subprime auto bubble

Another Red Flag Emerges in the Auto Securitization Market

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Irresponsible and dangerous lending practices in the U.S. automobile market have been flagged by many people for a long time, but nobody knows exactly when it will all come to a head and create real problems. Today, I want to flag the latest warning sign.

Bloomberg reports:

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings.

This group of securities is experiencing cumulative net losses at a rate projected to reach 15 percent, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote in a report Thursday.

“The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,” said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment. That becomes riskier in the tail end of the loan, after the car has mostly depreciated and borrowers may be left owing large balances.

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Welcome to the U.S. Auto Market aka the ‘Trade-in-Treadmill’

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Most of you reading this are probably aware the U.S. auto market is a train wreck waiting to happen, but a recent report by Moody’s really puts the industry’s insane lending practices into perspective.

Reuters reports:

As U.S. auto sales have peaked, competition to finance car loans is set to intensify and drive increased credit risk for auto lenders, Moody’s Investors Service said in a report released on Monday.

“The combination of plateauing auto sales, growing negative equity from consumers and lenders’ willingness to offer flexible loan terms is a significant credit risk for lenders,” Jason Grohotolski, a senior credit officer at Moody’s and one of the report’s authors, told Reuters.

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Subprime Auto Loan Delinquencies Jump to Highest Level Since 2010

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Just in case you need some more evidence that the U.S. economy is rolling over.

Bloomberg reports:

More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt.

Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7 percent, a level not seen since 2010, according to data from Wells Fargo & Co.

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“Liars Loans” are Back…but with a Twist

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Most of you will be intimately familiar with the roll “liars loans” played in last decade’s financial crisis. In a nutshell, these were loans in which the borrower was encouraged to lie about his or her income in order to qualify for a mortgage they couldn’t actually handle. In the aftermath of the crisis, regulations have been put in place to ensure lenders verify income and the ability of the borrower to service the mortgage. As is always the case, there’s a loophole, and Wall Street is already exploiting it.

The loophole pertains to loans for homes that will be used for business purposes. Unsurprisingly, people are lying about the true use of their homes to avoid regulations. Some of these are then being packaged in AAA rated bond issuances.

From Bloomberg:

The pitch arrived with an iconic image of the American Dream: a neat house with a white picket fence.

But behind that picture of a $2.95 million home in Manhattan Beach, California, were hints of something darker: liar loans, those toxic mortgages of the subprime era.

Years after the great American housing bust, mortgages akin to the so-called liar loans — which were made without verifying people’s finances — are creeping back into the market. And, like last time, they’re spreading risks far and wide via Wall Street.

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Subprime Auto Loan “Titan” Foolishly Proclaims There’s Nothing to Worry About

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Some of you will read the title of this post and wonder why I chose to cover this in light of all the other things happening in the world. While the rapidly growing subprime auto market might seem unimportant on a relative basis, I think it’s very significant as a microcosm of the many failures within the U.S. economy since the financial crisis, during which oligarchs were bailed out and the rest of the nation was left hung out to dry.

I best summarized how disturbing current trends in the U.S. economy are in the post, Land of the Debt Serf – How “Auto Title Loan” Companies are Ruthlessly Preying on America’s Growing Underclass. With regard to trend toward debt serfdom, I noted:

Think about how troubling this is for a second. In the run-up to the last crisis, Americans borrowed on their home equity and used the proceeds to remodel kitchens, etc. Now these same Americans are so completely broke, the only asset they can borrow against is their cars, and they are desperately using the money to purchase groceries, pay cable bills, etc. Thank you Ben Bernanke.

Even worse, more than 10% of these debt serfs end up losing their cars. What will they end up borrowing against after the next crisis, their organs?

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