Experts are predicting an enormous surge of repossessions to begin 2023, signaling a catastrophe in the car business. Elon Musk and Cathie Wood, two well-known individuals, have expressed concern about the potential impact on world financial markets. It’s time to get ready for any unforeseen outcomes that could result from these unsettling predictions.
Musk responded to Wood’s statement on the probable auto loan issue and a string of tweets from the CEO of a group of vehicle dealers on Friday by writing on Twitter, “Potentially the largest financial crisis ever.”
An alarming tendency in vehicle loans is being raised on Twitter by an unnamed account. According to reports from CarDealershipGuy, a lot of lenders are hastily accepting loans for people who already owe more than their car is now worth, which is a surefire way to cause difficulty down the future.
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The authority on all things pertaining to the auto industry, CarDealshipGuy, recently tweeted something that caught everyone’s attention. His essay exposed a worrying trend that is affecting auto sales: an alarming rise in unsafe auto loan techniques.
“I’m now convinced that there is a massive wave of car repossessions coming in 2023.”
Many people during the pandemic were forced to buy an expensive car because they had no other choice. Sadly, auto values have been falling recently, with some falling by an incredible 30% in just one year!
And the same individuals who took out these substantial loans are currently “underwater.” In essence, he said, “they owe banks more on these cars than they are worth. The banks are well aware of the issue.
Many subprime borrowers are trying to acquire cars, according to an unnamed source from a car dealership, but alarmingly, up to 40% of new applicants having unpaid loans on their prior vehicles.
The dealer noted that most of the lenders he deals with are still making these loans, despite the fact that banks would generally be hesitant of such a circumstance.
“I’ve been in the business for a decade and this is completely unprecedented.”
He responded, “Some of the great household brands that you and I know are engaging in this,” when questioned about whether huge institutional banks were involved in this lending.
He explained the complicated situation in a string of tweets.
The dealer complained to the lender, saying “The lender allows the buyer buy the automobile KNOWING that they already have an open auto loan with another bank.” He postulates that banks are purposefully making this decision in the hopes that borrowers will continue making payments on their more recent loan while defaulting on their earlier credit, which was given by a rival bank.
He described the relationship between rival banks as “dog eat dog style.”
Declining Values
In light of declining resale values, Cathie Wood, CEO of the massive investment firm Ark Invest, expressed concern about possible instability in the auto lending sector. Her concerns indicate how much is at risk, with over a trillion dollars already lent out for cars internationally!
According to Wood, a financial expert who was in charge of an amazing $14 billion in assets as of September 2020, this situation might become worse because of rising consumer demand for electric vehicles. This move away from traditional transportation could result in even lower gas-powered car pricing.
Elon Musk entered the discussion and raised a warning about related concerns.
Elon Musk recently expressed his severe dissatisfaction of Jerome Powell, the chairman of the Federal Reserve in the United States, on Twitter. Powell’s policies have caused interest rates in the country to soar from almost zero to over 4% since the beginning of 2021 alone!
Exploding Time Bomb
In 2021, a series of bad incidents affected car dealers. They were forced to overpay for their goods due to manipulative market tactics, and as a result, extra prices were passed on through auto loans that banks offered. “Too often this year has seen rising demand far exceed available inventory, putting buyers down a risky path towards spending too much,” said Lucky Lopez, a knowledgeable loan broker with a base in Las Vegas.
“The dealers started calling banks, ‘Hey man, I gotta sell this for 150 percent, 160 percent of LTV [loan-to-value] … Can you do this?’ and banks that traditionally wouldn’t, started doing it,” Lopez said, paraphrasing the industry dynamics he had witnessed.
According to online lender LendingTree, the typical auto loan had an amazing 87% Loan-to-Value ratio in 2019. This demonstrates that drivers were able to finance a sizable portion of their purchase without needing much initial cash.
In an audacious step, Lopez is calling for the nationwide confiscation of numerous vehicles. These seized vehicles are expected to be sold at auction, where lenders run the danger of not receiving their full money back due to the automobiles’ declining value after being taken into custody. Banks may face a difficult battle as they fight against the odds to recover the money that is owing to them in this possibly turbulent situation.
Despite the efforts of individuals like Lopez, banks are remaining steadfast and have stopped the auction process, which might have expensive repercussions.
Sales are drastically down, and an alarming supply backlog is swiftly building up. According to Danielle DiMartino Booth, a former adviser to the Federal Reserve Bank of Dallas, this situation is a ticking time bomb. If something isn’t done soon, the effects on both the economy and industry might be explosive!
“This massive overhang of inventory continues to grow on a weekly basis because the lenders don’t want to recognize the loss on the loans,” Booth said in an interview on the Forward Guidance podcast.
She anticipates that regulators will intervene at some time and inquire as to why lenders haven’t seized the vehicles and compelled sales. This was “what regulators did in the housing crisis,” Booth continued.
“They’re going to make them clean those loans off their books, and then we’ll see used car prices fall.”
