One of the crime scenes

Tuesday, November 01, 2011

Rust Bucket

J.D. Byrider, a chain of 135 Buy Here Pay Here dealerships, was acquired in May by the private equity firm Altamont Capital Partners of Palo Alto*

Those masters of the universe, the 1%, the criminals who make obscene amounts of profit, not by producing anything, but by shuffling paper and taking advantage of people have hit on a new scam - and Wall Street is of course sitting up and taking notice and jumping in with both feet. Ken Bensinger of the L.A. Times examines this new form of legalized larceny in a three part series (Wheels of Fortune) in depth, two of which have been published with part three due on Thursday of this week.

Part One is headlined

A vicious cycle in the used-car business

Sign, drive, default, repossess and resell — that's the game at Buy Here Pay Here dealerships.

In this little-known but fast-growing corner of the auto market, dealers command premium prices for road-worn vehicles and finance the sales at interest rates that can top 30%.

In a kind of financial alchemy, they have found a way to turn clunkers into cash cows and make money off the least creditworthy customers: the millions of Americans who are stuck in low-paying jobs, saddled with debt and unable to qualify for conventional auto loans.

For most of those people, having a car is the only way to stay employed, and they'll accept almost any terms to get one.

Buy Here Pay Here lots sold nearly 2.4 million cars nationwide last year, up from 1.3 million a decade ago, according to CNW Marketing Research.

CNW estimates that there are more than 33,000 such lots nationwide, compared with about 20,000 dealerships selling new cars. Buy Here Pay Here dealers make $80 billion in loans every year, according to the Federal Deposit Insurance Corp..../snip

One might wonder how dealers can make money on selling used cars to people who can't pay for them or go bankrupt and force the dealer to repossess the beater. Well by selling the car to desperate customers who NEED the transportation to have any chance of employment at from 50% over to double blue book value with a loan at sometimes almost forty percent and reselling the same automobile four, five, six or even eight times over - it is difficult to lose money.

The type of lot is called Buy Here Pay Here for a reason, because often the buyer is required to come to the dealer every month with his outrageously over sized monthly payment and :
What's more, these hand-me-down wheels hold their value remarkably well. The sale price is sometimes higher the second or third time a car is sold, records show -- a testament to the desperation of buyers and the market power of Buy Here Pay Here lots as lenders of last resort.

Default and repossession are so central to the business that many dealers plan on both. They equip cars with hidden GPS devices and remote-control ignition blockers to make the repo man's work easier..../snip

Many dealers don't worry about buyers' credit scores -- knowing they can't be good -- but they almost always insist on long lists of references so they can pressure friends and family when a payment is missed.

Dealers also often continue to harass those whose cars have been repossessed and resold, maybe multiple times since the repossession, to complete their end of the "contract," even though they don't have the car. Also it is almost standard procedure for the contract to actually state the interest is along the lines of 12%, when an examination of the math will show the actual rate is over twenty, sometimes even over thirty percent.

Part II,
or here come the Slice and Dice Guys!

Investors place big bets on Buy Here Pay Here used-car dealers

Private equity firms are investing in chains of used-car lots, and auto loans are being packaged into securities much like subprime mortgages. They're attracted by the industry's average profit of 38% for each car sold....../snip

.....Loans on decade-old clunkers are being bundled into securities, just as subprime mortgages were a few years ago. In the last two years, investors have bought more than $15 billion in subprime auto securities.

Although they're backed mainly by installment contracts signed by people who can't even qualify for a credit card, most of these bonds have been rated investment grade. Many have received the highest rating: AAA.

That's because rating firms believe that with tens of thousands of loans lumped together, the securities are safe even if some of the loans prove worthless.

For the non-productive, but highly compensated, the sub-prime/slice and dice used car business is even better than the fraudulent mortgage scams that almost caused the Really Great Depression in 2008. Overpriced homes sitting empty and impossible to sell for anything near the original price are actually a burden on the banks. They deteriorate, get vandalized and in more and more communities the banks are penalized for not keeping up their ill-gotten real estate, to the point where the banks themselves are beginning to knock down what were formally half million dollar (were they really?) homes rather than maintain them or pay fines. That in itself is almost criminal in a country crowded with people without a roof over their heads. I don't know if it is accurate, but I did hear one statistic the other day which claimed that currently the United Failing States had FOUR foreclosed homes sitting empty and deteriorating for each homeless American. I know that in certain areas of the midwest rustbelt the empty homes in some cities that used to have mills or factories DO outnumber the homeless sleeping on their streets.

Dealing in a commodity, used cars, that can EASILY be repossessed and sold over and over is much more rewarding and lower risk for the slicer dicers than real estate and is just another part of the ongoing demise of America.

Mr. Kensinger has produced an excellent expose of yet another nasty little scheme that you have to go to business school to learn to appreciate. On Thursday he will be publishing Part III, which may give those desperate for a ride to work some alternative and fairer methods to be mobile.

Thursday: Is there a better way for the working poor to find wheels?

Used car dealers and salesmen never held much in the way of a level of respect in society, often in heavy competition with lawyers and politicians for least esteemed, but this is a new low for a business whose reputation seemed impossible to downgrade!

*Altamont Capital, hmmm, maybe they use Bikers to collect or repossess!


Anonymous Anonymous said...

Hard to understand how this scam is allowed to continue .... it's disheartening to know that the poor and out-of-work are continually being preyed upon.

Where are the 'laws' and consumer protections against these outright criminal acts.

Tuesday, November 1, 2011 at 6:39:00 PM PDT  
Blogger Gary E said...

That's what you get for electing a bunch of used car sales people to office.

Wednesday, November 2, 2011 at 5:35:00 AM PDT  
Anonymous Anonymous said...

Does subprime mortgages ring a bell? Same thing here, different commodity/asset. Total ripoffs by yes, car salesman and dealers.
The goverment(s) should be putting them out of business, now.

Wednesday, November 2, 2011 at 8:21:00 AM PDT  
Blogger kootcoot said...

Anon @8:21am,

Did you read the post, especially Part II - Here Come the Slice and Dice Guys?

I thought my part two and part two in the LA Times made it clear how similar to the sub-prime mortgage scam this was. Only this one seems to be even more profitable and less hassle than dealing with vacant, deteriorating homes impossible to sell.

Wednesday, November 2, 2011 at 10:33:00 AM PDT  

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