Subprime on Wheels

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It’s a good time to be a repo man. . . again.

Lots of business picking up used cars people’ve stopped making payments on.

According to S&P Global Ratings and an article in Bloomberg News, defaults on these subprime loans are at their highest water mark since the subprime collapse of 2008 and the “recovery rate” – what the lender ends up recouping of the original debt principal – is a mere 34.8 percent.

It’s a lot money flushed.

But how is it that cars – all of them, not just the used ones – bleed value this quickly and this much?

It’s because they’re not really worth that much to begin with.

As distinct from what their price was to begin with.

New car prices are hugely inflated – mostly because of electronic gadgets that dazzle when new and for which people will pay (that is, finance) top dollar . . . but which get old and lose value quickly.

They don’t get old in a calendar year or wear-and-tear sense but in terms of their “latest thing-ness,” which vanishes like a late April snow shower. Think how quickly your smartphone or computer hags out. Now consider the screens and apps and other such they’re installing in cars.

How useful is a five-year-old GPS system with a non-touchscreen and without the latest version of whatever-the-latest-apps are? It probably doesn’t even have the latest app to version up to.

And how much is a five-year-old laptop worth? It cost $1,200 new.

Today, it’s worth $200.

Cars have become similarly short shelf-life items because they are a bundle of computers and apps and screens as much as they are gears and cams and wheels.

Another problem, beyond almost-immediate technological obsolescence of the gadgets is that in-car electronics and gadgets have gone from peripheral amusements to embedded in the DNA of every mechanical system in a modern car. And the electronics do not hold up as well over time (the time usually corresponding to the duration of the warranty) as the mechanical parts.

The engine in almost any car built since the ’90s is a marvel of durability with a useful service life three to four times as long as an engine made back in the ’70s. What was once burning oil and knocking rod bearings by 75,000 miles is today hardly even broken in.

But the electronics that are critical to the operation of the engine won’t last that long.

And when they begin to serially fail, the cost to replace them relative to the value of the car at that point becomes problematic. And there are more than just engine electronics. Everything in the car is controlled by a computer. This includes even the power windows, which are no longer a simple system consisting of a switch and a motor. There is now a thing called a body control module – and when it fritzes out…

The profusion of soon-to-be-old news eGadgetry has increased in tandem with the exponential uptick in extremely elaborate, software/sensor/computer-dependent mechanical systems.

All of it driven by debt.

Most people can’t afford the gadgets – or the cost of the mandates requiring ever-more “safety” as well as ever-higher fuel economy and ever-lower emissions (including of non-pollutants such as carbon dioxide) out of new cars. The car companies resort to over-the-top technologies (e.g., automatic transmissions with at least eight and lately ten forward speeds, all intricately controlled by computers and code) to keep Uncle happy while passing the bill for it on to buyers – who generally cannot buy it who therefore must finance it.

This works ok – up to a point.

That point generally arriving when the thing financed is worth less than the sum still owed the lender.

And that is why the bubble is bursting – and the repo man is busy.

House loans can be stretched over 15 or 30 years because a house – and the land it sits on – is a durable asset; its value may go up or down, but it will probably never disappear. Being under water on a house loan is an economic-historic anomaly.

A car on the other hand always depreciates; it is guaranteed to lose value over time

An 84 month (seven year) car loan is an economic-historic anomaly. An aberration that cannot be sustained.

And it’s not just used cars – which were recently new cars. Many of these leased, which is another form of stuffing costs (and losses) under the rug. The initial lease holder gets to drive the car for two or three years at a monthly payment far less than what he would have had to pay had he signed up for a loan on the full purchase price.

Great – for him. But what happens to the car once the lease is over?

Now depreciated by 30-40 percent, it goes on the used car market – and gets sub-prime financed to some poor innumerate slob who eventually realizes he signed up for a $25,000 note on a car that’s worth $12,500.

When he realizes this, he inclines to walking away (or just not paying).

Enter the repo man.

Who be ever-busier as new cars become ever-pricier and ever-more-rapidly Yesterday’s News that gets chucked in favor of something “new.” As more and more economically-untenable electric cars – the 2018 Chevy Bolt, for instance – are force-fed to the market and end up being “sold” at huge discounts when new and even huger discounts once used.

Look out.

The Jenga Tower we see tottering before us will topple at any time.

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  1. The old adage , its not yours until you get the title comes to mind , unless like me GM accidentally sent me the title to my 2004 Silverado when I refinanced it , needless to say the credit union was in a panic until I dropped off the title to them .

    • outlaw, I’ve heard this recently from a friend. He also said the price of a new tractor he’d bought, a 9400 JD came in at $450K and by the time he’d changed oil twice at 400 hours it was worth $360K. That’s practically a new tractor by any rights. The chemical companies along with seed companies have taken the profit. Farmers see it coming. I’ve spoken with 3 recently. The banks will get their land and the ag and chemical companies will buy it cheap. Ranchers have gotten none to little help in subsidy and now it’s turned into the best thing to happen to them. I simply dropped off the rolls after qualifying for $5K in feed subsidy(emergency drought relief) and receiving $200. My dad and I smelled the rat. We never showed up again.

      • I have dealt with these same issues on cars where the keys transmissions air bag modules are held hostage until you pay the manufacturer the (tax) fee to have it programed

      • 8, It’s like most other things these days though: Most of it is done with the victim’s complicity. See it all the time here. I make as much on my little place with 10 cows and no subsidies and NO debt, as my neighbor does when all is said and done on his 120 acres with 70 cows and almost $400K of debt.

        They want other people’s money for free. They have to give up autonomy and privacy to get it.

        Land is cheap here. Cost of living is low. You can still have a nice life here without killing yourself, but people seem to want to kill themselves. Bigger, better, more! Bigger numbers on paper. Doesn’t improve their life any; in-fact, it degrades it, but I guess it sounds better if you’re worth a lot on paper and have a lot of equipment. The people who are impressed by it never ask “How much debt are you in?”.

        Meanwhile, everything I own is free ande clear (except for Uncle’s extortion). Might not impress many, but it’s all mine and I love it, and I can sleep very well and have the time to enjoy it, and privacy and autonomy.

        Meanwhile, I expect the guy with $400K in debt to be going bankrupt this year. He’s a nice guy, but he’s just gone with the flow. I don’t know how he’s held on this long. His place is getting ratty because he has to have an in-town job now to subsidize his farming.

        The bank’s not gonna be happy if they get his land back. He bought at the height of the bubble here (which was a little later than the coasts/urban areas)- The land is worth 30% less now, retail. Less at auction.

        There are few winners in an economy which is based on debt.

  2. Eric:

    Great points.

    To anyone asking “Hey smarty-pants: why don’t we have inflation if we are printing all this money?” Just point to auto sale prices, housing prices (yes – once again), medical care, and the stock market.

    Just because we don’t have (much) inflation in energy, food, and normal every-day items doesn’t mean we don’t have inflation.

    Look at college tuition vs. available credit.

    Look at auto prices vs. available credit

    Look at medical care vs. available “credit” Medicare is funded, literally, with printed money, and Medicare/Medicaid pay $0.77 of every dollar of medical “care” in the country.

    Notice any patterns?

    The inflation flows first to the sectors seeing the “new” money first.

    I’m sure GMAC and the rest of the auto bubble finance industry will be back at the trough soon enough: When these loans go south faster than good loan revenues can cover them, it will be the new Hank Paulson saying, once again, that there will be martial law if we don’t give them trillions in bailout money no questions asked.

    • Just because we don’t have (much) inflation in energy

      You must live on a different planet than I do.
      I have lived in the same house for 25 plus years….. I have not changed a thing as regards electricity use, except that I’ve not used the clothes washer or dryer for some years because of high iron content in the water. Stains the clothes, so I mooch off friends. (actually, trade for the amazing good coffee I produce).

      SO if anything my total KwHrs of juice have dropped slightly. Coming across energy bills, same serice provider, I’ve compared monthly usage from five years ago.. almost no change. SAME usage almost year round (I heat with wood) BUT….the actual dollars paid each month has increased THREE TO FIVE TIMES in as many years. Same KwHrs used, that much more money.

      Don’t tell me about little inflation on energy. Natural gas has dropped.. but won’t be coming anywhere near my place for at least 20 more years. Motor fuel has dropped a bit, but is rapidly approaching prices from five years ago once more.

      Nah…. inflation IS part of it, but many of the same things that drive car costs up also drive energy prices up…. and the root of it all is… grubbermint meddling. EPA mandate stupid stuff for cars, they mandate just as much or more stupid stuff for electricity production and distribution, natural gas and oil, hah, they’ve even mandated cataclysmic pervertors on WOOD STOVES. I bought mine the last year they were not required…. so even the cost of burning wood goes up. All because of the EPA, a crowd of unelected, unaccountable, corrupt, bought off bureaucrats seeking to destroy our economy for perverse reasons, and inside good ol boy gains.

      • I agree inflation is a huge factor. I followed it religiously when I was trading stocks a dozen or more years ago.

        While we haven’t seen a large electrical charge increase, we haven’t seen a wage increase in this part of the world since the 80’s….or at least much of one. Some parts of the country have much higher wages and higher costs too.

        I used to know people who went to Ca. and worked in the construction trade of one sort or the other, union wages. They’d work half a year and go home to Tex. or Ga. or some similar state and lived better than if they’d worked all year in their home state. Of course Ca., like all states now, is ravenous for revenue so they hit even out of state workers hard to income tax….and the cost of subsisting there, maybe just living in an RV as cheaply in as cheap of scenario as they can find has been inflated to a huge degree.

        I’ve noticed since the early 80’s wages in Texas increased very little for people who actually create things and produce. Anything that’s even remotely connected to costs of govt. have increased a great deal more and you can readily see the difference between someone such as a school teacher or worker at the county courthouse and the people who simply work and produce…..who are getting screwed.

  3. I’m currently driving a 2006 Land Rover LR3 with about 136,000 miles on it. Last week it blew a brake light switch which gave rise to a flurry of scary errors and a suspension fail (it reset to its lowest height which makes for uncomfortable driving).

    An easy fix, once you get it diagnosed. However diagnosis (without the help of the internet) is difficult because of the associated errors that all go away as soon as you switch off the engine. All of which could be real — rather than just figments of a complex electronic imagination.

    Apart from that, the car’s in excellent condition, runs like new, looks like new(ish). Until you look underneath and see where I’ve been a bit close to a few rocks off-road. The nav was last updated in 2012 and is DVD-based. The company that makes it aren’t making updates for that model anymore. But it’s still useful as a general indication of how long it’ll take me to get where I’m going. And I have a smartphone as backup.

  4. Too bad that no auto manufacturer will sell simple cars in America any more. You know, cars with wind-up windows and manual door locks, etc; and with almost all of the other electronics stripped out. Cars like I’ve owned in the past – base model Geo Metros, Suzuki Swifts, and all of the other basic city cars that used to be sold in the US. I enjoyed owning and driving them for many years, and I’ll bet I’m not alone in my preferences. Now I’m into my tenth year of a base model Toyota Yaris hatchback automatic, that I bought brand new in 2007. It has electric power steering, air conditioning, wind-up windows, manual door locks, and an AM/FM/CD radio — and that’s all I need, or want. It get’s 44 mpg highway (for me), has needed almost nothing in the last ten years except for routine maintenance items including a battery, a few wiper blades, and two sets of radial tires. it only has 93K on the odometer so far, and I hope it lasts for another 10 years or longer. If I need to replace it someday, and if ELIO never makes me the one I ordered in the meantime – then I’ll buy a used Mitsubishi Mirage (unless something cheaper with better gas mileage comes along in the interim). Maybe my automotive tastes have never been mainstream — but like my buddy the tailor says, “Hey, not everyone wears a 42 regular!”

    • Hi Kitty,

      I think the car companies would sell such cars; the problem is the rip tide of debt-fueled extravagance that carries us all along with it. “Most people” are willing to sign up for six-seven years of debt in order to have all the gadgets – and to spread out the costs of the government mandates, which are thus “hidden” from view.

      • eric, they should sell, like they once did, cars with the options you want and not a plethora of the fuckers just for the one or two you want. I liken it to satellite tv where you have a hundred or more channels you have to purchase to get the half dozen you want.

        I recently visited my best friend, 350 miles nearly exactly, house to house. 75 mph and close to 100 miles of I-10 at 80 so I want a cruise control and do 78 or 9 and 83 or 4. It’s 60 miles to the nearest store with everything I might need, gotta make that trip tomorrow just to get a 1/4″ brass nipple and hopefully a brass or plastic 1 1/4 T. I’ll get a few things I need and optimize my 130-40 mile roundtrip. That’s plenty of time in the seat so I like seats that adjust to fit my body, a steering wheel to drop down and if I could find it, one that telescoped also. A/C is a no brainer, 95 degrees right now. Taking CJ with me electric door locks and windows are my preference, esp. since the only GM pickup or car I’ve owned I never had a bit of problem with those two options but had a manual crank Silverado that was a nightmare. Sure, I want a good sound system but want one superior to what I could buy and install for the same money rather than trying to find something without factory shitty stereo and upgrading.

        I would prefer a manual shift but rarely is that available. And that depends on if I’m in a car or pickup. And pickups never seem to have enough OD’s to suit me.

        Not to beat a dead horse but dammit, I’d like a comfortable headrest too. I do not want all those options even the salesmen can’t identify for me. On Star would quickly be Off Star for me no matter what mods I had to do.

    • What’s even worse, Kitty, is that they no longer sell (and haven;t for a LONG time) simple large cars and full-sized pick-ups and vans! Not only are the essential functions of virtually every mechanical component of every modern vehicle controlled by a maze of sensors, computers and wires, but they’re so stuffed with all of the mandated “safety”[read: “Distraction”] garbage, and luxury options/gadgetry, that it’s to the point of absurdity.

      When you look at an old car from say the 40’s, or even most from the 60’s and 70’s, it’s amazing how few wires they even had. You opened the hood and saw an engine, with all kinds of space around it; and a few ignition wires, and that was pretty much it. We don’t need all this garbage which cars have come with for the last 40 years. Much less all the computerization that they now have. Just simple mechanical components, and a few cables and linkages to control them. Worked just fine; lasted forever!

      The best and most reliable, efficient and economical way to achieve any goal with mechanical items, is usually the option which will enable one to do what they need to do, while being the simplest and most direct option. These modern abominations are as far from simple and direct as one can get. It makes me want to scream!

      The vast majority of people don’t seem to have a clue though. If they did, there would be a mass rebellion/boycott. I mean, the fact that people spend big money to buy these turds which essentially are not feasible to own after the warranty expires, because they are too complex/expensive to repair, AND then those same people go back for more, and salivate over the latest gadgets/features/state-of-the-artness, is truly a testament to Edward Bernays.

  5. Apache helicopters are fitted with lots of cutting edge combat electronics. This stuff becomes obsolete pretty fast. But they don’t send the whole aircraft off to the crusher. Instead they strip out all the old stuff, and replace it with the newest systems.

    Then, the same bird goes back into service, with all the latest and greatest.

    Wouldn’t it be nice if cars could be similarly updated? Just unplug all the old electronic hardware, and plug in the new.

      • We would probably have third party electronic replacement companies out there. But with software, the car companies hold the cards close (like any software company does). If you tried to commercialize replacement software (and hardware), the car companies would have the government put you out of business.

        Since you don’t own software, you only buy a license to use it. Changing the software or using it in a way not intended by the publisher, is grounds for violation and being banned from using it.

        A third party would likely have to reverse engineer each model car, probably replace all the controlling hardware somehow. And make sure they have removed ALL the code put into a car by the car company to be somewhat “legal” I imagine. It would be expensive and pretty difficult to be able to make a profitable business out of it.

        • There’s no money in it. I do this kind of stuff myself – my daily driver is a fourteen year old car which has a really good infotainment system by modern standards, which I built myself. I had to reverse engineer all the vehicle integration signaling on the CAN bus, I had to custom fabricate more parts than you can imagine, and I had to make custom electronics. I did this for fun because I’m a freak, but it was a TON of work. All this work is completely specialized to my car, god only knows how much it would cost. I think you’d have to build cars with re-building in mind, the are just too many single purpose, single-use components in there.

          If it costs you thousands of dollars to improve the electronics in your car, and you can get a better used car for the money, why bother?

          There is nothing fancy in my car in terms of tech, just a 300 HP, manual transmission RWD sedan with good visibility that can’t exist today due to crazy safety standards. I’m keeping this thing forever!

          • Opposite, sounds like my 2000 Z 71, a rolling nightmare of electronic bugs. My wife said today it needs better speakers. No, it needs new speakers since those baked in Tx., exposed to the elements speakers of dubious quality are no longer dubious, just shitty and worn out. I can’t change stereos without buying some electronic thing that takes the place of the TheftLock system that the entire friggin pickup runs off. I made a mistake buying it. I’m negotiating a 93 Chevy heavy half long bed ext. cab 6.5 turbo diesel 4X4 with electrical problems. I’ve done electrical work, ac and dc for nearly 40 years so I can hopefully track the problem down. I can, with a hell of a lot of work, change that entire pickup body over to my one ton 4×4 and get rid of the electrical problems to boot. But this is a huge project for one man. Even though I have hoists and a forklift on my tractor sitting one cab down on a frame is a MF with only one person. Then I get to change wiring harnesses even though they are close to the same but one has problems. Once done though it would be worth it. No computer on that bad boy and all mechanical injection makes me a happy camper. With all the specialty tools required, completely rebuilding it is fairly straight forward……if I only had another set of hands. Can’t wait to change that 2000 for a 93 and to hell with the rest of it.

  6. Here in FL, there’s a guy named Fucillo, owns a bunch of Kia dealerships, including the largest one in the world. Also owns a bunch of dealerships in Upstate NY. Friend of mine was a salesman for him for a while. He sells so many cars because he will get financing for ANYONE. No credit, no job, no down payment, no problem! According to my friend, almost half of the cars he sells are eventually repossessed, but hey, what does Fucillo care? He got his money when the bank approved the loan. And oh, guess who also owns the largest auto repo company in FL? None other than Billy Fucillo himself. Nice racket. Sometimes makes me wish I was smart enough to be a scumbag.

    • Hi Vz, We vacation in the Berkshires and I always get a laugh out of his commercials, I think he’s on all the Albany tv stations along with one of his daughters who must own/run a few of the dealerships. At least he has original ads, unlike the slick productions numbers done by the automakers. Makes me nostalgic for the ads Ernie Boch ran back in the day: “come on down…..” ?

      • Oh yeah, Ernie Boch – isn’t he like the richest person in all of MA? If I recall though, Ernie’s a decent guy, does a lot for the community, charities,etc. Fucillo seems like more of a huckster who’s just lookin’ to make more money than he could ever figure out what to do with. At least here in SW Florida, he doesn’t seem to do anything that benefits the community in any way.

  7. Electronics when done properly and big automakers and their major suppliers can do them properly do not fail early and often. Could they go the extra steps and pot them and do other things so that water leaks don’t wreck them? Sure. Could management allow less constraints to prevent bone-head placement that puts them where the water goes? Sure. A number of things could be done that often aren’t, but these are secondary factors that lead to failure. Environmental issues that come about because someone put the computer near the floor and the car started leaking from some failed seam sealer or rust. Just failing on their own isn’t that common. It isn’t because of design and manufacturing standards.

    I’ve dealt with one, one actual sensor failure. A EVAP system flow sensor. Ford located it near a heater hose. I had noticed this when I got a EVAP code many years before the failure and insulated it. Years later my insulation broke off and I let it go. Then the sensor failed. When I replaced it I insulated the new one so it didn’t see as much heat from the hose. I know…. 210K and 20 years isn’t old enough.

    The main driver is that people just don’t want them any more. It’s “old”.

  8. And, despite the reliability of electronics these days, still their biggest nemesis are temperature fluctuations, vibration and dirt. All of which are the automobile’s raison d’etre.

  9. Nissan seems to be selling a bunch of Sentras and Altimas to people that can’t afford them, often with 0% financing over 72 months.

    If I were Carlos Ghosn, I’d be worried about “doing a Mitsubishi”, with lots of cars in customer’s hands that are likely to default.


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