Financial Crisis - Car Loans!

When I left school and began to work, I made a massive strategic error. My father had grown up in the depression when his parents had lost all their money and lived in a state of gentile poverty. While Dad loved the high life, he never borrowed a lot of money. He trained me. My massive mistake was that I did not lever myself up in the 1970's and 1980's when I could have done so safely.

But today most people have had the opposite training that I did - - credit is so easy to get and its all about cash flow. Many have been blinded to the essence of credit - that cash flow and asset values have to be strongly linked.

Where is Rob going with this you may ask - well here is my point. Imagine owing more on your car loan that the value of the car? How could anyne be so stupid? Well anyone is a lot of people.

More troubling, today's average car owner owes $4,221 more than the vehicle is worth at the time it's sold -- up from $3,529 in 2002, according to industry analyst Edmunds.

The longer loans are directly related to the higher balances. By extending the length of loans, lenders keep monthly payments down. But because these loans take longer to pay off, a much larger piece of the principal remains unpaid at the time the car is traded in.

The response of the automotive finance industry? Extend loans further and allow the indebted customer to roll what he owes into a new loan with little, if any, effect on his new monthly payment. In effect, the driver is paying a loan on two -- or more -- cars at once.

To keep the new cars selling the industry has been enabling us to roll one car into another. This is of course a shell game or Ponzi Scheme that has to have an end to it. My bet is that 2008 may be the end of this game and we can expect a further dent in the auto industry and in consumer credit and hence the economy.

It's not just individual consumers who are at financial risk. Nationwide, an estimated $575 billion in new and used auto loans are written every year by auto manufacturers, banks, credit unions and other lenders. About 30% of the loans that are originated by banks, and 100% of those issued by automaker financiers, are, like mortgages, repackaged and sold as securities, according to the Consumer Bankers Assn.

Analysts warn that just as investors didn't comprehend the risk inherent in some of the more exotic home mortgages in recent years, they aren't considering how risky these car loans are. If longer loan terms allow debt on the loans to grow too large, many drivers may simply default, leading to expensive repossessions.

And even those who keep paying their bills may reach a point, like Gerhardt, where they simply can't afford another car. That could send vehicle sales down the drain, a nightmare scenario for an industry that has already taken a hit this year from slower consumer spending and higher gas prices.

It could also lead to serious losses among financial institutions that have invested in car debt. Among securitized auto loans, two-thirds have terms longer than 60 months, a fact that Standard & Poor's, which rates auto debt for sale on the secondary market, calls a "credit concern."

So our banks not only have the subprime problem, but a growing credit card problem and now an auto loan problem. Soon we will have a Bank problem - then you will see a Messy World indeed