THOUSANDS of second-hand cars, ranging from dented clunkers to Bentleys, glisten under the evening floodlights at Major World, a car dealership in Queens, a borough of New York. “Business has been good,” says a crisply-dressed salesman, scurrying between prospective customers. Almost everyone who wants to buy a car at Major World can get approved for a loan, he explains, regardless of their credit score, or lack of one: when banks turn buyers down, the dealership offers them its own in-house financing.
In both America and Britain new-car sales reached record levels last year (2.7m cars in Britain and 17.5m in America), as did second-hand-car sales in Britain. So too did car loans: £31.6bn ($42.8bn) in Britain and $565bn in America. Even folk with poor credit records (“subprime” borrowers) have been able to find financing. So some are asking whether this latest credit boom might have sown the seeds of a new crisis.
In America worries have centred on rising delinquencies in subprime asset-backed securities (ABSs) based on car loans. Bundling car-loan repayments into ABSs to sell on to investors represents an important source of financing, particularly for non-bank lenders. Cumulative net losses on subprime car-loan ABSs issued in 2015 are at levels not seen since 2008—over 6% after only 15 months.
Some hear echoes of the financial crisis….Continue reading