|An ancient saying holds, “It’s an ill wind that blows no one good.” It is generally thought to mean that regardless of how bad events are, often there’s a silver lining for at least some of us.|
That thought crossed my mind recently as I was listening to a couple of investment types talking on the radio about the mortgage mess. One of them made a pretty good point—one that I think may apply to buy here pay here operations. His point was that the incentives in the mortgage system, or the lack of them, led in a predictable way to the wave of defaults and delinquencies.
He noted that the way mortgages have been made in the recent past had people – brokers – creating mortgages and selling them to banks and other financial institutions, who in turn either sell them to other entities or who “securitize” them. When mortgages are securitized, they lend themselves to being sliced and diced into various instruments that aren’t even mortgages, but that are “derivatives” of mortgages. At the end of the day, the person who is owed money under the mortgage or derivative is far, far removed from the person making the underwriting decision. He suggested that if the entities doing the underwriting had intended to keep the mortgages and collect them, their incentives and underwriting standards would have been vastly different.
That gave me an “aha!” moment. I thought, “I know an industry where the debt obligations stay with the originator. It’s called the buy here pay here industry.”
Now, I’m not saying that BHPH dealers won’t suffer in a number of ways because of the mortgage meltdown. I am saying, though, that if ever the incentives were in the right place for creditors to get paid in this or any other market, they are in the right place for BHPH dealers.
Among the ill effects BHPH dealers will feel from the credit crunch will be (has been?) a tightening of credit, as many lenders to the industry see liquidity problems of their own. I have no doubt that delinquencies and repossessions will creep up for BHPH dealers as well, and perhaps significantly (just not to the degree that we’re seeing on the housing side).
Another problem that the housing mess will create for dealers will come from the legislative backlash that we will see as our elected representatives fall all over each other in their attempts to “fix” the housing problems. In their attempts to address housing woes, legislatures may propose fixes that are so broad that they impact vehicle financing, as well.
Finally, the plaintiffs’ lawyers have already smelled the blood in the water, and are filing lawsuits against the mortgage brokers and lenders as fast as the trees can be chopped down to make the paper for the complaints they are filing. They will be using many of the arguments that have been developed over the years for suing creditors, but they will be coming up with new theories that, in many cases, can also be used to sue subprime car creditors. One of my personal favorites is that the broker/initial lender made the borrower a loan that was “unsuitable” for the borrower (This is the “The devil made me do it” claim). We’re already seeing that one on the car side.
But, after all this digression, I need to get back to the title of this article, because there is some good news in all the housing bad news. That comes from the fact that legislators, regulators and plaintiffs’ lawyers have only so much time and only so many resources. If their time and treasure are devoted to going after housing creditors, they will have less time to devote to the sorts of mischief they might otherwise be visiting on car dealers and finance companies.
So, we get at least a little good out of this ill wind.
Vol 5, Issue 6
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