Negative Equity: Auto Loan Style

Nouriel Roubini has a good post on the confluence of two issues facing the auto industry: (1) economic meltdown plus high oil prices, and (2) the increasing number of vehicles that are upside down, meaning the owners owe the bank more than the SUV is worth. Evidently 25% of auto loans are underwater, not so good when that automobile is supposedly your security interest for the loan. (click here for the post) Here is an excerpt:

We have been worrying for a while about the collapse of home sales, the free fall in home prices, reckless lending practices that occurred in mortgages and now millions of households being “under water” or with negative equity on their mortgages.

But guess what? The same kind of credit mess did occur in auto sales and auto loans. The latest auto sales for April have been an unmitigated disaster. As Reuters put it:

“U.S. auto sales fell to their lowest annual rate in more than 15 years in April as weak consumer confidence and rising gas prices hit the industry's most profitable vehicles hardest.”

So auto sales are free falling and desperate car makers are cutting on prices and providing further price cuts via loose financing terms. But at the same time a time bomb of negative equity in auto loans is emerging. For the last few years auto loan lenders sharply loosened their lending standards, used aggressive, deceptive and predatory lending practices, allowed households to buy cars with little equity in them (as zero down-payment deals became the norm) and thus caused a bubble in car production and in car sales (individuals with cars too big and too many cars each) that was financed with a reckless lending bubble.

Sounds familiar? The car lending bubble was as reckless as the subprime and mortgage bubble. And now this credit bubble is going bust leading to rising default rates, significant negative equity in car loans (25% of all car loans are “under water”), massive losses to auto loan firms and a severe recession in the auto industry.