Analysis Discounts Subprime ‘Bubble’ Fears

Two economists in a white paper discount fears that increased subprime auto financing could create “the next bubble.”

“While the subprime lending segment needs to be monitored carefully, the evidence at this time does not suggest there is a bubble forming.” says Dennis Carlson, deputy chief economist for business information-provider Equifax.

Subprime auto lending plunged during the financial crisis of 2008 and 2009. It has made a comeback because of greater access to affordable credit and creditors vying to increase business. Subprime accounts for about 32% of auto-loan originations.

But some skeptics claim financial institutions are going too deep, citing increased risks of low-credit lending. They call for a slowdown, lest things get out of control.

Often cited as a cautionary example is the massive subprime lending defaults that triggered the national credit meltdown of six and seven years ago.

But those bad loans involved subprime mortgages, not auto financing, note Carlson and colleague Amy Crews Cutts, Equifax’s chief economist,       

“The lending landscape today is not the same as it was in 2007, both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased,” Carlson says.

By examining data aggregated from the credit reports of more than 210 million consumers in the Equifax credit database, the pair of economists evaluated whether certain traditional characteristics of a bubble are evident.

Among their conclusions:

The write in their report:

“Many are chastising lenders and investors for ‘subprime shenanigans,’ suggesting that, similar to the mortgage issues that precipitated the financial crisis, there is a bubble being created that is ready to burst.

“Others criticize the often high interest rates that borrowers with subprime credit must pay to obtain financing and feel that the practice is unfair and that rates should be capped.

“Surprisingly little data has been shared in the press. Many of the arguments

have been rhetorical, based on the following premise: Subprime lending

caused the financial crisis, ergo subprime lending is dangerous. This

generalization, however, does not always account for actual subprime

loan data.”

They add:

“A fair and functioning ‘second-chance’ market is necessary for a fully functioning

economy. In many cities in America, an individual’s job prospects are limited without a car.

“In the absence of a subprime auto loan, many would be unable to finance a car and therefore face difficulty obtaining and maintaining employment.” 

The whitepaper is available at http://media.globenewswire.com/cache/23864/file/28405.pdf.

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