The LAT reports in today’s piece that the subprime auto-loan securities market is running at a $14 billion annual clip in the first half, more than double last year’s pace and that it’s similar to how subprime mortgage loans were securitized, down to turning garbage into AAA gold:
Buy Here Pay Here is also being boosted by one of the sophisticated financial strategies that drove the nation’s recent housing boom and bust: securitization. Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.
Although they’re backed mainly by installment contracts signed by people who can’t even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.
That’s because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.
Some analysts worry that the rush to securitization could lead to careless lending by dealers eager to sell more loans, as happened with many mortgage-backed bonds.
Surely, Mr. Market is too smart now to let such a thing happen, right?
Nice work by Bensinger and the LA Times of digging into this business and showing us how it’s financed by big money.