Subprime Lending Part II

From Stansberry Digest 4/28/2017:

Loans for education and cars contributed to 90% of the growth in consumer debt since 2012. By 2015, roughly 25% of car loans were made to subprime borrowers.

But why should the banks care? These auto loans are securitized, just like the bad mortgages were. In the last five full years, $455 billion in auto loans were securitized. Remember, one out of every three cars that are traded in for a new car have negative equity (meaning the unpaid portion of the old loan is “rolled” into a new loan). And the durations of auto loans have been extended. (The average auto loan is now 68 months)… Given those facts, it’s a safe bet that something like half (or more) of these securitized auto loans have zero equity.

You might recall a major factor in the mortgage crisis of 2008 was that most subprime mortgage holders (and even a lot of prime mortgage holders) had zero equity in their homes. Walking away from those mortgages was a rational (if not ethical) financial decision.

Today, with used-car prices plummeting… how many subprime borrowers are going to keep paying 20% a year to drive a car with zero equity?

And then there’s the elephant in the room…

Student loans. Today, a record number (42 million) Americans have a student loan. This debt is virtually impossible to extinguish in bankruptcy. It’s not going away. And the total debt outstanding has doubled in the last 10 years to $1.3 trillion. That’s bigger than auto loans. Bigger than credit cards.

And the problems in student lending are nightmarish. Currently, 8 million people, who collectively owe $137 billion, are seriously delinquent. That means they’re more than 360 days late. That’s 19% of all borrowers. Another 3 million (owing $88 billion) are at least a month behind on their payments and likely to default. So more than 25% of all student loans are essentially in default.

That’s bad enough. But it doesn’t tell the whole story.

People have all different kinds of ways to defer paying these loans. So if you include all the loans that aren’t being serviced, you find that more than 40% of these loans aren’t being serviced and are likely to default.

And here’s the “good” news… It’s not just “kids” who borrow for college. About 3.5 million adults have borrowed $77 billion on behalf of their children.

We’ve never seen figures like these before in the U.S. economy.

Currently, U.S. consumer debt, not including mortgages, equals 20% of gross domestic product (GDP) – an all-time high amount. The culprit is ballooning auto loans and soaring student loans. We already know that a shocking number of these loans aren’t being serviced and will not be repaid.

The bad car loans will be repo’d and sold. (That’s why used car prices are plummeting right now.) But how will the student loans be cleared? Nobody knows.”

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