Wells Fargo will rein in its subprime lending business, limiting subprime car loans to 10 percent of auto loans it originates. According to the New York Times, the move comes amid concerns that the market for subprime car loans is expanding too quickly.
While the paper’s Dealbook section notes that Wells Fargo has a strong reputation for managing risk, the move to limit subprime auto loans also sends a signal that the subprime auto loan market has become too risky. Concerns have previously been raised regarding lax underwriting practices and increasingly long loan terms driven by a demand in securities backed by subprime auto loans.
According to Dealbook, the 10 percent figure is in line with how many subprime loans are originated by Wells Fargo compared to prime loans. But the move comes as increasingly longer terms become the norm in the subprime space, since even repossessing a car and re-selling it is often insufficient to recoup the losses on a loan with a term of 84 months.
The recent jump in new car sales is also cited as another factor behind the decision. During the recession of 2008, new car sales plummeted, leading to a diminished supply of used vehicles in 2012 and beyond. The result was a significant spike in prices of used cars, which enabled lenders to reap higher profits when originating used car loans. But the record sales of new cars in 2013 and 2014 will inevitably lead to a glut of used cars, which should further depress used car prices (or return them to an appropriate level, depending on one’s perspective). The first crop of cars from this time period should enter the market next year, and Wells Fargo’s move could be seen as a pre-emptive move to hedge against this event.
Another theory that hasn’t been explored yet is the 7th anniversary of the Great Financial Crisis. This is a significant milestone, since it will allow the first crop of individuals who suffered bankruptcies or other black marks on their credit report to get a fresh start and have those blemishes erased from their files. That means that subprime financing will no longer be absolutely necessary for them. A new car dealer may be willing to give them a loan at a lower interest rate for something new and shiny. If that happens, then expect to see demand for subprime loans on used vehicles wither, as America’s insatiable desire for new vehicles is fueled even further.
Wells is such a huge company, I think most people don’t realize. And they’ve a storied history all the way back to 1852. 263,000+ employees – that’s quite a lot. And they own 1/3 of all mortgages in the US, including mine.
I got 2 mortgages with different lenders, and they both eventually ended up at WF.
I worked in their brokerage organization. Wells is very well-run. Like any bank, they are very risk averse. I still own Wells stock and have a lot of trust in John Stumpf, their CEO. If they have cut back on these loans, part of it is avoiding risk. Part of it is a public relations move.
I’m putting on my Grammar Hat for a moment because spell checkers don’t catch this. “Rein” is the word to use in the opening paragraph, like pulling back on the reins of a horse. “Reign” refers to the rule of a king or queen.
Sometimes they require a lot of coaxing to do deals with insurance companies, even the conservative ones! They’re getting into the financial reinsurance game here lately though. They shy away very quickly when any mortality risk is involved.
Does one “reign” in horses or instead sit on a throne?
To compound the misuse, “reign” does have a certain cache. ;-)
Even worse because Wells has all those horses and wagon as their logo. Ha.
Whoa to the next commenter to make a pun.
The average credit score in the US is 687 (which seems high to me). That means that half of all Americans fall below that. Cars are expensive and a lot of people truly need one. If Wells Fargo won’t finance them, someone will.
True that, if Wells won’t finance them someone else will but that someone may also be risking the loss while Wells won’t.
When my #3 son was stationed at the Pentagon, his wife worked for Wells Fargo Mortgage. She was astonished at how many people (at that time) were subprime in both their Mortgage AND their car loan.
Maybe Wells learned from that 2007/2008/2009 financial experience. A lot of people buried themselves and then looked to the US Government to grant them relief for their own financial incompetence.
It’s the best decision for Wells – keep that crap off their books, and thus looking more secure to the rating agencies, which is what this is all about anyway.
I’m not sure where you’re getting your data, but an avg score of 687 does not necessarily mean that half of all Americans fall below 687. If large numbers of people have scores well above or below 687, the average is not the middle. A median score of 687 would have half of people above and half below.
Wells Fargo seems to take the long term view. It’s relatively risk-averse and therefore quite healthy for a bank of its size.
No good deed goes unpunished, but Wells Fargo has gotten so big, maybe they will skirt reprisal from the day-trade brigade.
“Concerns have previously been raised regarding lax underwriting practices and increasingly long loan terms driven by a demand in securities backed by subprime auto loans.”
Now let’s see whether Wall St makes up for the loss of supply by creating opaque derivatives in order to have something to bet on.
WF is such a large bank, I highly doubt a bunch of defaulted loans on Kia Sportages is going to cause any significant drop in profit. However, I’m worried this will force the unfortunate into buy here – pay here lots where they will be severely fleeced.
Or they could just pay $1000 and get a okay working car from an in-town Craigslist seller, then thumb their noses at Jack when he touts his privilege horn. Admittedly, it does require a bit of savvy. I only had two of those, one was impeccable and other was a money pit (had to donate it after another $450 transmission fix).
Eh – risk averse? Does anyone recall Wells Fargo had to be BAILED OUT during the great financial crisis, due to subprime lending, or it would have disappeared? Also, it was one of the last of the big banks to repay it’s bailout loan? If subprime auto loans are making Wells Fargo nervous, I suspect they are really, really bad news.
WF, at the time of the bailout requested to be left out of the entire process as they did not need the funds. They were however advised they had to TARP funds. This is documented in Tim Rattners book extensively. The CEO of the time at WF, the name eludes me, was understandably pissed they were being lumped into the same group as Citi, BofA, Lehmann Etal.
As for Sub Prime Auto lending, this will not even be a blip on the radar, in fact may help some other lenders shore up their sub prime business as WF typically on bought the ‘best of the worst’ so to speak.
I would bet the reason has a lot to do with the cross sell opportunities that exist within the FICO band of Sub prime and a decision was made the efforts were not worth the reward. WF’s primary goal, when I worked for them, was the cross sell. Move every customer to checking account with two other products attached (mtg, heloc, car note, debit/credit card, investments account etc). These are very profitable customers for them and generally have a low churn.