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A new credit bubble gets ready to burst

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Re: A new credit bubble gets ready to burst

#91

Post by ThrustVectoring »

nugget wrote: post #9
temp129038 wrote: post #7

If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for startups) and 2) Zerodown (pitching no down payment for homes). It would be quite something if tech and not banks caused the next great recession.

I just looked up Zerodown. How does their model account for the foreclosure risk if there's a real estate recession?

There's a roughly 3.6% spread between the purchase price appreciation schedule and purchase credit schedule, no option to extend the lease past five years, and a two-year minimum for accumulating leasing fees. This points pretty strongly towards partnering with a "hard money" lender willing to put up balloon loans and happy to collect either the above-market-rate interest or the property in lieu of repayment. It's likely arbitraged so that 100% of the risk gets offloaded. The appreciation schedule on the purchase option pays for the excessive interest demanded by lenders happy to take possession of property in downturns.

Furthermore, Zerodown is structured so that it will never go through the foreclosure process. They own the property and lease it out, so the worst they'll need to do is an eviction.

Re: A new credit bubble gets ready to burst

#92

Post by ThrustVectoring »

Waterluvian wrote: post #24
temp129038 wrote: post #7

If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for startups) and 2) Zerodown (pitching no down payment for homes). It would be quite something if tech and not banks caused the next great recession.

Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.

Zerodown is a combination lease and option to purchase. You're technically a renter for two to five years, just with a fixed cost for eventually purchasing a specific house.

Re: A new credit bubble gets ready to burst

#93

Post by megaremote »

gruez wrote: post #83
jstarfish wrote: post #81

Earlier quoted context omitted.

Pickups and SUVs with insane markups and profit margins. A Ford F150 Raptor's MSRP is something like $60-70k.

>Pickups and SUVs with insane markups and profit margins. dumb question: why do pickups/suvs have insane markups/profit margins?

They have them because people are wiling to pay for them. People are willing to pay because they think they are worth it. I would guess that the fact they are bigger make people think they cost a lot more to build, when they do not.

Re: A new credit bubble gets ready to burst

#94

Post by ericd »

kgwgk wrote: post #69
Despegar wrote: post #43

Earlier quoted context omitted.

The shadow banking is fine. The taxpayer isn't responsible if a PE fund engaged in direct lending to the middle market loses all their money. But shadow banking can and should be scrutinized, and potentially regulated, if there are systemic risks that will lead to the taxpayer being on the hook once again. If it's just isolated private actors losing money it doesn't matter.

The “private actors” are not always so private: CalPERS is doing a lot of PE, for example.

And I think this hits the nail on the head for where the problems are going to come from. Low interest rates have made it very hard for pension funds to keep up with their (overgenerous) past promises with safe assets, and a frothy stock market seems like it’s been keeping them solvent.

Re: A new credit bubble gets ready to burst

#95

Post by shwouchk »

Waterluvian wrote: post #24
temp129038 wrote: post #7

If SF, I'm seeing ads all over for 1) Brex (corporate credit cards for startups) and 2) Zerodown (pitching no down payment for homes). It would be quite something if tech and not banks caused the next great recession.

Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.

It is allowed since you are not really buying a house but rather getting zerodown to buy it and then lease it to you.

Re: A new credit bubble gets ready to burst

#96

Post by timtim51251 »

StevePerkins wrote: post #80
chiph wrote: post #29

> And household debt has grown no faster than household income and is concentrated in households best able to pay it back. I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with go…

> With the average new car priced around $37500 That's absolutely jaw-dropping. I assumed that was a made-up Internet stat, and was going to ask for a cite, but some quick web searching confirms it. I'm a used car guy, typically buying vehicles 2-3 years old, and would never contemplate paying above $20k. Even a brand new sedan (e.g. Nissan Altima, Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. N…

> Even a brand new sedan (e.g. Nissan Altima, Honda Accord) is around $23k MSRP. A crossover family vehicle (e.g. Nissan Rogue, Honda CR-V) is around $25k.

An accord/ultima start around that price for the base models and the lowest package. I doubt most people buy those models. People like options and get plenty of them.

Also keep in mind you pay a ton of tax and also registration. Registration is insanely expensive in states like CA.

The price of a low mercedes is much higher than that, not sure where you're getting your numbers, but they're off, WAY off.

Re: A new credit bubble gets ready to burst

#97

Post by edoceo »

smt88 wrote: post #65
dsfyu404ed wrote: post #55

Earlier quoted context omitted.

There's been a lot of apprehension around auto lending for a long time. I'm not sure what a crash would look like though.

Very different from a housing crash in important ways, that's for sure. Vehicles are much more "liquid" -- they're portable and fungible to some extent. A bank repossessing many vehicles will get much more of its money back than a bank trying to sell foreclosed houses.

Banks, and really all loans, make mad cash the first few years, 90%+ of the payment is interest. For cars, that's like 18mo, for homes it's a few years of good cash flow for the bank, and the home appreciate (cars don't) so when the bank is flipping a flipping a foreclosure, they still make out great.

Re: A new credit bubble gets ready to burst

#98

Post by rconti »

gruez wrote: post #83
jstarfish wrote: post #81

Earlier quoted context omitted.

Pickups and SUVs with insane markups and profit margins. A Ford F150 Raptor's MSRP is something like $60-70k.

>Pickups and SUVs with insane markups and profit margins. dumb question: why do pickups/suvs have insane markups/profit margins?

Because they can?

As utility vehicles, they also tend to have really good resale value, so they might not be quite the poor 'investment' you imagine.

Because the resale is good, margins can creep up. There's nothing holding them down.

Re: A new credit bubble gets ready to burst

#99

Post by rconti »

0xffff2 wrote: post #27
Waterluvian wrote: post #24

Earlier quoted context omitted.

Zero down payment isn't even legal in Canada and anything less than 20% down and you must purchase mortgage insurance. I'm amazed that 0% is allowed in the US after 2008.

Mortgage insurance is required for nearly all sub 20% down mortgages in the US too. Most banks won’t do straight 0% down either, but will do ~3%. A notable exception to both of the above are VA loans, which will finance 100% with no PMI, but VA loans are only available to a very small segment of the population.

Jumbo loans have no such requirement in the US (anything over 650ish-thousand dollars).

Instead of Private Mortgage Insurance, the banks (typically?) require that you have a certain amount of cash in the bank as reserves. x% cash, y% investments discounted at 30%, z% retirement discounted at 40%, and so on. More at 10% than at 20%. And so on. But I don't think these are required; there's no reason a bank couldn't just decide to let you go without. And while they require pretty extensive documentation, you can still game the system.

When we bought (2015), interest rates for jumbo loans were LOWER than confirming loans, and no PMI requirement. win/win.

Re: A new credit bubble gets ready to burst

#100

Post by jjeaff »

venantius wrote: post #59
chiph wrote: post #29

> And household debt has grown no faster than household income and is concentrated in households best able to pay it back. I'm not so sure about this - what I'm thinking is that the next (current?) bubble is in auto lending. I'm seeing tons of advertisements saying "We will lend up to 72 months with very little down". With the average new car priced around $37500 that's a payment in the mid $500's for someone with go…

My theory 2 years ago was that the likes of Uber, Lyft et al. would cause more and more people to buy new cars that couldn't really afford it. Should demand for ride sharing ever stall or fall off, the continued increase in people entering the "gig economy" workforce in such a levered manner would be catastrophic to the auto loan industry.

I think uber recently killed of it's in-house leasing program. But I imagine they may have a huge amount of liability on the books depending on how many of those leases haven't expired yet.
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