Thread by @GuyDealership

This morning I discovered something *extremely* alarming happening in the car market, specifically in auto lending.

I'm now convinced that there is a massive wave of car repossessions coming in 2023.

Here's what I discovered (and what no one knows):

Background:

Over the past 2 years, many people took out exorbitant loans on cars.

Car values were inflated (and frankly, still are to some extent).

But many people simply had no choice and bought an overpriced a car.

Well...

Car valuations are now plummeting.

Some cars have declined in value as much as 30% y/y.

And these same people that took out these big loans are now "underwater".

Basically, they owe banks more on these cars than they are worth.

And the banks are well-aware of this...

But there is no easy solution.

You can't just put the genie back in the bottle.

This brings me to what happened this morning:

Every Friday I conduct a team meeting to recap our week.

This morning, one of our General Managers opened up DealerTrack — a portal that dealers use to communicate with auto lenders — and highlighted something very concerning:

9 of our lending partners have started WAIVING "open auto stipulations" for consumers.

Wait, wtf does that even mean?

Let me explain using a simple, hypothetical scenario:

1) Consumer takes out an auto loan in 2020/2021 on an overvalued car

2) 2022 comes around and that overvalued car is now rapidly declining in value

3) With the car declining in value, consumer now owes more on the car than it is worth

4) Consumer no longer wants the car. Maybe they outgrew it. Or maybe it keeps breaking. So consumer wants to trade it in.

5) But dealer can't trade the car in because the consumer owes WAY too much on it.

So dealer asks consumer for lots of money down to cover the difference.

6) But of course, the consumer doesn't have $1,000s to cover the difference between what they owe on the car and what it's worth.

And here comes the perfect storm...

7)

Dealer can't sell consumer a car,

Consumer can't buy a car,

And, you guessed it, lender can't finance a car!

Everybody loses! Oh no

So what happens next?

8) Lender knows that most consumers are stuck in this situation, and does the following:

WAIVES THE OPEN AUTO STIPULATION.

Meaning, the lender lets the consumer buy the car KNOWING that they already have an open auto loan with another bank!

Why the f*ck would they do this?

Surely the lender knows that consumers that take out a 2nd auto loan are MUCH riskier and have a MUCH high risk of default? Right?

RIGHT?

Yes, but the lender does it because they know that the consumer will default on the other car !!!!

Dog eat dog style.

Let me be clear:

This is NOT normal.

But it's the only way lenders can finance cars and dealers can put cars on the road.

And the implications of this will be tons of repossessions.

I've been a doubter, but after what I saw this morning, I'm now FULLY convinced that a wave of car repossessions will hit in early/mid 2023.

If lenders are willing to backstab each other in order to put more loans on the road, we're in trouble.

This will not end pretty.

That's all for now.

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