Money was tight last year for the school-bus driver and neighbourhood constable in Jasper, Alabama, a beaten-down town of 14,000 people. One car had already been repossessed. Medical bills were piling up.
And still, though Nelsons credit history was an unhappy one, local car dealer Maloy Chrysler Dodge Jeep had no problem arranging a $10,294-loan from Wall Street-backed subprime lender Exeter Finance so Nelson and his wife could buy a charcoal grey 2007 Suzuki Grand Vitara.
All the Nelsons had to do was cover the $1,000-down payment. For most of that amount, Maloy accepted Jeffreys 12-gauge Mossberg & Sons shotgun, valued at about $700 online.
In the ensuing months, Nelson and his wife divorced, he moved into a mobile home, and, unable to cover mounting debts, he filed for personal bankruptcy. His ex-wife, who assumed responsibility for the $324-a-month car payment, said she will probably file for bankruptcy in a couple of months.
When they got the Exeter loan, Jeffrey, 44 years old, was happy someone took a chance on us. Now, he sees it as a contributor to his financial downfall. Was it feasible No, he said.
The Maloy dealership wouldnt discuss the loan. I got nothing to say to you, an employee said.
At car dealers across the United States, loans to subprime borrowers like Nelson are surging up 18% in 2012 from a year earlier, to 6.6 million borrowers, according to credit-reporting agency Equifax. And as a Reuters review of court records shows, subprime auto lenders are showing up in a lot of personal bankruptcy filings, too.
Its the Federal Reserve thats made it all possible.
In its efforts to jumpstart the economy, the US central bank has undertaken since November 2008 three rounds of bond-buying and cut short-term interest rates effectively to zero. The purchases of mostly Treasury and mortgage securities known as quantitative easing and nicknamed QE1, QE2 and QE3 have injected trillions of dollars into the financial system.
The Fed isnt alone. Central banks from Tokyo to Frankfurt to London are running their printing presses overtime. The heavily indebted advanced economies are trying to reflate their way out of the prolonged bout of crisis and recession that crystallised with the collapse of Lehman Brothers Holdings in 2008. That crisis, of course, followed a nearly decade-long cycle of easy money and exotic financial products that itself began with the collapse of the tech-mania bubble of the late 1990s.
The Feds programme, while aimed at bolstering the US housing and labour markets, has also steered billions of dollars into riskier, more speculative corners of the economy. Thats because, with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities bonds backed by subprime auto loans, for instance.
Lenders like Exeter have rushed to meet that demand. Backed by Wall Street banks and big private-equity firms, they have been selling ever-greater amounts of subprime auto loans in the form of relatively high-yield securities and using the proceeds to fund even more lending to more subprime borrowers.
Expansion of the subprime auto business was chronicled in a 2011 Los Angeles Times series.
Since then, growth has continued apace. Consider that in 2012, lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011, according to ratings firm Standard & Poors. The pace has continued so far this year, with $5.7 billion of the securities issued, compared with $4.4 billion for the same period last year, according to Deutsche Bank. On Monday alone, three deals totalling $1.6 billion of subprime auto securities were announced by Wall Street banks.
To make up for the risk of taking on increasing numbers of high-risk borrowers, subprime auto lenders charge annual interest rates that can top 20%.
The Exeter loan Nelson and his wife got, for example, carried a 21.95% rate. Exeter, which is majority-owned by private-equity giant Blackstone Group, assumes that one in four borrowers will default on their loan, according to an Exeter investor pitch book reviewed by Reuters.
Exeter works with auto dealers throughout the country to help consumers who do not qualify for prime financing, a company spokeswoman said. Exeter offers conventional financing with affordable payments tailored to each customers individual circumstances.