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Rodney Durham stopped working in 1991, declared bankruptcy and lives on Social Security. Nonetheless, Wells Fargo lent him $15,197 to buy a used Mitsubishi sedan.
“I am not sure how I got the loan,” Mr. Durham, age 60, said.
Mr. Durham’s application said that he made $35,000 as a technician at Lourdes Hospital in Binghamton, N.Y., according to a copy of the loan document. But he says he told the dealer he hadn’t worked at the hospital for more than three decades. Now, after months of Wells Fargo pressing him over missed payments, the bank has repossessed his car.
This is the face of the new subprime boom. Mr. Durham is one of millions of Americans with shoddy credit who are easily obtainingauto loans from used-car dealers, including some who fabricate or ignore borrowers’ abilities to repay. The loans often come with terms that take advantage of the most desperate, least financially sophisticated customers. The surge in lending and the lack of caution resemble the frenzied subprime mortgage market before its implosion set off the 2008 financial crisis.
Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scoresat or below 640.
The explosive growth is being driven by some of the same dynamics that were at work in subprime mortgages. A wave of money is pouring into subprime autos, as the high rates and steady profits of the loans attract investors. Just as Wall Street stoked the boom in mortgages, some of the nation’s biggest banks and private equityfirms are feeding the growth in subprime auto loans by investing in lenders and making money available for loans.
And, like subprime mortgages before the financial crisis, many subprime auto loans are bundled into complex bonds and sold as securities by banks to insurance companies, mutual funds and public pension funds — a process that creates ever-greater demand for loans.
The New York Times examined more than 100 bankruptcy court cases, dozens of civil lawsuits against lenders and hundreds of loan documents and found that subprime auto loans can come with interest rates that can exceed 23 percent. The loans were typically at least twice the size of the value of the used cars purchased, including dozens of battered vehicles with mechanical defects hidden from borrowers. Such loans can thrust already vulnerable borrowers further into debt, even propelling some into bankruptcy, according to the court records, as well as interviews with borrowers and lawyers in 19 states.
In another echo of the mortgage boom, The Times investigation also found dozens of loans that included incorrect information about borrowers’ income and employment, leading people who had lost their jobs, were in bankruptcy or were living on Social Security to qualify for loans that they could never afford.
Photo Credit Many subprime auto lenders are loosening credit standards and focusing on the riskiest borrowers, according to the examination of documents and interviews with current and former executives from five large subprime auto lenders. The lending practices in the subprime auto market, recounted in interviews with the executives and in court records, demonstrate that Wall Street is again taking on very risky investments just six years after the financial crisis.
Pointing to higher auto loan balances and longer repayment periods, the ratings agency Standard & Poor’s recently issued a report cautioning investors to expect “higher losses.” And a high-ranking official at the Office of the Comptroller of the Currency, which regulates some of the nation’s largest banks, has also privately expressed concerns that the banks are amassing too many risky auto loans, according to two people briefed on the matter. In a June report, the agency noted that “these early signs of easing terms and increasing risk are noteworthy.”
Despite such warnings, the volume of total subprime auto loans increased roughly 15 percent, to $145.6 billion, in the first three months of this year from a year earlier, according to Experian, a credit rating firm.
“It appears that investors have not learned the lessons of Lehman Brothers and continue to chase risky subprime-backed bonds,” said Mark T. Williams, a former bank examiner with the Federal Reserve.
In their defense, financial firms say subprime lending meets an important need: allowing borrowers with tarnished credits to buy cars vital to their livelihood.
The Money
Investors, seeking a higher return when interest rates are low, recently flocked to buy a bond issue from Prestige Financial Services of Utah. Orders to invest in the $390 million debt deal were four times greater than the amount of available securities. What is backing many of these securities? Auto loans made to people who have been in bankruptcy.
An affiliate of the Larry H. Miller Group of Companies, Prestige specializes in making the loans to people in bankruptcy, packaging them into securities and then selling them to investors.
“It’s been a hot space,” Richard L. Hyde, the firm’s chief operating officer, said during an interview in March. Investors are betting on risky borrowers. The average interest rate on loans bundled into Prestige’s latest offering, for example, is 18.6 percent, up slightly from a similar offering rolled out a year earlier. Since 2009, total auto loan securitizations have surged 150 percent, to $17.6 billion last year, though some estimates have put the total volume even higher. To meet that rising demand, Wall Street snatches up more and more loans to package into the complex investments.
Much like mortgages, subprime auto loans go through Wall Street’s securitization machine: Once lenders make the loans, they pool thousands of them into bonds that are sold in slices to investors like mutual funds, pensions and hedge funds. The slices that include loans to the riskiest borrowers offer the highest returns.
Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds. In March, for example, Standard & Poor’s blessed most of Prestige’s bond with a triple-A rating. Slices of a similar bond that Prestige sold last year also fetched the highest rating from S.&P. A large slice of that bond is held in mutual funds managed by BlackRock, one of the world’s largest money managers.
Private equity firms have also seen the opportunity in auto subprime lending. A $1 billion investment by Kohlberg Kravis Roberts & Co., Centerbridge Partners and Warburg Pincus in a large subprime lender roughly doubled in about two years. Typically, it takes private equity firms three to five years to reap significant profit on their investments.
It is not just the private equity firms and large banks that are fanning the lending boom. Major insurance companies and mutual funds, which manage money on behalf of mom-and-pop investors, are also snapping up securities backed by subprime auto loans. While there are no exact measures of how many of these loans end up on banks’ balance sheets, interviews with consumer lawyers and analysts suggest the problem is spreading, propelled by the very structure of the subprime auto market.
The vast majority of banks largely rely on dealers to screen potential borrowers. The arrangement, which means the banks rarely meet customers face to face, mirrors how banks relied on brokers to make mortgages.
In some cases, consumer lawyers say, the banks actually ignore complaints by borrowers who accuse dealers of fabricating their income or even forging their signatures.
“Even when they are presented with clear evidence of fraud, the banks ignore it,” said Peter T. Lane, a consumer lawyer in New York. “The typical refrain is, ‘It’s not our problem, take it up with the dealer.’ ”
It could quickly become the banks’ problem, analysts say, if questionable loans sour, causing losses to multiply.
For now, the banks are not pulling back. Many are barreling further into the auto loan market to help recoup the billions in revenue wiped out by regulations passed after the 2008 financial crisis.
Wells Fargo, for example, made $7.8 billion in auto loans in the second quarter, up 9 percent from a year earlier. At a presentation to investors in May, Wells Fargo said it had $52.6 billion in outstanding car loans. The majority of those loans are made through dealerships. The bank also said that as of the end of last year, 17 percent of the total auto loans went to borrowers with credit scores of 600 or less. The bank currently ranks as the nation’s second-largest subprime auto lender, behind Capital One, according to J. D. Power & Associates.
Wells Fargo executives say that despite the surge, the credit quality of its loans has not slipped. At the May presentation, Thomas A. Wolfe, the head of Wells Fargo Consumer Credit Solutions, emphasized that the overall quality of its auto loans was improving. And Tatiana Stead, the Capital One spokeswoman, said that Capital One worked “to ensure we do not follow the market to pursue growth for growth’s sake.”
Prestige says its loans experience relatively low losses because borrowers have discharged many of their other debts in bankruptcy, freeing up more cash for their car payments. Another advantage for the lender: No matter how tough things get for troubled borrowers, federal law prevents them from escaping their bills through bankruptcy for at least another seven years.
Where's Bennie when we really need him? I can just imagine if he was still head of the Fed: "Subprime is contained"..."There has never been a national decline in automobile prices."
"...Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds. In March, for example, Standard & Poor’s blessed most of Prestige’s bond with a triple-A rating. Slices of a similar bond that Prestige sold last year also fetched the highest rating from S.&P..."
Where's Bennie when we really need him? I can just imagine if he was still head of the Fed: "Subprime is contained"..."There has never been a national decline in automobile prices."
"...Rating agencies, which assess the quality of the bonds, are helping fuel the boom. They are giving many of these securities top ratings, which clears the way for major investors, from pension funds to employee retirement accounts, to buy the bonds. In March, for example, Standard & Poor’s blessed most of Prestige’s bond with a triple-A rating. Slices of a similar bond that Prestige sold last year also fetched the highest rating from S.&P..."
What's a car compared to a pension fund or a 401(k)?
Steve Fessler of Prudential Agricultural Investments, left, shows Thomas S. T. Gimbel what are called a strawberry on a farm in Watsonville, Calif.Credit
His boots were caked with mud when Thomas S. T. Gimbel, a longtime hedge fund executive, slipped in a strawberry patch. It was the plumpness of a strawberry that had distracted him. Mr. Gimbel, who once headed the hedge fund division of Credit Suisse, now spends more time discussing crop yields than stock or bond yields.
He is the man on the ground for a group of investors — including New York’s biggest real estate dynasty, two Florida sugar barons and the founder of a multibillion-dollar investment firm — who have been buying up farms across the United States through a real estate investment trust called the American Farmland Company.
Hedge funds are not new to farmland. For nearly a decade they have scoured the corners of the globe for cheap land as food prices have soared, positioning themselves to profit from the growing demand. Hedge funds now have $14 billion invested in farmland, according to the data provider Preqin.
But in the latest twist, a small but growing group of sophisticated investors and bankers are combining crops and the soil they grow in into an asset class that ordinary investors can buy a piece of.
Farmland Partners and the Gladstone Land Corporation, two real estate investment trusts that also own and lease farmland, are already trading on the Nasdaq stock exchange.
For now, American Farmland is a private company, and its founder, D. Dixon Boardman, is pitching the vision to Wall Street. Corn, cotton, lemons, walnuts, avocados: If it grows in the ground and has an attractive income stream, he is peddling it.
“It’s like gold, but better, because there is this cash flow,” Mr. Boardman said. The income stream comes from the rent farmers pay American Farmland and also often includes a share of the revenue from the crops. The company buys farms with permanent crops like almonds and avocados and row crops like cotton and corn.
Down the line, if American Farmland follows the same path as Farmland Partners and Gladstone Land and lists on a public exchange, Mr. Boardman will have another audience to pitch his vision to: ordinary investors.
American Farmland has spent $131 million on 16 farms and more than 11,000 acres of tillable land — the equivalent of 13 Central Parks. It’s a small start, but Mr. Boardman, Mr. Gimbel and their partners have large ambitions.
an IPO in waiting
They are competing with investors that have huge war chests. Alaska’s state pension fund, for example, had $485.9 million invested in farmland in 2013. The world’s biggest asset manager, BlackRock, has $180 million of its clients’ money in an agricultural fund, according to Preqin.
The latest wave of interest was generated by the 2008 financial crisis. As global food prices soared and opportunities to buy land abounded, investors like BlackRock, Whitebox Advisors, Ospraie Management and George Soros’s hedge fund, Soros Fund Management, offered their clients ways to invest in the heartland. Investors were wary of the exotic sliced-and-diced securities that had contributed to the crisis, and farmland seemed more tangible.
“It was a major inflection point,” said Philippe de Lapérouse, managing director for the agriculture consulting firm HighQuest Partners. “At that time, investors were looking at farmland as an attractive asset to hold.”
Many individual investors were soon presented with a different challenge: Farmland can be difficult to sell quickly. Some hedge funds stopped offering agriculture investments. But the flow of money from some of the country’s largest pension funds has remained steady.
Wall Street’s foray into farmland may present its own challenges. Shares in Farmland Partners and Gladstone Land have been volatile, indicating investor uncertainty. “It’s a question of whether it is really in the long term something that’s going to appeal to investors,” Mr. de Lapérouse said.
Mr. Boardman and his partners — among them Harrison T. LeFrak, of the LeFrak real estate empire in New York; Alfonso and Pepe Fanjul, the Cuban-American owners of a sugar conglomerate; and William von Mueffling, the founder of Cantillon Asset Management — think it will.
Mr. Gimbel said, “It’s unlike any other asset class.”
American Farmland teamed up with Prudential’s agricultural investment arm, Capital Agricultural Property Services, which runs a farm management and real estate brokerage business. The unit provides loans to farmers and manages farmland, giving American Farmland access to information in an often opaque real estate market.
“I was not about to put on my Wellington boots with my pinstriped suit,” Mr. Boardman said. American Farmland and other Wall Street firms could soon crowd the heartland.
“I probably have a call from an interested party once a day, someone who has never invested in farmland,” said T. Marc Schober, a partner at Colvin & Company, which connects buyers and sellers of farmland.
Todd H. Kuethe, an assistant professor of land economics at the University of Illinois, said that at agriculture conferences, which were once the domain of farmers and industry insiders, a majority of participants are now institutional investors, venture capitalists and hedge fund managers.
“The share of bank and financial representatives who really want to know what is going on is now surpassing farmers,” Mr. Kuethe said. “I think there are more folks sitting around with money to buy than there is farmland.”
The few metrics that exist have helped lure many. National net farm income, considered a bellwether, is forecast to hit a record high of $130.5 billion for 2013, according to the Economic Research Service of the Department of Agriculture. The figure for 2014 is expected to soften to about $95.8 billion.
This is where wine comes from? You're kidding me. Unbelievable.
The value of farmland in the United States has appreciated on average by 8.4 percent over the last year and 4.7 percent annually since 1990, according to an index from the National Council of Real Estate Investment Fiduciaries. Taking into consideration the income generated by crops, the total average return was 17.4 percent over the last year and 11.9 percent annually since 1990.
But not everyone thinks farmland values will continue to rise endlessly.
“You can certainly overpay for farmland, and if crop prices declined for whatever reason — for example because of some type of natural disaster — there are all sorts of reasons why, all of a sudden, the income stream does not support the price you paid for a piece of land,” said Jeffrey R. Havsy, director of research for the council.
And as the financial world’s interest in farmland grows, some observers have raised concerns about the new landowners’ switching to crops that pay better but that work the soil too hard and use up precious resources like water. In California, for example, a recent move toward nut trees has put pressure on already constrained water resources during a severe drought.
These concerns are likely to increase as more farmland changes hands from farmers to corporations.
But to Mr. de Lapérouse, whose HighQuest Partners started Global AgInvesting, a series of conferences that take place in Dubai, London, New York and Singapore, the current level of interest is just the beginning.
“Less than 1 percent of global farmland is owned by institutional investors,” Mr. de Lapérouse said. “So even if you quintupled that, it would be a major sea change, but it’s still only a little territory.”
I am guessing that auto prices did decline in 1980, when the interest rates shot the moon. But autos are not financial assets, so who cares. Or maybe they are, by this time.
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