Auto lending: Let's try to keep things in balance
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Subprime auto loans are back, and that's a very good thing for the industry.
With the U.S. banking industry back on its feet after the 2008 credit freeze and recession, auto shoppers with less than top-notch credit ratings are qualifying for loans again.
That, of course, boosts sales and provides essential personal transportation for millions of Americans.
But we should hold the high-fives until we resolve to avoid the pitfalls that auto lenders blundered into before the recession.
The era's lust for growth overcame common sense. Wall Street used lax standards to provide funds for auto lenders. And lenders, in turn, offered easy credit to buyers.
Easy credit created more and more customers with underwater loans; their loans were worth more than the equity they held in their vehicles. To close sales for underwater customers, automakers had to sweeten deals with huge profit-eroding rebates of, say, $5,000 or more.
The industry was doing no favor to customers, including many with subprime loans, by selling them autos they could not afford. And the rebate wars of the pre-recession period trashed automakers' profits.
A catchphrase captures nicely the insanity of stupid lending: "We lose money on each sale but make it up in volume."
Now automakers, lenders and customers are in balance. Lenders' auto-loan portfolios are sound after years of lending to mainly prime customers, giving lenders more comfort to expand subprime lending.
And automakers have rebates under control.
But the industry earned today's balance with widespread pain in the bankruptcy period. Jobs were lost. Factory wages were cut. Pensions were reduced or eliminated.
Those sacrifices will be for naught if the industry drifts back to the bad habits of the pre-recession period. We risk returning to the same downward spiral if we forget the lessons of the past.
