Free Lunch – This Time It’s Different or History Repeats Itself?

By | April 26, 2016

SummaryWith easy money coming back into the market, borrowers who should not be borrowing getting loans and the economy at a tipping point is the history of the financial crisis about to repeat itself?

Will the return to ‘easier’ lending practices in markets spanning mortgages, student loans and used cars pose a problem?

Problem for the lenders that is or, potentially even the taxpayers who may have to bail those lenders out if and when a cascade of defaults hits the market!

If we remember back to the mortgage crisis a traditional or non-traditional loan originator would provide funding at a percentage of what they deemed the underlying collateral protecting their loan to be worth.

In more ‘normal’ economic times borrowers often hear the phrase 75% or 80% loan-to-value (LTV) which means that if a property is said to be worth $300,000, that borrower would need to fund a down payment of approximately $60K – $75K.

This borrower ‘skin in the game’ gives the lender some cushion if the loan payments stop coming and the lending institution needs to foreclose and eventually sell the asset. In other words the lender is collateralized and in mostcases through history will be protected and not face a loss.

Of course in out of the ordinary times such as during the 2008 financial crisis, some borrowers were getting over 100% financing, may not have been completely qualified for the loan in the first place, the foreclosure process, when necessary and particularly in judicial states, became onerous and lengthy and the pie’ce de resistance was that property lost more value than any cushion the lender may have had.

To the last point underwater meant that the property was worth less than the outstanding amount of the loan and ultimately the lender was going to lose money when they got the asset off of their books.

Live and learn and lenders certainly aren’t going to make these same mistakes again, right?

Fast forward about 8-years from the crisis and it appears that the scenario of easy-lending is poking its head back out.

You Want To Lease A Car?

In the beginning of April 2016 the article, ‘Pssst…You Want To Buy A Car?‘ said the following…

As inventories of pre-owned vehicles rise, dealers look to buyers who don’t qualify‘

‘The typical used-car lessee has a 635 credit score, 80 points lower than a new-car buyer, according to Experian PLC, which produces credit reports.‘

‘The bet on leasing could turn sour if used vehicle prices take a dramatic turn. But, lenders like Ally, say they are prepared to handle the downside…‘

If this all sounds somewhat familiar it’s because you heard similar statements out of mortgage lenders and banks in 2007 and 2008!

Well if the bet on leasing could turn sour if vehicle prices take a turn down, this chart might provide some reason for concern!

2008 financial crisis

Chart Source

So will this market become a drag on the lenders who originate the loans if the value of their collateral falls, borrowers stop paying and the car needs to be taken back and sold?

Maybe ‘this time it really is different‘ but the reality is that only time will tell!

Related Articles

Pssst…Hey Buddy, You Want A Student Loan?

97%+ Loan-To-Value Mortgage Loans: It’s Deja Vu’ All Over Again!

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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