Tag Archives: Subprime Auto Loan

Subprime Auto Loan Default Rates Are Now Higher Than During The Great Recession

One month ago, when discussing the most recent trends in the US subprime auto loan space, ZH revealed how despite a virtual halt in direct loans by depositor banks to subprime clients following the financial crisis, the US banking sector now has over a third of a trillion dollars in indirect subprime exposure, in the form of loans to non-banks financial firms which in the past decade have become the most aggressive lenders to America’s sub-620 FICO population.

https://www.zerohedge.com/sites/default/files/inline-images/wsj%20lenders.jpg

As we further explained, the banks’ total indirect exposure to subprime loans – not just auto loans, but also subprime mortgages, and subprime consumer loans – could be pieced together through public filings, and according to FDIC reports, bank loans to non-banks subprime lenders soared this decade, with the following 5 names standing out:

  • Wells Fargo: $81 billion, up from $13.4 billion in 2010
  • Citigroup: $30 billion, up from $4.1 billion in 2010
  • Bank of America: $30 billion, up from $2.8 billion in 2010
  • JP Morgan: $28 billion, up from $10.4 billion in 2010
  • Goldman Sachs: $22 billion
  • Morgan Stanley: $16 billion

Visually:

https://www.zerohedge.com/sites/default/files/inline-images/subprime%20loans%20masking.jpg

But while the supply side of the subprime equation is clearly firing on all cylinders – as only the next crash/crisis will stop desperate yield chasers – things on the demand side are going from bad to worse, and according to the latest Fitch Autoloan delinquency data, consumers are defaulting on subprime auto loans at a higher rate than during the 20082009 financial crisis.

https://www.zerohedge.com/sites/default/files/inline-images/subprime%20march.jpg?itok=hstsxxma

The highly seasonal rate for subprime auto loans more than 60 days past due reached the highest in 22 years – since 1996 – at 5.8%, according to March data; this is well over 2% higher than the comparable March default rate in the low 3%s hit during the peak of the financial crisis a decade ago.

The more recent April data, showed a delinquency rate of 4.3%, higher than the 4.1% last year, and the second highest April on record. Keep in mind, April is the “best” month of the year from a seasonal perspective as that is when the bulk of tax refunds hit, which are then promptly used to repay outstanding bills – it’s all downhill from there… or rather uphill as the chart shows ever higher default rates. 

And while delinquencies have been rising, the number of auto loans and leases to subprime borrowers has continued to shrink, falling 10% Y/Y according to Equifax. However, as we showed at the top, it’s not due to supply constraints at the non-bank subprime lenders, the slide in subprime loan volume is all on the demand side: auto-lease origination by subprime customers tumbled by 13.5%.

Meanwhile, as Bloomberg reports, the volume of bond sales backed by these loans are likely to remain the same because banks and credit unions don’t turn most of their loans into securities: “ABS is a fraction of the total auto credit market, which is mainly funded on balance sheets,” Wells Fargo analyst John McElravey told Bloomberg in an interview. “If the pullback from subprime is more from the balance-sheet lenders, banks, then maybe securitization keeps moving along.”

Not maybe: definitely. As the following chart show, the percentage of subprime securitization of all auto ABS as a share of total loans has not only surpassed the pre-crisis peak, it is at a new all time high.

https://www.zerohedge.com/sites/default/files/inline-images/subprime%20securitization.jpg?itok=JcWewnsb

Call it the latest “new (ab)normal” paradox: the underlying auto subprime loan market is shrinking fast, and yet the market for subprime auto ABS securitizations has never been stronger.

Subprime-auto asset-backed security sales are on pace with last year at about $9.5 billion compared to $9.6 billion a year ago, according to data compiled by Bloomberg. With new transactions from Santander, GM Financial, Flagship, and Credit Acceptance expected to hit the market this week, volume may exceed 2017’s total of about $25 billion.

And while it is safe to say it will all end in tears – again – as it did a decade ago, with the next recession the catalyst, the shape of the next crash will be very different. As we explained last month, this subprime bond market is vastly different from what it was even a few years ago, let alone during the last crisis as an influx of generally riskier, smaller lenders flooded into it in the post-crisis years, bankrolled by private-equity money and funded by big bank loans, pursued the riskiest borrowers in order to stay competitive.

“Neither banks nor credit unions have done ‘deep subprime’ lending,” Gunnar Blix, deputy chief economist at Equifax told Bloomberg. “That’s mainly done by smaller dealer-finance and independent finance companies” who rely almost solely on ABS for funding. According to Bloomberg, only about 10% of $437 billion of outstanding subprime auto loans have been securitized into ABS, according to Wells Fargo, which means that underwriters are generally massively exposed to the subprime auto loan crunch that is already playing out before our eyes, and which will be magnified exponentially in the next recession.

* * *

The latest subprime delinquency data seemed confusing, almost a misprint to Hylton Heard, Senior Director at Fitch Ratings who said that “it’s interesting that [smaller deep subprime] issuers continue to drive delinquencies on the index in an unemployment environment of around 4%, low oil prices, low interest rates — even though they are rising — and a positive economic story overall.” In other words, there is no logical explanation why in a economy as strong as this one, subprime delinquencies should be soaring.

Unless, of course the real, unvarnished, and non-seasonally adjusted economy is nowhere near as strong as the government’s “data” suggests.

Making matters worse, rising interest rates have made interest payment increasingly unserviceable for those subprime borrowers who are currently contractually locked up – hence the surge in delinquency rates – or those consumers with a FICO score below 620 who are contemplating taking out a new loan to buy a car, and suddenly find they could no longer afford it, an ominous development we first described one month ago in “Subprime Auto Bubble Bursts As “Buyers Are Suddenly Missing From Showrooms.

And even if the subprime bubble hasn’t burst just yet, every incremental 0.25% increase in rates assures it is only a matter of time. For once, St. Louis Fed president James Bullard was not wrong when he warned this morning that he sees Fed policy as the reason behind the flattening of the yield curve, saying that it’s been the Fed, I think, that has flattened the curve more than worries by investors on the state of the global economy.

“My personal opinion is the Fed does not need to be so aggressive that we invert the yield curve” he noted, adding that “I do think we’re at some risk of an inverted yield curve later this year or early in 2019,” and “if that happens I think it would be a negative signal for the U.S. economy.”

If he’s correct, it begs the question: why is the Fed seeking to crash the economy and, by implication, the market?

We’ll close with a quote from the last Comptroller of the Currency, Thomas Curry, who during an October 2015 speech said that “what is happening in [the subprime auto lending] space today reminds me of what happened in mortgage-backed securities in the run up to the crisis.” It’s only gotten worse since then.

Source: ZeroHedge

Advertisements

Subprime Auto Implosion Surge as Lenders Start Dropping Like Flies

https://i1.wp.com/www.listoid.com/image/64/list_2_64_20101121_071351_218.jpg

We are in the midst of watching the subprime auto lending bubble burst in its entirety. Smaller subprime auto lenders are starting to implode, and we all know what comes next: the larger companies go bust, inciting real capitulation. 

In addition to our coverage out just days ago  talking about how the subprime bubble has burst and, since then has been crunched even further and additional reports today are showing that smaller subprime lenders are starting to simply implode after being faced with losses and defaults. In addition, Bloomberg reported this morning that there have been allegations of fraud and under reporting losses, tactics that are clearly reminiscent of ➹ throw a dart at any financial crisis/bubble burst over the last 30 years:

Growing numbers of small subprime auto lenders are closing or shutting down after loan losses and slim margins spur banks and private equity owners to cut off funding.

Summit Financial Corp., a Plantation, Florida-based subprime car finance company, filed for bankruptcy late last month after lenders including Bank of America Corp. said it had misreported losses from soured loans. And a creditor to Spring Tree Lending, an Atlanta-based subprime auto lender, filed to force the company into bankruptcy last week, after a separate group of investors accused the company of fraud. Private equity-backed Pelican Auto Finance, which specialized in “deep subprime” borrowers, finished winding down last month after seeing its profit margins shrink.

https://www.zerohedge.com/sites/default/files/inline-images/c1_0.png?itok=tpYYe0lb

Article continues:

The pain among smaller lenders has parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming. In both cases, rising interest rates helped trigger more loan losses.

“There’s been a lot of generosity and not a lot of discretion on the part of lenders and investors,” said Chris Gillock, a banker at Colonnade Advisors, which advises companies on subprime auto investments. “There’s going to be more capitulation.”

Representatives for Spring Tree didn’t respond to requests for comment. A lawyer for Summit said “restructuring in a Chapter 11 bankruptcy proceeding is the best strategy to ensure its long term success” and the company is working with its vendors and lenders to meet its obligations.

Astonishingly and ridiculously, the article goes on to talk about this implosion as if it was expected to happen and as if it’s what would have happened during the normal course of business if ridiculous debt and engineered interest rates weren’t a mainstay of current economic policy:

This time around, the financial system’s losses are expected to be much more manageable, because auto lending is a smaller business relative to mortgages, and Wall Street hasn’t packaged as many of the loans into complicated securities and derivatives. As of the end of September, there were about $280 billion of subprime auto loans outstanding, according to the Federal Reserve Bank of New York, compared with around $1.3 trillion in subprime mortgage debt at the start of 2007. There isn’t a standardized definition of subprime borrowers, though it generally encompasses borrowers with FICO credit scores below 600 to 640 on an 850 point scale.

Take, for example, this gem of cognitive dissonance:

“When you think about the effects of housing versus autos, they’re a lot different,” said Kevin Barker, a stock analyst covering specialty finance companies at Piper Jaffray & Co. Losses tend to be less severe for car loans because they are smaller than mortgages and borrowers pay them down faster, he said, and the collateral is easier to repossess. With home loans, in many states foreclosures require a lengthy court process.

As we all saw from the housing crisis, the smaller shops are usually the first ones to go. The law of large numbers plays to the advantage of bigger corporations and usually buys them more time. The bigger the company, the more the government and institutions care if it goes bust. Smaller companies come and go like it’s nothing, because they have no tangible effect on major financial institutions or the US economy. However, this generally only exacerbates the size of the ticking time bomb to come.

In early March of this year, we posted our “Signs of the Peak: 10 Charts Reveal an Auto Bubble on the Brink“. Our timing couldn’t have been better. In that article we pointed out that the key data which seems to suggest that the auto bubble may have run its course comes from the following charts which reveal that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.

https://www.zerohedge.com/sites/default/files/inline-images/exp%205_0.jpg?itok=6WTTYXWh

https://www.zerohedge.com/sites/default/files/inline-images/jesus_0.png?itok=z7_xZNro

And while some can claim that this is just a natural result of healthy competition between lenders, what is likely causing sleepless nights at banks who have tens of billions in outstanding loans, is the coming tsunami of lease returns which will lead to a shock repricing for both car prices and existing LTVs once the millions in new cars come back to dealer lots…

https://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/05/cars%201.jpg(Where the worlds unsold cars go to die)

https://www.zerohedge.com/sites/default/files/inline-images/2016.12.09%20-%20Auto%20Lease%20Volume_0.JPG?itok=LKLfieyY

We have seen this bubble coming from a mile away. 

Also, just as we expected, between record prices (courtesy of what until recently was easy, cheap debt), record loan terms, and rising rates, shoppers with shaky credit and tight budgets have suddenly been squeezed out of the market. In fact 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.

https://www.zerohedge.com/sites/default/files/inline-images/subprime%20jd%20power_0.jpg?itok=vThqskJd

Confirming our observations, Bloomberg notes that while lenders took chances on consumers with lower FICO scores after the recession, partially on the notion that borrowers prioritize car payments ahead of other expenses, several financial companies started to tighten their standards more than a year ago. The result is a surge in the amount of captive financing shown in the chart above, which as we warned is the clearest indication yet of the popping car bubble.

We also predicted back in December of last year that certain PE firms would start to feel the pain of their subprime auto bets.

However, no one wants to make the point that subprime auto also followed in the footsteps of the financial crisis because it was a bubble that was engineered due to the Fed making it easy to take on cheap debt in order to fuel our nonsense “recovery”.

The continued focus on borrowing and spending, instead of saving and under consumption, will ensure not only that these bubbles continue to happen going forward, but they will get larger in size as time progresses.

Source: ZeroHedge