Financial crises tend to start at the periphery and work their way into a system’s core. Think subprime mortgages (a tiny little niche of a few hundred billion dollars) that blew up in 2007 and nearly brought the curtain down on the whole show.

There’s no guarantee that the same dynamic will play out this time, but stage one – the bursting of peripheral bubbles – has definitely arrived, with three in progress as this is written.

Subprime auto loans

One of the bright spots of the past few years’ industrial economy was the willingness of people who couldn’t afford new cars to buy them anyway, usually on terms that lock them in until those cars are barely roadworthy seven years hence. This trend always had an expiration date (as does everything “subprime”) and January appears to have been it.

Subprime New-Car Buyers Going Missing From U.S. Showrooms

(Bloomberg) – The American consumers who were stretching themselves to buy or lease a new car are starting to go missing from showrooms.

Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market. In the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9 percent, according to J.D. Power.

The researcher’s data highlights what’s happening beneath the surface of a U.S. auto market in its second year of decline after a historic run of gains. Automakers probably will report sales in March slowed to the most sluggish pace since Hurricane Harvey ravaged dealerships across the Texas Gulf Coast in August, according to Bloomberg’s survey of analyst estimates.

Credit Profiles
Westlake Financial Services has specialized in subprime lending since its founding in Los Angeles thirty years ago. Subprime loans now make up just 55 percent of its portfolio, down from 75 percent five years ago, said David Goff, vice president of marketing.

“Subprime losses increased maybe to pre-recession levels a year or so ago,” Goff said in an interview last month. “That caused you to require a little bit more from the subprime customer. And those people, instead of buying a new car, are switching over to a used car.”

Mortgage refis

As interest rates fell inexorably over the past 30 years, a mortgage holder could refinance at a lower rate every two or three years and either pocket some extra cash or lower his or her monthly payment. This worked like a rolling tax cut for homeowners and a steady source of zero-risk income for banks.