Does anyone remember the mortgage crisis of 2008? I do vividly, and I hope we never have to live through a financial crisis of that magnitude ever again. For many people in the world, the fallout from the mortgage crisis was catastrophic. If there is one thing we can learn from history, they try not to make the same mistake twice. Unfortunately, greed can creep back into the picture and this greed fuels the next bubble.
There is a bubble brewing in subprime again, however this time it’s not the housing market. This bubble is coming from the subprime auto loan market. You’re probably thinking, how can this possibly affect me? I am not going to tell you that it will, because most likely it won’t be a problem for most of us. The reason I am writing this is to warn investors to beware of investments that promise an interest rate well above the treasury rate with no risk.
Any investment that promises an interest rate above the United States Treasury carries a certain amount of risk. I have seen advertisements recently promising a 6 percent rate of return with no risk. If you are investing in these securities, I beg you to dig further and see what’s backing these investments. You may be surprised to find that the bond you bought is backed by subprime auto loans. These loans are given to consumers with credit scores below 550 and the interest rate attached can be as high 18 percent or more. The banks offering these loans package them into one investment and sell them to the retail investor. Believe me, there is plenty of money to be made by the banks that package this type of product and then resell it to the individual investor. These investments are presented to the public as having no risk when in fact the risk is extremely high. You have basically loaned your money to a group of people who have credit scores in the 500 range. There is a reason these people have low credit scores. They don’t pay on time and they miss payments regularly.
The amount of late payments in the subprime auto loan market is on the rise. You couple this with the fact that the used vehicle price index dropped 3.8% in January and has dropped for 8 months in a row and this will lead to defaults. This article is meant to make you take notice of what investments you own or are considering. There are numerous financial institutions with exposure to the risk associated with these loans. There are also individual investors out there who are exposed to these bonds. I know for a fact there are people selling these bonds in our local market. If it sounds too good to be true, it usually is. Do your homework before investing and consult a Certified Financial Planner™ before investing in anything you are unsure of or do not understand. Please call us at (772) 223-9686 if you have any questions or would like a free portfolio review.