To what extent have subprime loans fueled the GDP boom?

WASHINGTON (MarketWatch) – It would be tempting to think that the era of subprime loans fueling the economy was a product of the era of the aged or deceased Ace Greenberg, Alan Greenspan and Angelo Mozilo.

Except when you break down GDP growth, it’s clear that the purchases of cars and light trucks have played a major role. And subprime loans, in turn, finance these transactions.

In the second quarter, spending on motor vehicles and parts increased 17.5% per year. In other words, cars accounted for 3.7% of all consumer spending, the highest rate since the first quarter of 2008.

Subprime loans account for about a third of new car sales and two-thirds of used cars, according to data from Experian Automotive, at the end of last year. The New York Times, in a story about the subprime lending industry, pointed out that growth soared by more than 130% in the five years following the crisis.

No price, moreover, to guess which one the sector has been excluded from regulation by the Consumer Financial Protection Bureau in an amendment added to the Dodd-Frank Banking Reform Act.

FINANCIAL ALLY ALLY,
+ 2.39%
, the financing arm of General Motors, insists that subprimes are not their business. (In the first half of the year, 13% of their designs were from unprivileged clients or without FICO scores.) But one executive noted on a call for space. “And even at Ally, the delinquency rate is starting to increase.

Of course, subprime mortgages are not the only factor driving auto sales. The percentage of older vehicles on the road is at its highest level since 2009, according to data from Experian. Some of this still reflects wary consumers scarred by recession, although it may change consumer preferences as well. As the economy creates jobs, consumer confidence rises, and wage growth accelerates (perhaps), this replacement cycle should be allowed to continue.

And it’s also worth noting that the auto loan default rate is pretty stable, just under 1% in June. However, some states, including Delaware and New Jersey, are starting to see sharp increases in 60-day delinquencies.

There may well be a good argument that the risks of subprime auto loans, to use the memorable word of former Federal Reserve Chairman Ben Bernanke to describe subprime mortgages, are “contained.” There is no evidence that the current financial system is leveraged in the auto market the way it was in the real estate market before the bubble burst.

But it also worries the US economy, which is shifting so quickly from one area backed by loose loans to another.

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