Henderson on sub-prime lending: are we forgetting the lessons of history?
It is said that those who ignore their history are doomed to repeat it. Can the financial crisis of 2008 really be so far in the past that we are forgetting it? John Bennett, Henderson’s head of European equities, thinks our memories really are that short and that there are ominous signs in the markets he watches.
No auto loan books free of sub-prime
The FT recently reported Mr Bennett’s comments about car loans currently being made in the US. Some of these have an eight-year duration, with Mr Bennett saying that no car dealer has managed to persuade him that they have a loan book free of sub-prime. He is convinced that the poor decisions and reckless lending that led to the 2008 crash are being made again, with bankers, finance and leasing companies all involved.
Mr Bennett’s warnings echo those made by Polar capital manager Nick Davies, highlighting the rising share prices of finance and car companies in Europe and the dangers investors face when buying into them.
More recently, Experian told CNBC that the percentage of car loans made to those with the lowest credit scores in the US is outpacing growth in the rest of the market. It also reported an increase in car loans that were 60+ days in arrears.
There are those who believe that employment growth in the US reduces the risk of delinquencies in these loan books. In the UK, IVA cases are certainly at their lowest level since 2008, according to the government’s Insolvency Service.
This is partly because providers such as Carrington Dean group limited offer a wide range of debt management services from which people can choose.
Loans backed by complex financial instruments – again
Others point to the fact that nearly 21% of car loans in the US are to sub-prime or ‘deep sub-prime’ customers.
Just as US sub-prime mortgages were backed by complex financial instruments, so sub-prime car loans are packaged into asset-backed securities. Does this sound horribly familiar? Many of the companies lending this money are backed by private equity firms. They rely heavily on securitisation, just as Northern Rock did for mortgages.
A red light seems to be flashing on the dashboard of the car finance industry and we should ignore it at our peril.