Mortgage crisis spreads to sub prime car loan market

Fears are mounting that the sub-prime mortgage crisis is beginning to infect America’s $300 billion (£150 billion) car loan market as evidence emerges of a surge in the numbers of US motorists in arrears.

According to the National Automotive Finance Association (NAF), the trade body that represents America’s sub-prime vehicle lending market, the number of car loans that were late by at least 30 days, or had missed repayments, jumped to its highest level for three years.

Lenders who made more than 40,000 sub-prime car loans in 2006 saw the percentage of those in arrears jump from 6.8 per cent to 8 per cent, while smaller lenders who tend to offer loans to higher-risk customers saw their arrears levels more than double from 6.2 per cent in 2005 to 14.6 per cent in 2006. Wall Street is worried that the same mortgage borrowers who are falling behind with their home loan repayments will also miss repayments on their car loans.

The housing slump in the United States is causing financial pain to banks that provided expensive home loans to low-income householders with poor credit ratings. The sub-prime car loans market targets the same risky borrowers. Like the mortgage market, sub-prime car loan companies package loans and sell them to financial investors.

Goldman Sachs has told its clients that “the auto loan securitisation market is only partially open for business. Investor demand for sub-prime assets remains uncertain.”

Jack Tracey, director of the NAF, explained that the speed of repossession in the car market is far more rapid that in the housing market: “A nonprime lender will grab back a car fairly quickly. There are not as many legal hurdles to reclaim collateral as there is to reclaim a house.”