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There are some differences too, though. - There is no expectation that a car should increase in value over time (except for collectibles), whereas there was an

There are some differences too, though. - There is no expectation that a car should increase in value over time (except for collectibles), whereas there was and still is an expectation that houses should increase in value over time. - Because of that, there is no such thing as interest-only, negative-amortization, or option ARM car loans. Those products were the worst-performing mortgage loans from the financial crisis. - For a lot of Americans the biggest component of their net worth is the equity in their house, so a house price crash wiped out most of their net worth. Most Americans have little to no equity in their cars, so a car price crash would help more Americans that it hurt. Will a lot of these loans default if there's an economic downturn? Of course, but as long as there isn't a "repo man moratorium", investors will still recover most of their principal. Now, if Goldman Sachs is selling derivatives on these car loans, that's a whole different story.

throwaway5752 5y ago
This is not about the asset class, it's about the business model of selling X, packaging loans for X, and the reselling the loans for securitization. X can be anything. When the income stream for the financial product becomes large in comparison to the income stream for underlying purchase, it doesn't bode well.
- throwaway5752 5y ago
  Enron (energy), GE (rails, aerospace, industrial), cars (GM/GMAC), homes (Countrywide, IndyMac), home loans (Lehmans Bros, Bear Stearns, AIG and others that repackaged the loans in addition to CDO and other derivative instruments), ad nauseum. The pattern is there. When you get out of the business of selling widgets to people and getting into the business of selling widget loans that you are originating to investors, that inextricably changes the type of company you are. You are going to optimize for the inevitably higher ROE business line of securitization, and you are going to eventually make bad widget selling decisions to prioritize widget loan sales. I have commented more than enough, so just going to tack this on, but people may forget that loan ownership and "zombie debt" was a big problem in 2008. It is not a great sign that Carvana was banned from selling cars in a mid-market due to title delivery issues: https://www.cbs17.com/news/local-news/wake-county-news/ncdmv-revokes-carvanas-dealers-license-in-wake-county-until-2022/ https://www.cbs17.com/news/local-news/wake-county-news/ncdmv...
  - sokoloff 5y ago
    Banned from selling cars at one of their locations. That seems like the rough equivalent of one fast food franchise location getting shut down by the health department.
  - FireBeyond 5y ago
    > not a great sign that Carvana was banned from selling cars in a mid-market due to title delivery issues My girlfriend bought from Shift. They didn't get anything to the DOL for nearly 4 months from purchase. At one point, with expiry of temporary tags, Shift put her in a rental car for _a month_ while they "dealt with it". Apparently not uncommon.
throwawayboise 5y ago
IDK how much principal can be recovered. For used cars, depreciation is slower, but most cars purchased with financing are upside down immediately. You would recover a fraction of the principal after paying the repo man and then reselling the car at a wholesale auction.
- gnicholas 5y ago
  Is this the case for used cars? What is a typical down payment for Carvana? Also, I assume they wouldn’t have to sell the vehicles at auction, since they could use their own platform.
  - deleted 5y ago
    [deleted]
- analog31 5y ago
  Someone I knew in the used car business told me that the bottom-feeder used car lots would take a down payment that was more than what they paid for the car, wait for the borrower to get behind, repo it themselves, and repeat the cycle. No middlemen needed.
  - geoduck14 5y ago
    I've been in the auto lending business - I would like to point out that the scenario you described is for the REALLY BAD bottom feeding lots. The financiers I worked with was MANDATED to send repoed cars to auction houses. I'm not sure how someone would get an exemption from that.
rootsudo 5y ago
Price crash wouldn't help, it would hurt as many people overleverage to purchase a car - and that asset, while on a financial point of view DOES depreciate, many people are very well unaware at what rate, and most likely traded in an underwater loan, to get another car (negative equity) and are more and more overleveged. With the past year, most cars appreciated in value on paper, only because of supply and demand and money inflation - that's it. There is also very much a housing crisis and a huge population that do not have a house, and need to juggle the rent payment, the car payment, the insurance payment and well it seems unsustainable. tl;dr you assume that the price of the asset is the same when repo'd, that is not true, very much the asset itself can be worthless if there's default across because it means there's no demand or need for cars.
gnicholas 5y ago
> There is no expectation that a car should increase in value over time (except for collectibles) Except for the last 18 months.
- subpixel 5y ago
  My brother in law drove a new trick across the country for eight months, pulling an RV, then sold it for $5k more than he paid for it. To a dealer, who planned to raise the price and resell it. You’d be foolish to factor this into any business model however.
  - gnicholas 5y ago
    For sure, it was a joke.
- ineedasername 5y ago
  Yep, about 2 years ago mine was worth $8k. I just traded it in for $16k.
geoduck14 5y ago
This comment is spot on. Also, there were "NINJA" mortgages before the 08 recession (No Income No Job/Assets).

throwaway5752 5y ago

This is not about the asset class, it's about the business model of selling X, packaging loans for X, and the reselling the loans for securitization. X can be anything. When the income stream for the financial product becomes large in comparison to the income stream for underlying purchase, it doesn't bode well.

throwaway5752 5y ago
Enron (energy), GE (rails, aerospace, industrial), cars (GM/GMAC), homes (Countrywide, IndyMac), home loans (Lehmans Bros, Bear Stearns, AIG and others that repackaged the loans in addition to CDO and other derivative instruments), ad nauseum. The pattern is there. When you get out of the business of selling widgets to people and getting into the business of selling widget loans that you are originating to investors, that inextricably changes the type of company you are. You are going to optimize for the inevitably higher ROE business line of securitization, and you are going to eventually make bad widget selling decisions to prioritize widget loan sales. I have commented more than enough, so just going to tack this on, but people may forget that loan ownership and "zombie debt" was a big problem in 2008. It is not a great sign that Carvana was banned from selling cars in a mid-market due to title delivery issues: https://www.cbs17.com/news/local-news/wake-county-news/ncdmv-revokes-carvanas-dealers-license-in-wake-county-until-2022/ https://www.cbs17.com/news/local-news/wake-county-news/ncdmv...
- sokoloff 5y ago
  Banned from selling cars at one of their locations. That seems like the rough equivalent of one fast food franchise location getting shut down by the health department.
- FireBeyond 5y ago
  > not a great sign that Carvana was banned from selling cars in a mid-market due to title delivery issues My girlfriend bought from Shift. They didn't get anything to the DOL for nearly 4 months from purchase. At one point, with expiry of temporary tags, Shift put her in a rental car for _a month_ while they "dealt with it". Apparently not uncommon.

throwawayboise 5y ago

IDK how much principal can be recovered. For used cars, depreciation is slower, but most cars purchased with financing are upside down immediately. You would recover a fraction of the principal after paying the repo man and then reselling the car at a wholesale auction.

gnicholas 5y ago
Is this the case for used cars? What is a typical down payment for Carvana? Also, I assume they wouldn’t have to sell the vehicles at auction, since they could use their own platform.
- deleted 5y ago
  [deleted]
analog31 5y ago
Someone I knew in the used car business told me that the bottom-feeder used car lots would take a down payment that was more than what they paid for the car, wait for the borrower to get behind, repo it themselves, and repeat the cycle. No middlemen needed.
- geoduck14 5y ago
  I've been in the auto lending business - I would like to point out that the scenario you described is for the REALLY BAD bottom feeding lots. The financiers I worked with was MANDATED to send repoed cars to auction houses. I'm not sure how someone would get an exemption from that.

rootsudo 5y ago

Price crash wouldn't help, it would hurt as many people overleverage to purchase a car - and that asset, while on a financial point of view DOES depreciate, many people are very well unaware at what rate, and most likely traded in an underwater loan, to get another car (negative equity) and are more and more overleveged. With the past year, most cars appreciated in value on paper, only because of supply and demand and money inflation - that's it. There is also very much a housing crisis and a huge population that do not have a house, and need to juggle the rent payment, the car payment, the insurance payment and well it seems unsustainable. tl;dr you assume that the price of the asset is the same when repo'd, that is not true, very much the asset itself can be worthless if there's default across because it means there's no demand or need for cars.

gnicholas 5y ago

> There is no expectation that a car should increase in value over time (except for collectibles) Except for the last 18 months.

subpixel 5y ago
My brother in law drove a new trick across the country for eight months, pulling an RV, then sold it for $5k more than he paid for it. To a dealer, who planned to raise the price and resell it. You’d be foolish to factor this into any business model however.
- gnicholas 5y ago
  For sure, it was a joke.
ineedasername 5y ago
Yep, about 2 years ago mine was worth $8k. I just traded it in for $16k.

geoduck14 5y ago

This comment is spot on. Also, there were "NINJA" mortgages before the 08 recession (No Income No Job/Assets).