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\n Tricolor, a major subprime auto lender specializing in buyers without social security numbers or credit histories, is going out of business.\n <\/p>\n
\n The company filed for bankruptcy on Wednesday. Most companies that file for bankruptcy intend to stay in business. But Tricolor does not \u2013 it plans to liquidate. Tricolor has not been available for comment.\n <\/p>\n
\n Tricolor\u2019s failure is bad news for buyers who depend on such lenders, often undocumented immigrants \u2013 a particular focus of the Texas-based company. It\u2019s also not great for the major banks invested in Tricolor\u2019s debt backed by its loans.\n <\/p>\n
\n But Tricolor\u2019s problems aren\u2019t likely to upend the broader financial services industry the way the subprime mortgage lenders did in 2008, nearly bringing about a new Depression. Those loans gave birth to what became known as \u201ctoxic assets,\u201d forcing the federal government to pour billions into each of the nation\u2019s major banks to stop a complete seizure and collapse of the US economy.\n <\/p>\n
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\n Subprime auto loans, even questionable ones like the low documentation loans Tricolor offered, are a very different animal than the subprime mortgage loans of the early years of this century.\n <\/p>\n
\n \u201cIt\u2019s not something to worry about in terms of a market collapse,\u201d Pamela Foohey, a law professor at the University of Georgia and an expert in both auto finance and bankruptcies, told CNN Thursday. \u201cI think it\u2019s troubling for people that they take out subprime loans and then potentially have their cars repossessed if they can\u2019t afford the payments.\u201d\n <\/p>\n
What subprime loans are, and are not<\/p>\n
\n \u201cSubprime,\u201d whether it be for mortgages or car loans, refers to borrowers with weak credit scores. However, there are many important differences between subprime mortgage loans and subprime auto loans, Foohey said.\n <\/p>\n
\n First, the entire auto loan market is only a fraction of the size of the home mortgage market \u2013 one-eighth the size, according to the Federal Reserve.\n <\/p>\n
\n And auto loans are not as leveraged, Foohey said, meaning they\u2019re not bundled into bonds and sold to other investors as often as mortgages were just before the housing market collapse of 2008.\n <\/p>\n
\n But more importantly, unlike home prices in 2007 and 2008, car values are holding steady or rising. And cars are a depreciating asset.\n <\/p>\n
\n That means auto lenders, or those buying the bonds backed by the loans, aren\u2019t expecting cars to increase in value over the life of the loan. Mortgage lenders, and those buying mortgage-backed securities, were counting on home prices in the aughts to keep rising to bail them out of any bad loans.\n <\/p>\n
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\n \u201cThe biggest difference is the expectations of the lenders of what will happen with the assets \u2013 the cars \u2013 when the buyers default,\u201d said Foohey. \u201cIn many ways, subprime auto lenders actually expect borrowers will default and they\u2019ll get the cars back pretty quickly at some point and then resell it.\u201d\n <\/p>\n
\n For homeowners who miss payments, they can fight foreclosure and stay in their homes for an extended period of time. Even when a lender takes possession, reselling the home at a price high enough to cover the cost can be difficult and time consuming.\n <\/p>\n
\n That\u2019s not the case with car loans.\n <\/p>\n
\n \u201cWhen car buyers default, the underlying laws \u2026 (allowing) lenders to get back the cars are radically different than with homes,\u201d she said.\n <\/p>\n
\n And getting the cars back is relatively straightforward.\n <\/p>\n
\n Many subprime lenders build GPS features into cars to make it easier for teams repossessing the vehicles to find them. The lenders can even disable the ignition of the cars to prevent owners from driving them once they\u2019ve defaulted on the loan.\n <\/p>\n
\n Even if it doesn\u2019t match the size and scope of the home mortgage market, the car loan market is still sizable.\n <\/p>\n
\n Car purchases are the second largest purchase most households make, if not the largest. The Federal Reserve put total car loan balances at $1.7 trillion as of the end of June, compared to $12.9 trillion for mortgage loans.\n <\/p>\n
\n Of the overall car loan market, subprime auto loans made up between 15% and 16% during the last three years, according to data from Experian. And the part of that market considered \u201cdeep subprime,\u201d where Tricolor operated, accounts for less than 2%.\n <\/p>\n
\n High interest rates and near record car prices have resulted in huge car payments for many borrowers. More than 15% of all new car payments, including both loans and leases, are more than $1,000 a month, a record share, according to Experian.\n <\/p>\n
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\n Subprime borrowers and deep subprime borrowers are not likely to buy new cars. About 23% of used car loans go to subprime borrowers, with about 3% to \u201cdeep subprime\u201d borrowers. But even used car loan payments are at record levels. Four percent of used car loans are also more than $1,000 each month, with another 26% between $600 and $1,000, according to Experian.\n <\/p>\n
\n It\u2019s not just subprime borrowers affected by Tricolor\u2019s bankruptcy \u2013 the company also bundled together its loans to sell them to other investors, including banks. Tricolor\u2019s filing said that its liabilities range between $1 billion and $10 billion, but also listed assets in the same range. The secured lenders listed among its creditors are JPMorgan Chase, Barclays and Fifth Third Bank.\n <\/p>\n
\n Fifth Third said in a filing last week that it has discovered fraud in its relationship with a commercial borrower and that it is working with law enforcement on that case. It also said it expects to take a charge of up to $200 million related to the losses.\n <\/p>\n
\n A spokesperson for Fifth Third confirmed to CNN Thursday that Tricolor is the commercial borrower referred to in that filing. Tricolor\u2019s bankruptcy trustee did not immediately respond to a request for comment on Thursday.\n <\/p>\n
\n Correction: A previous version of this story misstated the total car loan balances as of the end of June. It was $1.7 trillion.\n <\/p>\n","protected":false},"excerpt":{"rendered":"Facebook Tweet Email Link Tricolor, a major subprime auto lender specializing in buyers without social security numbers or…\n","protected":false},"author":2,"featured_media":138261,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-138260","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/138260","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=138260"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/138260\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/138261"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=138260"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=138260"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=138260"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}