“Subprime Flashback”
A High level of missed payments for recent subprime loans made recently has raised concerns about underwriting standards. As standards have weakened, so have delinquencies.
The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.
In a “Subprime Flashback” the Wall Street Journal reports Early Defaults Are a Warning Sign for Auto Sales.
To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2.
The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed.
About 12% of the loans backing bonds sold in November by Exeter Finance Corp., another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company.
Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.
“What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders.
The total volume of U.S. auto loans is now at an all-time high of close to $1 trillion, with a fifth made to subprime borrowers, according to Equifax. Many of those loans are repackaged into bonds to free up capital so that new loans can be made.
Issuance of bonds backed by U.S. subprime auto loans topped $27 billion last year, the highest in a decade and up 25% from 2014, according to Asset-Backed Alert, an industry newsletter that has flagged concerns around Skopos and other “deep subprime” lenders.
Some 87% of the loans were to borrowers with credit scores below 600, on a scale of 300 to 850. A third of those had scores below 500 or no credit scores at all.
Loans Fuel Sales
Sliced and Diced Into Investment Grade
The Kroll Bond Rating Agency Inc., gave most of the bonds in the November deal investment-grade ratings.
According to Kroll, half the loans in the pool could default and all the bonds still would be repaid.
If those estimates are accurate, Kroll should use its earnings and buy the entire pool.
Rate Shopping Whores
In this perverse business, the agencies willing to hold their nose and assign the highest ratings gets the most business.
In recent Chicago bond offerings, Kroll gave the best rate assignments.
For details, please see …
- Pigs at the Trough: Rating Agencies as Corrupt as Ever.
- Rate Shopping Whores and Chicago’s Bond Rating.
Mike “Mish” Shedlock
“What’s driving record auto sales is not the economy, but record auto lending,”
That statement is essentially meaningless. Just about every auto purchase is financed so of course records sales means record lending.
“Just about every auto purchase is financed”? Really? I have purchased over 100 cars and trucks and NEVER borrowed a penny to do so, even when I had almost no money. My opinion is: if you can’t pay cash, you cannot afford it.
I know, I’m old school; a neanderthal. But it has worked for me. This instant gratification thing needs to come to grips with reality.
CJ the same here with me, we never finance a vehicle. Save our money then pay cash for what we want. Funny how we talk about this in 2010 when loose credit for cars really blowing up. I would never finance a vehicle longer then its warranty period. We spoke of people not paying as soon as they had a problem and it is out of warranty.
The time is coming where more and more will go belly up or they will trade them off for another lease.
CJ same here, I never finance a vehicle. We save our money then pay cash for one. I just cannot see financing a vehicle longer then the warranty period. Now vehicles cost more then my first home. We spoke of this in 2010 how people would start walking away when they had mechanical problems and the vehicle was out of warranty. Either you get another or lease one if you can afford one.
Buy a good used vehicle and never buy new. I have bought one new vehicle in my whole time on the planet.
Shamrock says, “That statement is essentially meaningless. Just about every auto purchase is financed so of course records sales means record lending”
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Unfortunately you failed to read or understand the article The credit worthiness of the lending pool is far worse then in the past, with far more subprime loans. It is very similar to what happened in the mortgage industry with NINJA loans. If you ease lending standards you will increase sales, and defaults, eventually you will fail.
Surprisingly the chart shows no indication “cash for clunkers” distorted the dollar volume of loans for cars. The recovery looks like a market that has saturated, and is about to roll over.
What will new car sales figures look like when all the leased cars & repossessed cars come on the market?
“A High level of missed payments for recent subprime loans made recently has raised concerns about underwriting standards.”
Standard Operating Procedure: Open Barn Door. Release Horses. Lament Horses Got Out.
Recently raised concerns- well after the damage has been done. WAY too late to have “raised concerns”, now.
Underwriting standards: can you fog a mirror?
Who is going to be the first to lie, that no one saw it coming?
Way back when Congress forced banks to lend mortgages in red lined areas to single welfare moms in the same proportion as in the prosperous white suburbs. Banks devised the asset backed security bundle to unload these toxic mortgages. A Chinese mathematician devised a formula proving that a bundle of toxic loans was safer than the individual loans. His formula was touted as Nobel Prize worthy back in 2007. Alas, he missed the prize.
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