[HN Gopher] Carvana's success rides on used-car loans
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Carvana's success rides on used-car loans
Author : bookofjoe
Score : 38 points
Date : 2021-08-15 18:04 UTC (4 hours ago)
(HTM) web link (www.wsj.com)
(TXT) w3m dump (www.wsj.com)
| throwaway5752 wrote:
| _" When Carvana makes a car loan to a buyer, it packages it with
| other loans and sells the debt to investors. While other auto
| lenders also sell loans to investors, they typically keep the
| debt on their books, recording gains and losses over time.
| Carvana, on the other hand, doesn't retain the debt and
| immediately books gains on the cash sales."_
|
| This is precisely [edit: precise is to strong. "analogous to"]
| what happened in the financial crisis almost 15 years ago:
| https://en.wikipedia.org/wiki/Bank_of_America_Home_Loans#Sub...
|
| _" When Countrywide finances mortgage loans, they usually
| packaged them for sale to large investors as mortgage-backed
| securities. Fannie Mae or Freddie Mac can only buy loans which
| conform to the standards of government-sponsored enterprises.
| Non-conforming mortgages securities must be sold in the private,
| secondary market to alternative investors."_
|
| I don't know auto loan based securities (size, participants) but
| this should be a huge red flag to anyone with any sense of
| history.
| adeelk93 wrote:
| I thought 5% vertical slice retention was a Dodd-Frank
| requirement for originators in ABS (I'm not an Auto guy though,
| maybe that's not true in this sector)
| swiley wrote:
| Yikes!! What are they going to do when the shortage ends?
| They'll have a bunch of loans with little collateral.
| dayofthedaleks wrote:
| Yes but the federal government will go to the mat for any of
| the Big Three automakers while everybody knows REITs can go
| dangle.
| throwaway5752 wrote:
| I don't understand your point. The big three (do you still
| count Chrysler/Stellantis?) make things and produce jobs.
| Carvana is not a REIT and is substantially a financial
| services company per this article.
| [deleted]
| xfitm3 wrote:
| They are a logistics company, not a financial company. I
| have no affiliation with Carvana but I am familiar with the
| market they operate in.
| ralph84 wrote:
| 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.
| throwawayboise wrote:
| 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 wrote:
| 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.
| throwaway5752 wrote:
| 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.
| rootsudo wrote:
| 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 wrote:
| > _There is no expectation that a car should increase in
| value over time (except for collectibles)_
|
| Except for the last 18 months.
| adventured wrote:
| > this should be a huge red flag to anyone with any sense of
| history.
|
| It's a small red flag and not at all concerning as a macro
| risk. In the scale of the US economy and US household finances
| (including disposable income vs debt service payments), Carvana
| & pals could hardly be more meaningless. Overall the subprime
| car loan industry is a modest rounding error sized problem (ie
| it can't cause even a small fraction of the damage the housing
| implosion did, that you're referring to re sense of history).
| For the auto industry subprime is around 7% of new vehicles and
| a quarter of used vehicles (both figures have decreased over
| the past year as the employment picture has improved). In a
| very bad outcome scenario, only a minority share of those
| subprime loans will go bad. The subprime sector risk is,
| realistically, measured in the tens of billions of dollars, not
| trillions (as the housing market risk was). Tens of billions of
| dollars is as close to meaningless as non-trivial things get
| against $137 trillion in US household assets and the US income
| figures.
|
| People get overly paranoid up as a matter of routine, looking
| for the next financial crisis. Every year there are typically a
| few items that the financial media will run headlines with in
| terms of clickbait doom, blaring about how x y z is the next
| impending financial crisis doom-cause agent. Subprime auto
| loans are not a big threat to the US economy.
|
| If you want to be worried about something, there are only two
| primary financial categories domestically to pay serious
| attention to: housing and the stock market. Nothing else much
| matters by comparison, those are the two giants, by a very
| dramatic margin (subprime auto loans, student loans and credit
| card debt are each trivial compared to housing & stocks, in
| terms of risk to the US economy).
| laweijfmvo wrote:
| Can someone explain why this is bad practice?
|
| If I loan someone $100 with 10% interest, and immediately sell
| the loan to someone else for $102, why should I care about
| anything other than $2 profit?
| Spooky23 wrote:
| Your question is the answer. The incentive is to get your $2,
| and you don't care about the $100.
|
| So the business process has an incentive to just write loans,
| period. It sounds like in this cases there is a compromised
| relationship with the lender as well.
| adeelk93 wrote:
| Skin in the game, forces you to consider the quality of the
| loan. In theory.
| [deleted]
| compiler-guy wrote:
| The seller works out great until the buyers decide they no
| longer want the product. In the housing crisis this was
| because the sellers of the security had them rated far higher
| than they should have been. Will these be rated properly?
| Very hard to m know.
|
| But the seller ends up I trouble if they can't sell the
| security because they are relying on the cash flow to finance
| the rest of the business.
|
| It all works fine as long as the pipeline flows.
| beerandt wrote:
| Regardless of the rating, the risk is entirety different,
| since vehicles almost always depreciate, and do so faster
| than the debt is paid off, whereas people expect real
| estate to appreciate long term.
|
| Even a highly rated vehicle note is still based on the fact
| that the asset will fully depreciate somewhat in line with
| the outstanding debt.
| HarryHirsch wrote:
| _why should I care about anything other than $2 profit?_
|
| That's the point, right? Securitization serves individual
| short-term interest, at the cost of stability of the system.
| We saw that in 2008, and even then the politically connected
| players made out like bandits.
| beerandt wrote:
| Car debt is a very different thing than real estate debt.
|
| No one is expecting cars to hold or appreciate value, even if
| some have in the past year.
|
| And no one buying used car debt has any delusions about the
| potential rate of defaults. Not to mention that default
| recovery is much cheaper and easier than mortgage foreclosures.
| adrr wrote:
| I am sure they are tranching the debt and selling the senior
| tranche as investment grade.
| rossdavidh wrote:
| Any article on anything to do with used cars at this point in
| time, should include the caveat that (in the US at least) this is
| a very strange year for used cars.
|
| That said, I bought a car from Carvana a couple years ago, and
| the process was much better than one associates with buying a
| used car, generally. I think they have created an actually
| improved process/business, rather than just sucked up a lot of VC
| money to undercut on price. They are getting lucky with being in
| the used car business during a time when that is the hottest
| thing going, but they are also just better at it from the
| consumer's point of view, and it's not mostly about price.
| josephorjoe wrote:
| i bought a car from them three years ago and was very
| pleasantly surprised w how smoothly everything went (fwiw i did
| not get financing from them).
|
| it was definitely not about price for me. it was about
| selection and minimizing hassle. i'm still reluctant to buy a
| guitar online but had no problem w buying a car that costs 15x
| as much online.
|
| i'll definitely buy my next car online too.
| throwaway5752 wrote:
| My gut feel is we can tuck this away for future financial crisis
| reporting: _" Carvana uses a related party, Bridgecrest
| Acceptance Corp., for loan servicing. Bridgecrest is owned by
| DriveTime Automotive Group, a Tempe, Ariz.-based used-car dealer.
| Carvana was spun out of DriveTime, which is owned by Ernie Garcia
| II. He owns around 45% of Carvana and is the father of its CEO."_
| toomuchtodo wrote:
| Wow! I did not know that relationship existed, but it makes
| sense as both concerns are subprime financing plays.
| adventurer wrote:
| Used car companies buying up all the inventory during a
| shortage and Zillow buying up properties in cash over their own
| online estimates. Regulation anyone?
| J253 wrote:
| > Zillow buying up properties in cash over their own online
| estimates
|
| A discussion around this probably deserves its own entire
| page, but as I am currently looking for a home as a first-
| time buyer, seeing "Zillow owned home" labels all over the
| area in which I'm looking (as if it's some sort of positive
| thing) has been infuriating. All they do is use their scale
| and data science to push me out of the market several times
| over!
|
| I present no evidence, to prove this, but from what I can
| tell, this is what they seem to do:
|
| First, they use scale and data science to find what they
| consider under-priced homes and buy them for cash. If I
| happen to find the same home for sale at the same time, what
| seller is going to go with a traditional loan over a full
| cash offer who could easily offer more if needed? I can't
| compete with that.
|
| Secondly, they don't do anything to the house (aside from
| clean it up and taking nice pictures--no value added) and
| then resell it for multiple tens of thousands more than what
| they just paid. If this house was originally at the high end
| of my budget, bought by Zillow, then re-listed for more, I
| can no longer afford it.
|
| Third, if that house DOES sell for more to someone else, it
| just drives up the rest of the prices in the neighborhood. A
| lose-lose all around for me and my family. I don't see how
| Zillow being able to flip houses is good for anyone. And by
| flip, I don't mean fix up---I have yet to find a Zillow-owned
| home that has anything of substantial value added to it---and
| saving 1% of closing costs or whatever their incentive is by
| owning a Zillow house is not enough value add.
|
| FWIW, I've spent a LOT of time of the past few years trying
| to get a hold of reliable MLS market data to do my own sort
| of analysis to try and find affordable enclaves or diamonds
| in the rough or whatever and that data is damn near
| impossible to get free access to. So the fact that Zillow has
| this data and also has unlimited pockets and FTEs who work on
| this stuff all day...it doesn't feel right to me.
|
| And it's not like they're driving up prices of arbitrary
| goods or services--these are single family homes (in probably
| the most popular price range) they're inflating when we're
| already in the middle of a national housing crisis!
|
| /rant
|
| Edit: spelling/clarification
| 6AA4FD wrote:
| I'm not saying it's fair, but is is probably better
| financially for current home owners. Sell faster, with
| fewer/no contingencies and waiting periods, and Zillow may
| potentially price "hassle" lower-- making deferred
| maintenance less expensive to take care of.
|
| Is it better for people who are trying to break into the
| housing market now? No. Is it better for people who are
| trying to sell and move out in a low-demand area? Probably
| not, except it might speed up the process.
| throwaway5752 wrote:
| I think this has happened coincidentally with a very
| substantial increases in spikes in markets they targeted,
| more than increases in the general market. Maybe they are
| good, maybe they are contributing to it. You identified the
| mechanism by which they would create a feedback loop.
| sokoloff wrote:
| To me, a plethora of "Zillow owned homes" in an area is a
| negative signal for pricing outlook. Zillow is a non-user
| of these properties and therefore represent future selling
| pressure in the neighborhood.
|
| I think they're welcome as a market participant and, if
| they're particularly good at pricing properties, they might
| be able to make some money by exploiting inefficiencies in
| the market.
|
| I think it's more likely that they'll be a net donor to
| most markets from their algorithmic operations (in trading
| terms, I doubt they'll exhibit positive alpha from
| algorithmic buying).
| jjeaff wrote:
| Used car market in the US is valued in the $150B range. So
| something like that could possible have some affect.
|
| The housing market in the US though is on a different level.
| $8-9 trillion, so I don't think any one player is going to
| even make the smallest of differences unless they are
| focusing in specific markets and maybe manipulating just that
| area.
| Retric wrote:
| Like insider trading it doesn't matter how large the market
| is, it's a question of the individual transactions. Because
| if you let anything get an unfair advantage in the market
| that thing can grow arbitrarily large.
| mmcconnell1618 wrote:
| Good call out. You have to wonder if Bridgecrest is really
| doing full risk reviews of the loans they are buying from
| Carvana or if the DriveTime/family connection is influencing
| the process. If Carvana could sell those bundles to other
| buyers at the same price, maybe everything is legit. On the
| other hand, if Bridgecrest is purchasing bundles that Carvana
| would have a difficult time selling to others, then Bridgecrest
| would be artificially propping up the financial performance of
| Carvana.
| ssharp wrote:
| I was given a rate by Carvana without having any credit
| pulled. You just give them your income and they'll start
| quoting you rates and the rates aren't particularly
| attractive if you have good credit.
|
| If people are actually taking those loans, there seems to be
| a decent amount of excess risk at play. I'm assuming Carvana
| eventually does pull your credit but I doubt they're lowering
| rates after doing so.
| rootsudo wrote:
| Now that I did not know! Wow!
| andrewmcwatters wrote:
| I'm buying a car right now. I own two German cars that have both
| been on the road for over a decade. Great cars, but they're at
| the end of their life now. I want one of the most common possible
| sedans you can purchase today to replace them: the Toyota
| Corolla. Should be an easy process, no brainer, in and out in
| less than half an hour.
|
| And yet, the whole experience with dealerships _and_ Carvana-
| likes is utter dogshit. It is a 1000% ripe market for any small
| shop who wants to own the entire experience Amazon-world-
| domination style.
|
| And it _will_ happen. There 's too much free capital in the world
| right now.
| alistairSH wrote:
| Where are you shopping? I bought a new Honda in March and it
| was dirt simple. Traded a few text messages with salesman to
| agree on price, show up at dealer, sign a pile of pre-printed
| paperwork (mostly loan related, Honda had better rates than my
| CU at the time), and on my way. I was there maybe 30 minutes.
| poulsbohemian wrote:
| That's awesome! I walked into a highly regarded area dealer,
| ready to buy, and the guy pulled out pre-printed four-square
| sheets. Took about five minutes of that before I walked out
| and got online, coincidentally with Carvana, where I found
| exactly the trim I wanted at a better price than any of the
| local dealers.
| closeparen wrote:
| I expect it is not actually profitable to let a customer out
| the door for the same price that brings him in the door. If a
| dealership shifted their pricing from last minute upsells into
| the advertised price, would anyone come?
| ssharp wrote:
| I've recently bought two used cars -- one from Carvana (about 2
| years ago) and one from a dealer (in the last month).
|
| In both instances, I paid with a certified check, so financing
| complications did not come up.
|
| In my experience, Carvana was a substantially easier process. I
| picked the car out online, "ordered" it, and they showed up a
| few days later with a flatbed and put the car in my driveway. I
| signed some paperwork and we were done in less than an hour at
| my house.
|
| The dealership took almost 3 hours to get me out of the door
| even though we had done a fair amount of work up-front to avoid
| having to spend time at the dealership. I suspect a lot of this
| could have been mitigated by the dealership if they were better
| with paperwork and interfacing with the DMV or doing some work
| ahead of time.
|
| In the end, however, I'd rather not buy from Carvana again. You
| have no room to negotiate and their customer service is not
| great. Their prices generally aren't better than the dealer's
| prices BEFORE you negotiate with the dealers. If you're buying
| a newer used car (I usually buy cars that are 2-3 years old),
| the certified warranties that the car manufactures offer are a
| really nice bonus that Carvana can't offer.
|
| For example, I just picked up a certified 2019 with around 19k
| miles. It's basic warranty will now run until 2025 or 100k
| miles. And the manufacturer warranties, in my experience, are
| substantially better than after-market warranties since the
| dealers' service departments work directly with the manufacture
| on servicing them and the dealers are more aligned with your
| interests than the manufactures' since they make a lot of money
| off doing repairs. Whereas third-party warranties are more like
| insurance and you better have your ducks in a row if you
| actually need to make a claim and expect to have it paid.
| jcims wrote:
| I sold an S5 to Carvana, got $1-2k over trade in offers, it had
| a broken windshield and bad brakes and there were zero issues
| with the process. They showed up, had to bring a specific
| person b/c it was manual lol, and wrote me the check right
| there. It was as painless a process as I've ever had with a
| vehicle transaction.
| missedthecue wrote:
| I sold a car to carvana and had the exact same experience. I
| thought for sure that there was going to be some kind of
| catch because it took just 15 minutes and they did all the
| work and hauled it away from my house. It was too easy it
| seemed unreal.
| throwaway5752 wrote:
| It is one of Tesla's underappreciated innovations.
| sokoloff wrote:
| Decade-old cars is around the midpoint of where I'm usually
| _buying_ them, not when they're end-of-life.
| missedthecue wrote:
| Not German cars I hope...
| sokoloff wrote:
| My 1998 Mercedes E300D (bought by me in 2009 at around 180K
| miles) was one of the best used cars I'd bought in terms of
| reliability. We drove it 7 years until New England salt
| ravaged the disastrous "environmentally friendly paint
| process" (which served to provide an early retirement for a
| mechanically sound car, the overall environmental benefit
| of which I cannot see).
|
| Mechanically, in the 7 years/~35K miles we drove it, it
| needed brake pads once each axle, oil changes, wiper
| blades, one glow plug, tie rod ends, and one tire plug.
| That's not quite EV level of low maintenance, but it's
| pretty solid.
|
| Best thing about the German car reputation is that some
| people are afraid to own them past the warranty and many
| are afraid past the 8-10 year mark. It makes them (911s
| aside) reasonably priced to buy used.
| bookofjoe wrote:
| https://archive.ph/njgI4
| poulsbohemian wrote:
| I'm in the middle of a transaction with Carvana, so I guess in
| some ways I'm somewhat surprised by this.... sure it would have
| been _easier_ to have them as the loan provider, but their rate
| was more than double what I was able to find elsewhere. Would be
| very interesting to know if the buyers who are accepting their
| financing are doing it because its the only option available.
| Because I went with outside financing, the transaction has
| definitely been a longer and more complicated process than I
| expected, but Carvana has overall been responsive and good to
| work with. Their customer-facing site and app were a better
| experience than their competitors. That said, it 's clear there
| are aspects of their back office that aren't as polished as the
| store window makes it appear.
| tmp_anon_22 wrote:
| Carvana puts a ridiculous mark-up on used cars - I'm talking
| several thousand more then the same car brand NEW in some cases.
| Further their inspection process leaves a lot to be desired, and
| best practice is to take the car for inspection after receiving
| it for how often they "miss" things.
|
| It just does not make sense to throw thousands of dollars away to
| save a couple hours at a dealership.
| throwawayboise wrote:
| Best to avoid dealerships altogether. They all have their
| markups. Have cash in hand and shop private sellers on local CL
| or Facebook.
|
| An exception might be if you live in a rust belt area where
| they salt the roads in the winter. Then you might need to go to
| a dealer who sources southern cars.
| jcims wrote:
| Private sellers around here are even more optimistic about
| what their used stuff is worth. It's bad with cars and
| trucks, even worse with off road vehicles.
| User23 wrote:
| That's because people are getting those prices, if they're
| even willing to sell at all. The used truck and tractor
| market is extremely hot. In fact, older tractors can be
| worth even more than new ones in the same class, because
| they are much less expensive to maintain and repair.
|
| Probably the best way to get used trucks, if you are an
| astute buyer, is to go to estate auctions, but that's
| obviously much less convenient than FB marketplace or what
| have you.
| rootsudo wrote:
| Yep, they do value add on and make it "zero" fees and then want
| you to use their financing option so they can sell your
| financing among others in a contract very similar to a CDO that
| has an expected depreciation curve (with high APR)
| xfitm3 wrote:
| Used car prices are skyrocketing. It's a function of the
| market. Compare apples to apples - used prices are higher on
| other sites, too.
| tmp_anon_22 wrote:
| > Used car prices are skyrocketing
|
| Yup, any car buying right now is going to cost extra - but
| even in that context Carvana overcharges (and offers
| laughable financing). IMO - I spent the past 3 months
| researching this topic for my own purchase, limited mostly to
| sedans and cross-overs.
| onlyrealcuzzo wrote:
| I don't get it. People in the market for used cars are
| presumably price sensitive - at least more so than new car
| buyers - who are already quite price sensitive.
|
| Who are the used car buyers that are paying 20% more and
| getting bad financing terms? Are they selling a lot of cars
| to subprime buyers?
| rootsudo wrote:
| They are also falling for the User Experience, much
| similar to what car max started with "no haggle" pricing,
| no needing to wait fir F&I from the dealer, etc.
|
| That's it - same old processes, but they have the UX to
| make it "nice."
|
| And people are paying a premium for that.
| jjeaff wrote:
| It's an amazingly high premium. I just looked up the same
| car I just bought last week from a used car dealer for
| $13.5k.
|
| Same model, year, trim and pretty close mileage are on
| Caravana, listed at $19k and $21k. So a 50% premium.
| rootsudo wrote:
| They're using the same idealogy of overpricing stuff and
| listing it in Amazon, so they have the first exposure,
| even if most expensive, it's most convinient.
|
| I, value 50% of the car's price and don't mind spending
| 3-6 hours to save $10,000~ but many people, simply have
| an old car, the mechanic says it needs a new engine, they
| have a shift working minimum wage-esque and go with the
| first option of visibility thinking it's a good deal.
|
| Financially poor, financially ignorant and time poor.
|
| The perfect American customer.
| jdavis703 wrote:
| People are starting to take out 6 and 7 year auto loans.
| Some people only look at the monthly payment to figure
| out if they can afford the car. Because of this, some
| "budget conscious" buyers are effectively price
| insensitive.
| baldeagle wrote:
| Convincing a buyer to be a 'payment' buyer is an old
| trick in the car market. Don't fall for it - always buy
| on price and then let the payments work out. With all the
| online calculators and soft pull applications (no credit
| hit, but accurate prices) it should be strait forward to
| figure out roughly what you can afford. If it seems like
| magic, it likely is.
| flurben wrote:
| I bought from carvana 2 years ago because they had:
|
| A. Lower interest rates than the local credit union or the
| banks, and
|
| B. Better prices on the vehicle I wanted than anyone else
| in the area.
| jseliger wrote:
| Six months ago, I was considering buying a car from Carvana or
| similar, and their prices didn't seem outrageous: the market
| was also much more liquid than any other I was aware of. The
| difference wasn't just a "couple hours" at a dealership--it was
| all in time and attention.
|
| I wound up with a new Tesla, partially because used car prices
| were so high. The amount of time and attention buying cars
| still commands, in most cases, is ridiculous, and the efforts
| of Carvana to lower both, however imperfect, is commendable.
| zitterbewegung wrote:
| Car Loans in the US are a part of all car companies whether they
| sell new or used. So this like a good ad for Caravana. Most
| people in the US expect to buy a car with some kind of financing
| but as people get price out of more and more homes you can see
| the Used car market growing more and more.
| dougSF70 wrote:
| Car dealer makes money from financing loans....no surprises!
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