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When I practiced in the mid-1990s, I occasionally worked on projects we called "asset securitizations." We didn't talk about it to our friends or families, because their eyes would glaze over and then they would pass out from boredom. Because of our client base, our asset securitizations were generally either used car loans from the finance side of large auto companies or franchise loan securitizations from oil and gas companies. Only when the financial crisis hit did everyone seem to become conversant in asset-backed securities, and the process of wide-spread securitization of mortgages seemed to be at the root of all the mortgage troubles.

The hypothesis is this, and it has some support: If lenders held their loans, particularly their mortgages, then they would only make good loans. By having a market to dump loans into, lenders loosen criteria to make more mortgages. Ignorant bond holders can't buy enough MBS, so lenders loosen criteria even more to meet demand. Lenders may even engage in fraud or encourage borrowers to engage in fraud. The Dodd-Frank Act tries to remedy these ills by having regulation at the lender end and the MBS end. We'll see if it works.

But the NYT this week tells us the securitization evil has spread to used car loans. Because I'm pretty sure used car loans have been securitized since at least 1993, I don't see this as news. However, the article suggests that because of less fun in MBS, those investors now have poured their money into used car loan-backed securities (let's say UCBS). The article doesn't state it's hypothesis, but suggests this is bad because (1) car buyers are defaulting and losing their vehicles and (2) financial players who package UCBS are getting rich. But, the article doesn't go so far as to provide evidence that (1) car buyers are defaulting more than usual or (2) that the demand for UCBS has caused lenders to be more unscrupulous than they have been in the past.

In addition, problems in the MBS market, particularly mortgage defaults, have pretty big negative externalities: foreclosures, neighborhoods with empty houses, dislocation of families, home prices, etc. When car borrowers default, the lender takes the car back. The borrower is out the car payments that were made (the NYT focuses on car buyers who never made any payments, so not particularly left worse off), but the car lot now can resell the car again. Cars are more liquid than houses, and repossession is quicker and cheaper than foreclosure.

So, I'm not getting very worried about the used car loan bubble just yet. If we think that used car loan rates are too high, then that's another concern. If we think that used car sales people are pressuring or misleading customers, that's another concern. But I don't think securitization is the problem.

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When I practiced in the mid-1990s, I occasionally worked on projects we called "asset securitizations." We didn't talk about it to our friends or families, because their eyes would glaze over and then they would pass out from boredom. Because of our client base, our asset securitizations were generally either used car loans from the finance side of large auto companies or franchise loan securitizations from oil and gas companies. Only when the financial crisis hit did everyone seem to become conversant in asset-backed securities, and the process of wide-spread securitization of mortgages seemed to be at the root of all the mortgage troubles.

The hypothesis is this, and it has some support: If lenders held their loans, particularly their mortgages, then they would only make good loans. By having a market to dump loans into, lenders loosen criteria to make more mortgages. Ignorant bond holders can't buy enough MBS, so lenders loosen criteria even more to meet demand. Lenders may even engage in fraud or encourage borrowers to engage in fraud. The Dodd-Frank Act tries to remedy these ills by having regulation at the lender end and the MBS end. We'll see if it works.

But the NYT this week tells us the securitization evil has spread to used car loans. Because I'm pretty sure used car loans have been securitized since at least 1993, I don't see this as news. However, the article suggests that because of less fun in MBS, those investors now have poured their money into used car loan-backed securities (let's say UCBS). The article doesn't state it's hypothesis, but suggests this is bad because (1) car buyers are defaulting and losing their vehicles and (2) financial players who package UCBS are getting rich. But, the article doesn't go so far as to provide evidence that (1) car buyers are defaulting more than usual or (2) that the demand for UCBS has caused lenders to be more unscrupulous than they have been in the past.

In addition, problems in the MBS market, particularly mortgage defaults, have pretty big negative externalities: foreclosures, neighborhoods with empty houses, dislocation of families, home prices, etc. When car borrowers default, the lender takes the car back. The borrower is out the car payments that were made (the NYT focuses on car buyers who never made any payments, so not particularly left worse off), but the car lot now can resell the car again. Cars are more liquid than houses, and repossession is quicker and cheaper than foreclosure.

So, I'm not getting very worried about the used car loan bubble just yet. If we think that used car loan rates are too high, then that's another concern. If we think that used car sales people are pressuring or misleading customers, that's another concern. But I don't think securitization is the problem.

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