The auto market may be under pressure as several experts predict a massive wave of foreclosures in early 2023. The likes of Tesla CEO Elon Musk and Ark Invest’s Cathie Wood are sounding the alarm about the likely impact on financial markets.
“Potentially the biggest financial crisis ever”, has published Musk on Twitter about the likely auto loan crisis. Musk was responding to a message from Cathie Wood and a series of tweets from the CEO of a car dealership.
Messages from the CarDealershipGuy Twitter account revealed a tendency “extremely alarming” with car lenders. According to the CEO behind the account, many lenders ignore the red flags and the fact that loan applicants are already “immersed” with a previous car loan.
“This morning I discovered something extremely alarming in the car market, especially in car loans”wrote on Twitter CarDealshipGuy, author of a newsletter dedicated to the car market that has attracted a lot of attention.
“I am now convinced that there will be a huge wave of car seizures in 2023.”
Many people have had no choice but to buy an expensive car during the pandemic. Car prices have fallen recently, sometimes by nearly 30% year-on-year.
“The same people who took out these large loans are now ‘overwhelmed’. They owe the banks more than the value of these cars. The banks are well aware of the problem. »
This morning I discovered something *extremely* alarming happening in the auto market, specifically in auto loans.
I am now convinced that there will be a massive wave of car repossessions in 2023.
Here’s what I discovered (and what no one knows):
— CarDealershipGuy (@GuyDealership) 16 December 2022
CarDealershipGuy, who wished to remain anonymous, said Epoch Times that many of these overwhelmed borrowers are trying to buy other vehicles while they have outstanding debt on their previous car loans. According to him, 35 to 40% of new loan applicants already have outstanding debt.
In normal times, banks consider this a warning signal and reject the loans, but this time 65% of the partner credit institutions granted these loans anyway.
“I’ve been in the industry for about ten years and it’s brand new. »
When asked whether the large institutional banks participate in these loans, he replied: “Some of the big names that you and I know do. »
He then described this dynamic on Twitter.
“The lender lets the consumer buy the car WHILE KNOWING that he already has an open car loan at another bank! » Banks make this choice strategically on the assumption that customers will not repay their previous loan – provided by a competing bank – but will continue to pay on the latest loan.
The dynamics that exist between competing banks are of the type “All shots are allowed”he says.
CarDealershipGuy’s Twitter feed caught the attention of Cathie Wood, director of management company Ark Invest, worry of “the impact that falling residual values could have on the auto loan market by more than a trillion dollars”.
Cathie Wood, who managed more than $14 billion in assets in September, added that this crisis could be exacerbated by a growing number of consumers choosing to buy electric cars at the expense of the cost of thermal cars.
Elon Musk responded to Cathie Wood’s tweet with the same concerns.
.@ARKInvest has been concerned about the impact of declining residual values on the $1+ trillion auto loan market. Most of these loans back gas-powered vehicles. @GuyDealership explains that the crisis is underway. The shift in consumer preference towards electric cars will exacerbate this crisis. https://t.co/G9Kjvr3yps
— Cathie Wood (@CathieDWood) 16 December 2022
Elon Musk openly criticized the Federal Reserve’s aggressive interest rate policy. publishing company on Twitter last month that “Fed must cut interest rates immediately”. Since the start of the year, the US Federal Reserve has raised its overnight lending rate from nearly 0% to over 4%.
A time bomb
As covered Epoch Times in November, the post-Covid boom and corresponding chip shortage sent car prices skyrocketing through 2020 and 2021.
Car dealers were forced to overpay for their goods and in turn imposed high fees on banks that provided auto loans. Lucky Lopez, a Las Vegas-based car loan broker, said Epoch Times that the loans granted in 2021 far exceeded the value of the vehicles in question.
“Dealers started calling banks: ‘Hey, I’m going to sell this with an LTV [ratio prèt‑valeur] 150% or 160%… Can you do it?’ And banks that traditionally wouldn’t have started doing that.”explains Mr. Lopez, schematizing the dynamics of the sector that he had witnessed.
In comparison, online loan broker LendingTree reported that the average loan-to-value ratio for a car loan in 2019 was 87%.
Lucky Lopez also predicts a massive wave of foreclosures by lenders, not without consequences for the car market. After a seizure, cars are usually sold at auction, but banks are reluctant to do this type of sale as it is difficult to recover 100% of the vehicle’s value.
As a result, banks are turning down most sales and continuing to delay the auction process, Lopez said.
According to former Dallas Federal Reserve Bank adviser Danielle DiMartino Booth, the lack of sales is leading to a glut of supply, which is a ticking time bomb.
“This massive excess inventory continues to grow each week because lenders don’t want to accept a loan loss”she explains during an interview on the Forward Guidance podcast.
Regulators will eventually step in and ask why lenders haven’t seized the cars, she says, they’ll force liquidations. “That’s what the supervisory authorities did during the housing crisis. »
“They’re going to force them to write these loans off their books, and then we’re going to see used car prices crash.”
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