The return of subprime loans
What could possibly go wrong?
Proving that no-one ever really learns anything, the New York Times is reporting on the rebirth of subprime loans in the US:
Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.
The situation isn't quite as bad as it was last time, however:
The push for subprime borrowers has not extended to the mortgage market, which remains closed to all but the most creditworthy.
The financial crash wasn't strictly caused by subprime mortgages, however. Instead, the blame usually falls at the feet of the "collateralised debt obligations", or CDOs, which were financial instruments created by bundling together these mortgages and selling them in tranches. The CDOs were then rated higher than they ever should (or would) have been if their provenance had been clearer. All of this was helped by a lax regulatory authority which only caught up with some of the outright deception involved long after the fact. (I should note that to call this a simplified version of the crisis would an understatement).
So at least this time none of that is happening. No, hang on, it is:
Auto loans are particularly attractive for lenders since they were largely untouched by many of the new regulations. The new Consumer Financial Protection Bureau said it had not yet decided whether it would oversee the largest nonbank auto lenders.
At the same time, the market for securities made up of bundles of auto loans is heating up. Last year, investors scooped up $11.7 billion in auto loan securities, up from $2.17 billion in 2008. The pace of securitization in credit cards is slower, with lenders selling roughly 30 percent of their card portfolios to investors, down from 60 percent before the financial crisis, according to S&P.
Worst of all, though, is the industry's terminology for their customers:
The lenders argue that they have learned their lesson and are distinguishing between chronic deadbeats and what some in the industry call “fallen angels,” those who had good payment histories before falling behind as the economy foundered.
If you aren't a fallen angel, you may be a rising star instead. Gag-inducing.