As the fifth anniversary of the Federal Reserve’s policy of keeping interest rates near zero approaches, the market for subprime borrowing is once again becoming frothy, this time in the car business.
As with mortgages in 2006 and 2007, the central bank’s stimulus is making it easier for people with spotty credit to buy cars as yield-starved investors purchase riskier bonds linked to auto loans.
While surging light-vehicle sales have been one of the bright spots in the U.S. economy, borrowers with imperfect credit are increasingly fueling it. Such car buyers account for more than 27 % of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25 % last year and 18 % in 2009, as lenders pulled back during the recession.
Issuance of bonds linked to subprime auto loans soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, according to Harris Trifon, a debt analyst at Deutsche Bank AG. The record $1.2 trillion in mortgage bonds sold that year dwarfed the market for such debt, which peaked at about $20 billion in 2005.
Late payments on subprime auto loans remain contained. After declining to as little as 2.83 % in 2011, delinquencies rose to 3.1 % of the debt in August, compared with 13.3 % in 2009, Standard & Poor’s said in an Oct. 22 report.