Bubble or Overblown: Ambiguous Signals in the
Subprime Auto Lending Market

Abstract

The financial press has noted, occasionally with some alarm, the rising levels of lending to subprime auto consumers on increasingly lax terms. At the same time, as the U.S. Federal Reserve pursues a lax monetary policy, investors have been attracted to the elevated yields sometimes available in the subprime securitization market. Is the Fed again priming the pump for a strong correction in the sector, driving investors into an asset class that is fundamentally becoming dangerously risky (reminiscent of the last recession), or are the concerns about longer loan terms, increasing volumes, and increasing delinquency rates in the subprime auto sector overblown? This article provides a balanced assessment by looking at recent data to evaluate both the current claims of potentially dangerous lending as well as the counter claims that there is no cause for concern.

TOPICS: Asset-backed securities (ABS), financial crises and financial market history