Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



This Subprime Bubble Is Getting Ready to Burst

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

There's another subprime loan problem brewing, but this time, home mortgages aren't the main ingredient in the securities being created, sliced, rated, and sold to hungry investors.

Subprime auto loans are making a comeback, as are the asset-backed securities that include these and other risky loans. Investors are snapping up these products, and a recent article on the subject strongly suggests that the Federal Reserve is to blame for the whole thing.

This bubble has been expanding at a rapid pace
ABSes have seen a resurgence in popularity over the past year, after falling out of favor shortly after the financial crisis hit. These investment products -- which are made up of debt such as student loans, credit card balances, and auto loans -- have become more attractive as stingy yields have become the norm.

A rejuvenated market for new cars and trucks has revved subprime auto loan production, and Equifax noted in its January report that auto loan balances have risen to a two-year high. By September of 2012, ABSes backed by subprime auto loans totaled more than $14 billion, more than the $12.7 billion issued during the whole of the previous year. For 2013, almost $4 billion has already been sold to yield-starved investors.

Shotguns as downpayments
The Reuters article referenced above is truly spooky, as it tells a tale of one individual with a shaky credit history purchasing a used truck with a shotgun as the primary down payment. One of the most active lenders in this space is Exeter Finance, a subprime lender with big backers such as Goldman Sachs (NYSE: GS  ) , Wells Fargo (NYSE: WFC  ) , Citigroup, (NYSE: C  ) and Deutsche Bank (NYSE: DB  ) .

How is the Fed to blame for this scenario, you ask? According to the author of the Reuters article, Federal Reserve policies designed to jump-start the economy have caused investment yields to plummet, turning everyday investors into ravenous risk-takers willing to go to any lengths to make a buck. While QE3 and other programs have certainly made some investments less attractive, I think it is a great exaggeration to lay the gearing up of risky investment behavior entirely at the Fed's doorstep.

Banks may have helped the subprime auto loan market speed up. Early last year, Bank of America (NYSE: BAC  ) and Wells Fargo were among the big banks that began loosening credit restrictions for these borrowers, although these two banks primarily financed prime and near-prime auto loans.

A crisis in the making?
The author of the Reuters article notes that a bursting of the subprime auto bubble would not affect the economy in the same way as the mortgage meltdown did, but concerns remain. Even a Goldman Sachs representative expressed worry over this market at the annual American Securitization Forum this past January.

For investors, at least, this type of investment can be dicey. While ABSes backed by prime auto loans have been stable, those containing subprime loans showed annualized losses of 6.72% at the end of 2012.

Even with an industry expectation of a 25% default rate, investments backed by subprime auto loans look to be headed for a crash -- so, investor, beware.

Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 05, 2013, at 12:24 PM, Driving50274 wrote:

    The housing bubble had me freaking out when it finally burst. But while $14 billion is a lot of money, it is nothing like the housing bubble, cars and their car loans are for a few years rather than a few decades and they can be shuffled to other buyers in other regions.

  • Report this Comment On April 05, 2013, at 12:52 PM, jacobkash wrote:

    Your article is wriiten with no knowledge of how these loans work. The Subprime auto industry is never going to be at risk.. It's higher interest rates-lower vested values of vehicles financed. This protects the lenders. plus they charge up front fees.. You got to be kidding me if you think their not positioned right!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2347918, ~/Articles/ArticleHandler.aspx, 9/28/2016 10:18:34 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,268.84 40.54 0.22%
S&P 500 2,161.35 1.42 0.07%
NASD 5,314.54 8.83 0.17%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 9:43 AM
BAC $15.34 Up +0.05 +0.33%
Bank of America CAPS Rating: ****
GS $163.54 Up +0.65 +0.40%
Goldman Sachs CAPS Rating: ***
WFC $45.39 Up +0.30 +0.67%
Wells Fargo CAPS Rating: ****