4. Oh... you fell for it. Sub-prime loans had almost nothing to do with 2008

The collapse was caused by unregulated derivative liabilities.

Sub-prime blaming is just a convenient way to blame poor people for a problem caused by rich people.

[DrDan]

5. weren't those derivatives based on mortgage-backed securities which were bundled subprimes?

[Taitertots]

6. They could have been based on the price of Cheeetos

The problem is unfunded derivative liabilities. The underlying asset is more or less irrelevant.

[Yo_Mama]

8. Not true - because the liabilities don't exist unless you have a catastrophic change in defaults.

It's ALL about the underlying asset price.

[Taitertots]

10. The liabilities existed before the asset price changes

And they should have been carried on their balance sheet.

It's ALL about investment banks taking money for derivatives, knowing full well they couldn't afford to pay them.

Direct losses on the underlying assets was insignificant. Losses from unfunded derivatives caused the collapse.

[Yo_Mama]

7. OCC & other regulators are expressing "concern".

They started last year:
http://www.occ.gov/publications/publications-by-type/other-publications-reports/semiannual-risk-perspective/semiannual-risk-perspective-spring-2014.pdf

Stats were clearly worsening by the middle of the year, and Benhart has been kind of banging on this drum since:
http://www.autoremarketing.com/subprime/12-climb-bank-charge-offs-has-occ-concerned

During a speech on Tuesday, Darrin Benhart, the OCC’s deputy comptroller for credit and market risk, highlighted how much charge-offs among banks grew in a 12-month span. Benhart indicated the average charge-off for a defaulted auto loan increased from $6,832 in the fourth quarter of 2012 to $7,618 in the fourth quarter of 2013.

By the end of of the year the problem was even clearer:
http://www.wsws.org/en/articles/2015/01/28/auto-j28.html?view=article_mobile

The Wall Street Journal reported that more than 2.6 percent of auto loan borrowers who took out loans in the first quarter of 2014, had missed a payment by the end of the year. Default rates were even higher for borrowers with credit scores lower than 620, which hit 8.5 percent.

In 2014, subprime auto loans (those issued to borrowers with bad credit) reached the highest levels since 2007, and were up by 15 percent over 2013. “It’s clear that credit quality is eroding now, and pretty quickly,” Mark Zandi, chief economist at Moody’s Analytics, told the Wall Street Journal .

That 8.5% default rate is a red flag!!! It implies that investors will take significant losses on that cohort of loans, and that regulators must stomp on the banks.

For a while losses on bad car loans were limited by higher used car prices, but that is no longer true:
http://www.cargurus.com/Cars/price-trends/

When your default rate is that high and your write-off per bad loan is rising with no end in sight, it's time to pull back on the lending.