Much has been written over the last year about the home loan industry. The newspapers are full of stories about lender bankruptcy and legislation to save homes from foreclosure.
However, a new problem is beginning to surface. Clever investment bankers, not limiting themselves to securitization of home loans, have managed to create huge investment pools for many other types of consumer loans. Automobile loans are now funded, to a large extent, by these investment pools.
With the economy declining, the auto finance industry is facing a challenge as well. Fitch Ratings released a report last week detailing its concerns about funding for the largest automobile financing businesses. An article in the News Observer explains the report and quotes Meghan Crowe, Director in Fitch’s Financial Institutions group, as saying:
“The same headwinds will lead to further asset quality deterioration in 2008, and recent dislocations in the bond insurance and capital markets heighten the potential that funding costs and liquidity pressures will be greater in 2008 than we saw last year.”
That is quite a mouthful, but it seems to say that investors in auto finance pools are facing an uncertain future. Fanciful language aside, it sounds like much of the consumer finance industry gets its funding from outside investors.
With the security of these investments in question, the rates for consumer loans will have to increase to compensate for the risk. This does not look good for our economic future.
