Mortgages, car loans, and write-offs

A question from Askville:

With all the repos in the housing area, why aren’t car loans and leases showing up as writeoffs?

Because cars were not financed at inflated values…

Let’s say lender financed a house appraised at $300,000 with a 100% loan-to-value loan (i.e., the face value of the loan was $300,000).  The borrower paid off some of the principal (let’s say, the outstanding principal now is $280,000) and then defaulted.  The lender repossessed the house; then it looked around and realized that the house can be sold, at best, for $250,000, and there are fees to be paid in order to sell it.  And if the house is to sell quickly, the price must be dropped further.

The problem, as you can see, is that the value of the collateral dropped below the loan value.  Normally, banks would cap loan-to-value at 80% or so to limit their losses in the event of repossession in a declining market.  But over the last 10 years, home values went up about 80%, so foreclosures became profitable.  Banks, seeing this seemingly unending price increase, gradually increased their loan-to-value caps; some non-bank finance companies went as far as 120% loan-to-value loans.  When the price trend reversed, lenders found themselves holding assets that were worth less than the loans with which they were financed…

With cars, conversely, nothing of the sort happened.  There was no price run-up over the last 10 years; values were and are readily established due to an active and well-organized market in used cars (dealer and repo auctions).  Additionally, lenders have not raised loan-to-value caps on car loans, precisely because they continued to expect that car values would decline over time…

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