Subprime is back! Well actually, it never really disappeared from the market. Instead, many subprime lenders also exercised more caution in approving this loans to borrowers. Subprime loans are still available to this day. Better days have come since the subprime housing crisis, But have we learned from our mistakes in the past?
What Pulled the Trigger?
In 2007, the volume of high-risk mortgage loans escalated dramatically. Fueled by the increase in housing demand, speculators started to enter the market. This caused the demand to shoot up even higher.
Lenders were offering mortgage loans to borrowers with poor credit. These were called subprime loans. They ever approving loans to borrowers who would not qualify for such a loan if it were a prime loan. Then, too many a borrower began defaulting on their loans. Because the payments were too high for them to make, loan default was inevitable.
By 2009, many banks were left bankrupt and Wall Street Firms experienced great losses. And not too long after, we have entered a global recession. The domino effect continues even up to this day. However, our housing market has recovered well since.
Are We Committing the Same Sins Now, On Auto Loans This Time?
This year, auto loan delinquencies drove higher. Deep subprime auto loan levels have spiked up since 2010 and have not translated into higher loan delinquencies. According to UBS, the root cause of this escalation of delinquencies may be attributed to income inequality and aggressive easing in lending conditions, especially by non-bank lenders.
A warning sign flashes for the next financial crisis. Wells Fargo & Co reported that fewer subprime borrowers are paying off their auto loans early. This can be an indication that these borrowers are struggling to make payments.
JP Morgan Chase, however, believes that this subprime auto hiccup won’t be causing a huge problem. They have acknowledged that auto loan industry may have a problem coming, but it won’t drag the whole economy down with it.