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I’m holding in my hand a printout from the website for Holy Rosary Credit Union (HRCU). It’s a small institution based in Rochester, New Hampshire, founded in 1962.
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Mike’s Moves to Make Buy: Food and beverage stocks; consumer staples stocks; Targeted investments that rise in value when auto-related stocks fall Sell: Autos; auto parts suppliers; Select banks and other lenders with elevated auto exposure |
Scroll through the small print on its auto loan page, though, and you’ll see the kind of auto lending they’re doing is downright scary. They’ll happily lend you money against a depreciating asset – your car – at a 125% loan-to-value ratio. In other words, they’ll give you $31,250 on a $25,000 vehicle, exactly the kind of malarkey that blew up the mortgage industry and housing sector a decade ago.
HRCU is far from alone. USE Credit Union, which serves teachers, students, and alumni in the University of California system, will lend you up to 125% of your car’s value – and for up to seven years. Sacramento Credit Union will do you one better – 130% LTV, all according to their websites.
First Credit Union of Chandler, Arizona really takes the cake, though. Buried in the fine print of its October 17, 2016 online rate sheet, which spells out terms and interest rates on all of its loans, you find this gem: “Max All-in LTV 140%.” One-hundred and forty percent!
And if you’re looking for a “car-gage” … a loan so long-term it might as well be a mortgage … head on over to R-G Federal Credit Union in Belton, Missouri. They’ll let you borrow for as long as 108 months. Nine … long … years.
Even Pentagon Federal Credit Union, the “Pen Fed” company that’s running all those commercials on CNBC these days, is getting in on the fun. They offer a “Payment Saver” auto loan, which gets you a lower payment up front by charging you a “balloon payment” at the end of the term.
In other words, you might pay $379 per month on a $27,000 new car for five years … and at the end, still owe a whopping $6,729. Pen Fed does say you can “sell, trade, or refinance” (with asterisks after the word “refinance,” which lead to small print saying “not a guarantee to refinance” because you have to meet “current creditworthiness standards”) at the end of the term.
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But let me ask you this: If a borrower can’t even afford the payment on a fully amortized loan (one where the balance is paid off entirely at the end of the term), do you really think that person will have the financial wherewithal to cough up several thousands of dollars later?
Or are they going to be left hopelessly upside down … stuck with a car they can’t sell … and unable to buy a new one because they need to spend every last penny of potential down payment money just to get out of their last bad deal?
You want to know why I rail so much at the ridiculous monetary policies we’ve been pursuing, or harp on the importance of turns in the credit cycle? It’s because this is the kind of garbage that goes on as a result. It happened in housing a decade ago, and it’s happening in the auto industry today.
By the way, it isn’t just the credit unions. Regional and national banks, as well as the so-called “captive finance” companies who work hand-in-glove with car manufacturers, have also gone wwwaaayyyy overboard in the kind of lending they’re willing to do.
Just look at this chart, which shows the amount of car and truck loans outstanding in this country. We have never, ever seen an explosion of auto credit like this, and we wouldn’t have seen it if standards weren’t slashed to the bone. But the percentage increase is very similar to what we have seen before – in mortgage lending ahead of that sector’s crash.
So what lessons can you take away, as an investor, from all of this?
First, understand that auto lenders are now, belatedly, starting to tighten standards. That’s just like what happened in the early stages of the housing bust, so you can pretty much guarantee the auto industry is topping out. Industry executives and apologist analysts on Wall Street will try to convince you otherwise. Don’t listen to them.
Second, the auto industry is a key driver of the economy. Roughly 1.5 million Americans work directly for car makers here in the U.S., according to the Alliance of Automobile Manufacturers. But if you factor in suppliers, finance firms, and other auto-related companies, you get a number north of 7 million. That’s almost 4% of total private sector jobs. The industry also accounts for about 3.5% of GDP.
Anyone who tells you an auto sector downturn won’t hit the U.S. economy where it hurts doesn’t know what they’re talking about. Just look at what Ford Motor (F) admitted this week: It will have to temporarily halt production and idle workers at four separate plants in Mexico, Kentucky, and Missouri because of bloated inventories. That comes shortly after Ford said it would idle a Michigan plant that produces the Mustang because of plunging sales and surging supply.
My advice: Don’t touch any stock that’s levered to the health of auto sales, auto production, auto lending, and more. If you’re lucky enough to get an oversold bounce, sell your shares and don’t look back.
Or better yet, don’t get mad, get even! Sign up for my All Weather Trader service, where I’m recommending investments that RISE in value when auto-related stocks FALL. My analysis tells me those investments are going to hit pay dirt, just like plays on falling housing and mortgage-related stocks did a decade ago.
If you’re a more conservative investor, favor less-economically sensitive stocks in sectors like food and beverage and consumer staples over sectors like manufacturing and industrials. There are even a handful of stocks that are poised to profit from the purging of the excess auto supply and from the shift toward ride-sharing options versus individual car ownership by more Americans.
Lastly, be sure you don’t chase seemingly generous dividend yields of stocks like Ford and General Motors (GM) … because price declines can eat those yields up and then some. GM sports an indicated yield of 4.8%, for instance, but the stock is down almost 8% year-to-date. Ford yields around 5%, but its shares have dropped almost 14%. Again, better — and safer — dividend and income ideas can be found in my Safe Money Report.
Do you agree with my assessment? Or do you think things aren’t as bad in the auto industry as I’m suggesting? Be sure to add your comments below, and keep your eyes out for ongoing updates on this major economic and market story.
Until next time,
Mike Larson
P.S. To see my 5 steps to take IMMEDIATELY to protect yourself from the shadow trillionaires, and their secret plan to crush your stocks in the coming months, please click here now!
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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20 trill.in debt,1 trill.student loans,$? cars loans,etc,etc,Things are looking brighter by the day,until humney falls off the wall,breaks his neck,back,ribs, legs,arms and skull and rushed to hospital and the doctor says,I aint a miracle worker.Best of luck lads,its a jungle out there.
Right on Ian
Oh ,I thought his name was Humpty
I agree with your over all assessment. There are a few things that explain the high rate of auto credit in the country and the shocking upside down car loans. I don’t know if it is because credit unions are more conservative or less greedy than banks but credit unions are safer than banks and only suffered two closings during the last recession that wiped out many more banks. There is an insurance policy car buyers can buy called gap insurance that will pay off a vehicle when the owner is up side down on their car trade in. As you mentioned, lenders are extending car loans way beyond the traditional 36 to 48 month loan periods. I saw one advertisement for a ten year loan. Add to this the skyrocketing price of new cars and you have not just more auto loan debt but debt which based on weak worker security and pay which is never good for any market.
I agree with the bad outcomes that will happen.
F O R D –
Fix Or Refinance Daily
The only price that works is the one that you do not set. The one that is discovered by buyers and sellers.
Amazon should be a good stock – all those ex-drivers who lose their cars will be shopping on line, not driving their lost cars to the markets.
Obama came to power in 2009 promising to regulate the financial markets, so that so that crises like housing bubble do not recur. Instead, he seems to have presided over multiple bubbles now which can be called “ObamaDoesn’tCare” (pun intended).
And, credit unions used to be a safe place to park your short term money because they were always conservative with their lending practices and thus stable. I guess (or hope) this would be reflected in the Weiss ratings for these institutions.
Obviously being short the car stocks is the way to go as well as some of the lenders.
I don’t think are as bad in the auto industry, but I think electric cars or self driving cars would cut down a lot on the carbon dioxide emissions which has got to be good for global warming.
Hi Mike, I fully agree with your assessment, but this has been in the mill for some time. This is one more result of falsified interest rates brought on by the Fed. But nooo problem, this rusty can full of holes has been kicked down the road until after the elections; whoops, on second thought, maybe that could be a problem soon.
What about auto parts sales like GPC and Autozone, will they be safe?
Just wait until it is suggested that American Consumers ONLY buy cars “Made In America”…….. It is coming and ii will be the opening salvo of a movement to ONLY buy “Made In America” products that brings Success back to America where those products are consumed……
Reminds me of the Big Short. Whether its Hillary or Trump, they are going to get clobbered and monetary policy by the Fed won’t help overcome 8 years of job-depleting policies. If Hillary wins and gets her tax increases that alone will tank investment. If Trump wins and gets his tax cuts, we might get lucky and get a surge of economic activity, but for either of them the huge government entitlement programs will continue to blow up the national debt and interest payments on that debt. I don’t see any will in Congress to slash government spending, in fact, with the Russians saber rattling and preparing for war – not to mention China’s increasing militarism – we may be forced to make good on all the military cuts over the Obama Presidency.
The concept of a cheap auto loan that requires an $8k balloon payment at the very end, secured by a car that’s badly depreciated, is such a risky proposition for a lender, that the lenders must have an exit strategy.
In the buildup to the 2008 Crisis, the lenders’ exit strategy was to bundle mortgages into negotiable securities that were secured by an insurance policy from AIG and by legal rights against each individual borrower. The reason this resulted in the 2008 Crisis, was that in many cases, the mortgages were not legally enforceable. (Instead of checking on the chain of title in the official records the courts would use to decide any dispute over who owns the land, banks relied on a private firm’s research that proved faulty. Once a significant percentage of the mortgages proved uncollectable in court, the crisis developed swiftly.). In short, the scheme would have worked, except for the fact that some of the mortgages were worthless but the investors who bought them weren’t informed of that risk.
With the car loans and the balloon payment, those risks are known. The car can be repossessed. The title is searchable by computer in every US state. Still, who could afford the risk of those huge balloon payments defaulting?
And then it hit me.
Uber has $10 billion in cash from selling it’s China business to rival Didi.
Ten billion dollars could assume about 1.25 million of those balloon payments.
Is it possible that a million deadbeats will become Uber drivers to pay their debts?
Is it possible that this deal could fail spectacularly?
Yes and yes.
Thanks for bringing this to our attention.
You have exposed the weakness of the auto loan market but didn’t broach the other canary in the coal mine, that being the auto leasing business.
Consumers that sign up for these weapons of mass debt creation are looking at years of payments followed by fine print that require penalties for all manner of unanticipated depreciation such as excessive miles driven, dings, dents, chips and general wear that accrue over the normal life of a vehicle but to one that the lessee does not own. Just wait till those bills start showing up in the mailbox at the end of the lease.
There is no end to human greed, desperate guinea pigs, misguided self-justification excuse makers, the desire to bury the facts by those who work and live in deception. When prices of products are so out of line with incomes to buy them, many people will break all the rules of logic and wisdom to still get what they want anyway. And there will always be those willing to accommodate them for the instant profit without caring about the future risks their shady deal making will inevitably bring about. A loan shark just about snared my hard of hearing husband, who thought a loan he wanted for business would be 8% finance charges. A little investigation on my part, as someone with a suspicious mind, revealed the charges were 5% just to sign paperwork and 80% thereafter; and of course if one is late just once, the percentage goes off the charts. Buyer beware whenever getting any loan for any purpose; sharks are circling everywhere.
“…Never a borrower nor a lender be; Do not forget, STAY OUT OF DEBT!!!” Words of old; still true today!
When all this unravels, and it will, it’s going to get very UGLY, no matter on which side of the debt equation you may be!!
Other industries related :
Steel
Aluminium
Copper
Plastics
Glass
Rubber
etc.
etc.
etc.
The Baby-Boomers are retiring and don’t need a new car anywhere near as often as non-retirees. This is going to put-paid to almost the whole economy which is right now teetering on a precipice. Uber and other such companies will probably do well.
Meanwhile, I’m going to keep my 13 yr. old pickup truck for awhile longer, rusty as it is, and I’m sure many others are going to do the same thing.
Good to hear from you Mike. You’ve been pretty quiet lately. I’ve been reading you and Martin for many years, and I know he’s doing a lot more traveling and having some well-deserved fun these days. I always appreciate your input and analysis. Thank you!
Well Mike you almost made me do it. I almost spritzed my keyboard and monitor with what I was drinking. I swear you just can’t make this stuff up. The California Credit Union for teachers and students is named USE Credit Union! USE! And that is exactly what is being done to all of these proclaimed and aspiring “intellectuals” and budding “geniuses”.
I hope that that is funny on some level because otherwise it takes suffering and stupidity to a whole new level. Aren’t we humans something?
Mike, you are absolutely correct. It seems that every industry at one time or another, tries to find a way to get people to buy. First it was the home industry where anyone who could fog a mirror (alive and breathing), was given a mortgage.
Now, as you have pointed out, we have CU’s and Banks offering to place people in new cars but at a terrible financial cost. Anything to keep the economy moving, to keep people buying, no matter how badly they get hurt financially and maybe worse God forbid.
I am still driving our 2002 Ford Explorer, 111,500 miles, and will continue to drive this car until we can afford to buy another. The worst investment that any of us can make in our lifetime is a VEHICLE…end of story !!
I agree with the article that the sheep is going to hit the fan as delinquencies rise and the Subprime in the Auto business goes Bust .
Thanks Mike for doing what you do!!!
There is one bright side to all this. At some point the cost of a new car will drop drastically just to clear bloated inventory. Just like home sales did a decade ago. Pick your favorite car, and wait a while for the price to drop.
You’re way to conservative in your estimates. And you didn’t mention the “easy money” policies of the fed. I’ve always likened financials to kids trading baseball cards. In this case, baseball card prices have been negotiated time after time. One day, one father doubles his kids allowance, and the kid now has excess free money to spend on the card or cards he has been saving for or had his eye on for some time. Just before, felt the card was not worth all his allowance. Now….not. The easy money not only made it possible to buy the card, but also changed his valuation of money totally. It appears, from the chart on car loans, the whole of our country has had their allowance increased. And another thing, with each passing generation, younger folk have less fear of borrowing. Just look at the college loan crisis looming. Younger folk think nothing of borrowing 100K, for a teaching job? The problem is not banks or credit unions, it is a spoiled population with an increased allowance. My parents and grandparents by comparison, never bought anything on credit. The great depression era sobered them up. Kids today think the bubble we live in is normal business as usual. It is not. If we an out of body experience, float overhead and look down, makes one sick.
The younger generation also does not have this obsession with cars and houses like the baby boomers–these people born after about 1995 want to live and work near their jobs.
Also if uber and car sharing takes off even in a small way, it will cut down on the number of cars people buy. A woman I met on a trip told me her son lives in Boston, uses Uber all the time, has a 12 year old honda and is not interested in buying another car in the near future.
The trouble is people under. 40 are stupid politically correct think goverment will take care of them can’t add or subtract cannot compute in their head percentages so have no clue how to handle money so when $ 199 a month is stated that’s all they see that it’s for 200 months who cares!!
Greed has no limits. Back in 2002-2004…I worked in the mortgage industry. Having been in business since 1980, I knew something was “a foot”…Loan officers worked with Appraisers to get the value of a house up to a value that would pass the loan application ( against the law by the way)…..Loan officers were pushed to write Class C credit mortgages so we could pummel them with closing costs and fees……Managers had the OK to add half a point to a mortgage before closing time..( the Manager got 1/2 as a spiff the company got the other 1/2)….we were encouraged to write interest only mortgages with a balloon payment in 10-15 yrs…Well, in 2008, we saw this ponzi scheme collapse.
Now the THIEVES have discovered car loans. With Mortgages as worthless paper…oh sorry its called ” derivatives”…..now car loans will become worthless as the car buyers can’t possible pay them back.
What else can the thieves get away with?…Oh, the Presidential race…thats right…
Another troubling trend is the Cass Freight Index fell 3.1% year over year in the month of September. Imagine what happens to the index when there are less vehicles being shipped because of plants being idled by Ford and other car Companies .
Mikes articles are usually very informative and interesting. Their well written.
Yes, we see signs of a bubble about to pop in the auto loan area, but look at total debt to put it in perspective. FRED data (St Louis Fed data site) shows that total credit to non-financial sector is at an all-time high in dollar terms, and a bit off its all time high (from Q1 2008) as a percentage of GDP.
With private sector credit at an all-time high, (the dollar value number) and ability to service that debt near an all-time low (the percentage of GDP number), we see that not only is the auto bubble likely to pop, but also that the financial system as a whole is quite overextended.
Avoid automakers and auto finance companies? That’s a good start, but I’d say that this is not a good time to be long any financial assets. A falling tide strands all ships on the newly exposed reefs.
UBER CAR OR THE BUS
The weak link in all the newer cars is the electrical components. A computer to run the auto door, another computer to run the automatic transmission, and yet one more separate computer to run the engine ( Control Module) and emission functions. Each costs almost $1,000. Numerous sensors, each $200.00, then other components and circuit boards. The life of most of them is maybe 15 years.
Auto Makers are only required to manufacture replacement parts for 10-15 years at most. After that, many components are not available and can not be repaired either ( instrument clusters, for example). Then your car is not derivable and its market value close to Zero. Then what ? Better call Uber Car.