A recent wave of articles suggests that the next subprime crisis
will ensue in the form of auto loans1. The fundamental
issue is whether subprime auto loans are a real basis for concern
or much ado about nothing.
Just as the securitisation of home mortgage loans was not
previously widely known outside those operating in the financial
markets, many today may not realise that auto loans are also
securitised. Investors seeking a higher rate of return are turning
to securities backed by subprime auto loans, which are offered to
less creditworthy borrowers at higher interest rates (often 20
percent or higher as compared to 5 percent for prime
borrowers).
According to the financial press, the major concern is that
"[t]he explosive growth [in subprime auto loans] is being
driven by some of the same dynamics that were at work in subprime
mortgages."2 A recent New York Times article noted
that "[m]any subprime auto lenders are loosening credit
standards and focusing on the
