A new home and a new car: for the best part of a century these have defined the good life for Americans and Canadians. But the financial crash of 2008 punctured that dream for millions when predatory lending by banks transformed the family dwelling into a debtor's prison. Even as the economic recovery gathers pace there are emerging fears that the aggressive financing techniques used to create America's disastrous mortgage bubble are being applied to the family car.
New car sales are adding an extra sheen to the hood of the U.S. economic motor. Figures out this week show that year-over-year vehicle sales were rising by double-digit percentage rates, with Ford gaining 16 per cent, Fiat Chrysler rising by 14 per cent, and GM up 18 per cent. All the talk is of the new confidence; fuelled by cheap gas and propelled by rising employment, the American and Canadian consumer is touring the auto dealer showrooms. Few are questioning whether the deals being offered by banks and automotive finance companies are sensible or even affordable.
In October, the rating agency Moody's gave warning that Canada's banks may be encouraging the nation's consumers to buy more wheels than they can afford. Total car loans have been increasing by an average 20 per cent per a year, rising to $64-billion in 2013 from $16-billion in 2007. Even more worrying is Moody's report that loan maturities are lengthening, with more than half now extending beyond five years compared with only a fifth in 2009. With cheap gas, low rates and a longer payback, you can swap the sensible Nissan for a more satisfying Mercedes.
In the U.S., cheaper money is once again encouraging lenders to tap those parts of the market that only recently seemed beyond the reach of credit. In December, information services group Experian said that in the third quarter, the proportion of loans that were 60 days delinquent had surged by 27 per cent, some $4-billion, compared with the same period in 2013. By the end of the third quarter of 2014, according to Experian figures, 3.4 per cent of car loan borrowers has missed a payment, up from 3.2 per cent in the third quarter of 2013.
Of the total $500-billion new car loans in 2013, some 27 per cent were subprime and the surge in car lending is creating the same fascination among practitioners of structured finance as did the mortgage market before the financial crash. Automotive debt is being packaged and sold, just as home loans were during the pre-2008 housing boom. Securitizations have grown fourfold to $20-billion since 2010 and subprime securitziations increased by 28 per cent last year.
Even more worrying, according to an article in The New York Times, is the trend for auto title loans. As regulators clamp down on payday lending, the U.S. finance industry has discovered a new way to lend at high interest rates to Americans who are strapped for cash but have a large saleable asset parked in the driveway.
More than a million Americans are pawning their cars in a high-cost, short-term lending transaction with interest rates as high as 300 per cent, reports the Times, quoting figures from the Federal Deposit Insurance Corporation.
There is, so far, no reason to fear that the surge in subprime auto lending is creating systemic risk . The volume of subprime automotive lending is still a small fraction of the scale of the pre-2008 mortgage bubble but there are interesting and disturbing parallels between cars and homes.
In a country mostly bereft of public transport, Americans need their cars as much as the roof over their heads, sometimes more. Keeping your car is therefore a top priority for consumers who need to ration payments to creditors. Small wonder, then, that lenders seem to be falling in love with car loans. Add to that wireless technology and satellite monitoring which allows creditors not only to keep tabs on borrowers but control their movement. Some two million American cars are fitted with devices that kill the car's ignition when the owner defaults on a payment. The remote-operated kill-switch gives extra comfort to lenders who know that the car is immobilized until their borrower pays up. As a result he is more likely to extend credit to neighbourhoods where he might otherwise fear to tread.
America is still in love with the idea of a car and a home but the postwar romance of a white clapboard house, children playing on the lawn and an Oldsmobile in the driveway is in danger of becoming a chimera. For some car owners, these objects of desire have become financial assets, the playthings of financiers and they are only owned in a theoretical sense by their users. We have not yet reached the point where a defaulting householder can be locked out of the home at the flick of a switch. But you can be sure that someone is working on it.