Tag Archives: subprime auto loans

Another Bubble… On The Verge of Popping, by Eric Peters

Posted on March 21, 2016 | Leave a comment

From Eric Peters on a guest post from theburningplatform.com:

Termites start low and work their way up. By the time you notice them, it’s often already too late to save the place. All you can do is rebuild, start over.

This analogy may be useful in terms of understanding what’s going on in the car business… on the lower end of that business. And what that could portend for the rest of the business – ostensibly “doing gangbusters,” according to mainstream media accounts.

You know … like the housing market was “doing gangbusters” a few years back.

Until, of course, it wasn’t.

Well, check this:

The number of “subprime” car loans being sold is increasing – and so is the number of delinquencies on those loans. They are up to 5.16 percent, the highest level in 20 years.

Consider what this means.

First, a growing number of people cannot get traditional loans for new cars. They lack the verifiable income to qualify – or their credit scores suck. But financial flimflam outfits are loaning them money – often, at exorbitant interest – nonetheless.

Sound familiar?

It does to Comptroller of the Currency Thomas Curry, who recently said “… what’s happening in the auto loan market reminds me of what happened in mortgage-backed securities in the run-up to the (housing) crisis.”

Second – and not surprisingly – these loans are being defaulted on in growing numbers. Apparently, people who can’t swing a mainline loan at 3 or 4 percent interest are having trouble keeping up with loans that have interest rates twice as high.

Who’d a thunk it?

Now, are talking about $25 billion in subprime auto loans. Will Uncle step in – once again – and bail out the shysters issuing these loans with more of our money?

Of course he will.

Spending other people’s money is not only what Uncle does best – it’s all that Uncle does. He hasn’t got a penny of money that’s not been taken from others first. Why not be generous? There’s always more where that came from.

To continue reading: Another Bubble… On The Verge of Popping

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Subprime Auto Delinquencies At Two-Decade High, by Robin Wigglesworth

Posted on March 15, 2016 | Leave a comment

From Robin Wigglesworth at Financial Times, via davidstockmanscontracorner.com:

Delinquencies on poor-quality US car loans have climbed to their highest level in almost two decades, according to Fitch Ratings, reinforcing concerns over the rapidly growing market.

The rate of “subprime” motor loans overdue by more than 60 days rose to 5.16 per cent in February. This surpassed the post-financial crisis peak and was the highest since the 5.96 per cent reading in October 1996, according to the rating agency.

Subprime car loans have long been a concern for analysts, some of whom feared that rapid issuance since the crisis and weakening lending standards would cause problems in the market for securitised motor loans. There, banks repackage loans into asset-backed securities and sell them on to investors, much like they did with subprime mortgages in the 2000s.

“Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year,” Fitch Ratings said in its report.

To continue reading: Subprime Auto Delinquencies At Two-Decade High

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Here’s How To Buy A BMW On Food Stamps—–Soaring Auto Junk Loans, by Michael Corkery and Jessica Silver-Greenberg

Posted on January 28, 2015 | 1 comment

Here is Son of Subprime, this time in automobile loans, not mortgages. From Michael Corkery and Jessica Silver-Greenberg at the New York Times, via davidstockmanscontracorner.com:

The loans were for used Dodges, Nissans and Chevrolets, many with tens of thousands of miles on the odometer, some more than a decade old.

They were also one of the hottest investments around.

So many asset managers clamored for a piece of a September bond deal made up of these loans that the size of the offering was increased 35 percent, to $1.35 billion. Even then, Santander Consumer USA received more than $1 billion in investor demand that it could not accommodate.

Driven Into Debt

Articles in this series are examining the boom in subprime auto loans.

Across the country, there is a booming business in lending to the working poor — those Americans with impaired credit who need cars to get to work. But this market is as much about Wall Street’s perpetual demand for high returns as it is about used cars. An influx of investor money is making more loans possible, but all that money may also be enabling excessive risk-taking that could have repercussions throughout the financial system, analysts and regulators caution.

In a kind of alchemy that Wall Street has previously performed with mortgages, thousands of subprime auto loans are bundled together and sold as securities to investors, including mutual funds, insurance companies and hedge funds. By slicing and dicing the securities, any losses if borrowers default can be contained, in theory.

http://davidstockmanscontracorner.com/wake-up-call-to-yellen-heres-how-to-buy-a-bmw-on-food-stamps-soaring-auto-junk-loans/

To continue reading: Junk Auto Loans

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They Said That? 1/10/15

Posted on January 10, 2015 | Leave a comment

From Gina Proia, a spokeswoman for Ally Financial Inc., a leader in car loans, referring to a recent increase in loan delinquencies:

[The increase in losses] is related to growth in the consumer portfolio as well as our strategy to diversify the business and book a more balanced mix of assets. The increase in losses was expected and in line with our expectations. We continue to have a robust underwriting policy and price for risk appropriately.

“Robust underwriting policy,” assuming Ally is following standard industry practice, is to make loans to people with little income and few assets. It’s Son of Subprime, this time in the auto sector. Some of the auto industry’s recent strength can be attributed to easy credit.

To see how relaxed standards have become, consider this quote from Patrina Thomas, who had her car repossessed after she was unable to make her $385-a-month payments.

“Now my credit is ruined. I can’t buy a house for a while.”

The Wall Street Journal, “Car Loans See Rise In Missed Payments,” 1/9/15

If Ms. Thomas can’t make car payments, what makes her think that it will be her “ruined” credit, rather than her lack of income, that will prevent her from buying a house, if only just for “a while?” The auto lenders have reached the same point as their subprime mortgage predecessors: anyone who can sign their name can get a loan.

Presumably lenders like Ally build in default probabilities when deciding what rate to charge borrowers. Ms. Thomas was paying 20.4 percent interest, which covers a lot of delinquencies and defaults. But haven’t we heard this song before, say in 2006 and 2007 just before housing went bust? Delinquency rates on auto loans are ticking up even while the economy is supposedly recovering. The auto loan market is nowhere near as large as the residential mortgage market. Bad auto loans won’t take down the economy, but if things head south for other reasons, those loans will administer a body blow, perhaps lethal, to auto lenders and to automobile sales. An interesting side bet is whether the government will find a way to put taxpayers on the hook for those loans. Anyone making odds?

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