This Perfect Storm Could Threaten U.S. Transportation

The auto loan market is in trouble, at least if a recent report from Bloomberg Markets is any indication.

The convergence of fraud and financially-strapped consumers has led to increased losses for car lenders, Matt Scully of Bloomberg reported last week. He cited data from research firm Point Predictive, which determined the value of those bad loans could double from $6 billion in 2015 to upwards of $12 billion this year. Delinquency rates are close to surpassing 1 percent, the level that was attributed as an underlying cause of the mortgage crisis a decade ago.

No one is predicting that an impending collapse of the automobile-lending market will trigger a financial catastrophe like the one that nearly demolished the U.S. economy in 2008. After all, the U.S. automobile financing market is much smaller than the home loan sector. But it's important to note that used automobiles are being financed by loans much more now than in the past -- and other storms are brewing that may destabilize transportation systems across the country.

The research firm Experian estimated that over 90 percent of all used vehicles were not attached to any loan agreement as of 1990. That figure has since cratered to around 20 percent. And almost 63 percent of the automobiles financed at the end of 2015 were used or pre-owned.

And as with the U.S. economy overall, the so-called “shadow banking” sector is taking over a larger share of the auto lending market.

Data shows that more loans are being underwritten based on fraudulent claims of income or employment status. And short-term rental or car-leasing programs financed by the likes of ridesharing giant Uber also contribute to the growing problem of consumer dependency on expensive auto loan schemes.

At one point Uber was a lender as well: It briefly touted a partnership with the banking giant Santander that ended abruptly last summer. On the Web, those links are now redirected to the company’s driver recruitment page.

Nevertheless, Wall Street was quick to jump on the bandwagon Uber started. Goldman Sachs, for example, launched a $1 billion credit facility to help Uber retool how it could “help” its drivers secure access to a car.

This trend has been ongoing for several years. As Gary Rivlen of Mother Jones pointed out last year, the subprime auto loan market is growing by leaps and bounds -- and just about every auto manufacturer or financial institution has coveted a piece of it.

General Motors once struggled in part because of its automotive loan division’s performance. But earlier this decade, the automaker was quick to enter that market as it emerged from bankruptcy with the purchase of subprime lender AmeriCredit for $3.5 billion in 2010.

With auto loans generating an estimated $113 billion in revenues last year, it is little wonder why many companies are after a slice of that pie.

The result, wrote Gwynn Guilford in Quartz, is that Americans are borrowing more money for auto loans than ever before -- and they're on the hook for approximately $1.2 trillion in debt.

Many analysts are quick to attribute this trend to “consumer confidence.” But the stubborn fact is that delinquencies are on the rise as more consumers struggling to get by are lured with easy but expensive access to credit. Schemes that give potential drivers for ridesharing companies access to cars through potentially predatory lenders also send a grim warning.

As Rebecca Vallas of the Talk Poverty blog summed up in 2014, the fact that more at-risk consumers are signing up for loans with exorbitant fees and interest rates, when they can often not afford them, is just another example of how our society "punish[es] people for being poor.”

So, how did our citizens become entangled in this mess?

In larger towns and cities, ridesharing companies are quick to describe themselves as the solution to mobility -- which can pave way for serious problems. These firms further argue that car ownership will quickly become obsolete as autonomous cars become mainstream. One research firm has even suggested a bucolic future for many urban areas, one in which autonomous electric vehicles roam the streets and quickly displace parking lots and street-widening projects.

That's fantastic scenario, if it happens. But the problem is the disturbing reality underway now.

Let’s start with the bloated number of cities hitching their wagons to ridesharing companies, which are still not profitable, assuming these mobility pathfinders will soon shuffle people to work and home. The result is often not promising for urban transportation infrastructure. While some big-ticket public transportation projects have been approved in the past year, transit budgets are seeing increasing cuts as local lawmakers seem keen to 'pass the buck' to ridesharing and auto companies.

Matters will only become worse if the current presidential administration succeeds in its drive to cut as much as 13 percent of the Department of Transportation’s budget – an agency on which many municipalities rely for funds.

As Henry Grabar of Salon summed up last December, cities think they can reduce those services because Uber or Lyft can fill that gap. The problem is that those companies’ models are hardly sustainable; that is why Uber has gone into adjacencies such as food delivery or freight. The math that the likes of Uber are giving us does not add up.

There is no way society can support a system that allows a private driver for every commuter, even for a short commute home. And again, neither of America's largest ridesharing companies company has made money: High-profile campaigns to appease investors and stockholders, such as Uber’s offer last summer to move Manhattan commuters for almost nothing, are simply short-term fixes.

At some point, the cost of these rides will spike in price. Add the fact that more drivers are precipitously close to having their cars repossessed, and the outcome could go beyond citizens losing their wheels and being saddled with bad credit scores. The country’s already creaky transport system could become even more dysfunctional.

Policymakers need to take a step back, stop being lured by the unfulfilled promises of the ridesharing industry, and answer this question: Is 'mobility for all' best served by allowing more citizens to plunge into debt so they can drive the rest of us around, or should we stick with the system of buses and rail that served us well since the early 20th century, at least with proper funding?

Image credit: Shawn Clover/Flickr