Bloomberg reports Subprime Auto Bonds From 2015 May End Up Worst Ever, Fitch Says. I suggest 2017 will be worse, but let’s tune into Fitch first.
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.
Credit-rating companies that assess the auto debt packaged into bonds have raised concerns in recent months about rising delinquencies and defaults. They note that additional pressures in the used-car market have weighed on lenders’ ability to recoup funds from borrowers who have their cars repossessed.
S&P Global Ratings, which rates a larger percentage of the markets than Fitch and Moody’s, has blamed the rising net loss rates on weaker recoveries. S&P noted this month that net losses on prime deals have reached a pace not seen since 2008.
2017 Will Be Worse
2017 will be even worse. This Automotive News story provides an easy to understand explanation: New-Car Loans Lasting 73 to 84 Months Soar.
In the first quarter of 2009, 11.7 percent of new-vehicle loans were 73 to 84 months, Karl Kruppa, senior automotive solutions consultant for Experian, said at CU Direct’s Drive ’17 conference here last week. Through February 2017, 33.8 percent of loans were 73 to 84 months.
Even within that bucket, term lengths are creeping up. In the fourth quarter of 2010, three-quarters of new-vehicle loans in the 73- to 84-month category were between 73 and 75 months, Kruppa said. “Now we are seeing more and more lenders willing to go all the way up to 84 months,” he said. In the fourth quarter of 2010, 17.1 percent of new-vehicle loans were 84 months. In the fourth quarter of 2016, 28.7 percent of new-vehicle loans were 84 months.
“You know what’s kind of startling?” Kruppa said. “There’s actually 10 percent of [2010 model-year] used vehicles being financed at a term between 73 and 84 months. Longer terms are here, and more and more lenders are willing to do that.”
Septuple Industry Whammy
- New car incentives are rising
- Used car glut with prices plunging
- Length of loans increasing
- Economy weakening
- Aging boomers will drive less, with cars already lasting longer
- With default rising risk, lenders will hike loan rates, reducing new car affordability despite increased incentives.
- Self-driving vehicles are right around the corner. Demand for cars without those features will plunge.
Other than those items (and anything else I may have missed) the auto industry is doing quite fine, thank you.
Mike “Mish” Shedlock
I’ve been shopping for a used car, and not only are retail prices not collapsing they are actually up 5 o 6% this year.
https://www.cargurus.com/Cars/price-trends/ Last 90 days prices in several categories UP over 5%. Where are you seeing collapsing prices?
CPI
Used cars and trucks down 4.6% year over year (April).
https://www.bls.gov/news.release/cpi.htm
https://www.bls.gov/news.release/cpi.t01.htm
Makes sense to me.
Probably worse actually
Thanks to both responses. It looks like BLS gets the data from NADA used car prices. Other industry sources are showing price increases, so, who the hell knows. https://publish.manheim.com/en/services/consulting/used-vehicle-value-index.html
https://publish.manheim.com/content/dam/consulting/ManheimUsedVehicleValueIndex-WebTable.png
If the finance people and banks can get away with it…….
I suspect them to artificially reduced supply and inflatied prices, just as they have in housing for the past 9 years.
Government figures simply cannot be trusted.
Based on the cargurus site, the biggest price drops are in makes THAT NO LONGER EXIST (Mercury, Plymouth, Pontiac, etc.) How much you wanna bet these are taken into account in CPI figures?
Plymouth has been defunct long enough for it to not be in CPI figures. But Mercury, Pontiac, and Saturn are defunct less than 7 years and CPI for used cars looks at cars aged 2-7 years. Those 10%+ drops for defunct nameplates are offsetting the other brands.
If the CPI says you’ll buy hamburger if you can’t afford steak, then it must be true that you’ll buy a used Pontiac if you can’t afford a used Lexus.
@ shamrock – you are ignoring seasonality
Check the CPI. For month over month used cars and trucks +0.9% unadjusted, but -0.5% adjusted.
People buy cars in the spring. Noticed on your car guru chart you picked December 14th as start date … BUT if you reset chart to May 1, 2016 start date.
May 2nd, 2016 … $19,875
June 11th, 2017 … $19,503
I agree. I was looking to see if there was any “hard” data to corroborate my personal experience anecdote of seeing prices for the used car I’m shopping for up 5-6% this year. Granted, no category of vehicle has a higher seasonal variance than convertible, so there’s that.
YOY, car guru – 1.48%, CPI -4.6%, and manheim used car auction index +2.7%. If you average those 3 you get year over year at -1.1%. I wouldn’t call that a plunge.
I have a friend who told me the same thing to my surprise. His used truck was going up in value.
I was recently shopping for a used car and there’s a big car max near me. Looked on their site and many used cars cost as much as new cars. The used cars were the upper end lines compared to the lower lines of new cars, but new cars come standard with so many features, it made no sense to buy a used car.
“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”
…
Duh.
Anyone with a brain knew – in real time – this was going to blow up eventually. …Just like the negative amortization / NINJA mortgage loans mid 2000s. But hey, it drove sales TODAY … and that is all that matters to those folks who collect their fees up front. And then Wall Street financialization cooks them into securities to foist on dumb institutional investors.
Back in the day (like 15 years ago) it was rare to find a car loan longer than 5 years for a couple of reasons. 1) depreciation 2) After 4 / 5 years is when repair / maintenance bills start to escalate. How many subprime borrowers 5 years into a loan can afford the monthly AND a major repair bill?
It is even worse than that.
Many – if not most – of these sub-prime auto loans (new cars) are written for LTV’s of 110-120%. Used car loan LTV’s are EVEN HIGHER.
These people are not only borrowing the entire sales price of the vehicle at APY’s as high as 25%, they are also borrowing the funds to pay for the insurance, gas and routine maintenance and repairs!
Total insanity.
To make matters worse dealers for years have been taking upside down loans on trade ins and rolling it into the new vehicles which compounds the problem. The chickens are coming home to roost.
“New car incentives are rising”
…
Just throw it on the pile of other charts going ballistic.
for May
incentives +23% year over year
sales -0.6% year over year
https://static.ed.edmunds-media.com/unversioned/img/industry-center/analysis/may-2017-sales-insights.pdf
The tsunami (which will last YEARS) of newish vehicles coming off lease should help matters.
Self driving, to whatever extent it bears out, will increase demand for cars. Making a good’s consumption easier and more convenient, always does. Self driving will also allow cars better access to “incentivize” drivers to take certain routes, stop at specific charging/fueling stations and restaurants; hence allowing automakers to take a cut of the benefit businesses derive from having targeted drivers dropped off at their door. So far, so good, for the auto industry.
More ominously, “self driving” will dramatically accelerate the the trend towards cars becoming a commodity. This is, even without “self driving,” already putting huge pressures on traditional premium brands and models. Which is where profits are, as traffic laws, road/highway design and parking infrastructures, are by now already pretty much optimized for, even by cheaper models. Traditional differentiators that used to be an incentive for those who could afford to, to by premium; such as speed, handling and size; can no longer be practically improved upon, versus those of non premium models. Where competition is fierce and profitts slim.
“Self driving” will massively accelerate this, as their “brains” are much simpler and less flexible than humans’, and at the same time better at repetitive standardized tasks. Hence the benefits from even tighter standardization will only increase. The bragging rights of a 12 seat SUV with 1500 horsepower and a sub 5 minute ‘Ring time, will be even more obviously pointlessly wasteful and silly, if all cars are self driving and limited to top speeds and accelerations that doesn’t unduly disrupt other self driving cars. Doubly so, if the luxmonster doesn’t fit in parking structures designed with self driving in mind…
And in the end, once the dust is settled; being a commodity producer, is rarely all that lucrative.
How many self driving corvettes do you think we will see, or ANY sports type vehicle. Until you recognize that a large percentage of car purchases are based more on emotion that practicality or need, attempting to analyze impacts on car sales is flawed.
I would contend that the commoditization of auto travel will make the model lineup shrink significantly as there will be less need for differentiation. I would suggest that it will significantly reduce auto ownership as a prolific fleet of “Uberized” self-driving vehicles combined with the commoditization will reduce any demand. If self driving cars and human driven cars were able to coexist, I would say car manufacturers might have a chance…but they are not….and insurance and government will create policies to make human driven cars are a thing of the past. Remember convertibles and pony cars of the seventies? Government and insurance made them disappear in a matter of a couple of years. Can you imagine government provided the opportunity to remove massive numbers of cars from the road PLUS have direct access to every vehicle in America’s route and destination. Think of how much safer and better our world will be….when we have fewer choices and less control.
Let’s just say that my views are diametrically opposed to yours. But time will tell.
Some folks pay for shrinks, others ride motorcycles or enjoy a Porsche convertible. Kentaur-like unison with a driving machine can be exhilarating!
In Western Europe, there are a ton of okay cars, cheap as dirt. Those who know mechanics or have skills can drive those clunkers for years to come. Ebay and other online platforms (like forums for a certain vehicle) help. I see more garages fighting and dying. And wonder, how much longer will the industry accept that 1/3 of the sticker price goes to sales and marketing?!?
While I don’t buy into the self-drive future, I can see major manufacturers using the internet for initial sales. Don’t you?
“While I don’t buy into the self-drive future, I can see major manufacturers using the internet for initial sales. Don’t you?”
In the US, the only thing preventing Amazon from selling cars, is what is preventing people from enjoying any freedom of choice here anymore: Laws, and an entire legal and political system dedicated to one thing and one thing only: Robbing and enslaving the vast majority of the population for the (thankfully “short” in historical term, as the Romans found out) benefit of a small, entrenched class of utterly-expendable-without-a-single-negative-sideeffect leeching class.
The Obama debt economy doesn’t work. lets all act surprised
The Bush debt economy didn’t work, either. Both McCain and Obama supported TARP. It is the same routine, over and over again by both political parties.
I doubt self driving cars are just around the corner. There are some major issues, including a big reluctance of drivers to trust a computer with your life. The technology is nowhere near ready or affordable. Yes, the dimocrat strongholds that the lsm lives in are all for it. Many of us in flyover country LIKE driving and the freedom it provides. Many of us don’t trust the government not to take control at some point. Self driving cars mean you can be tracked anywhere you go. It also means that you can be kept from going certain places. NO THANK YOU!
Even the dumb-o-crat strong holds are going to find out that self driving cars cost money — whereas there are (at least) 4 years of auto production that was basically given away for free ( 7 year loans?? no money down on a depreciating car??? Rates at or below CPI????).
Why pay to be a crash test dummy for Google, when you can get a normal car for free?
What is money when you have the power to create it to “infinity and beyond”?
Are we really going to stress out and predict any amount of doom due to DEFAULT? We know that this is an outdated notion in that our government…the Fed or the banking cartel seems to have the ability to “liquify” virtually any threat, and if a threat is even publicly discussed, it is only for the purpose of creating an excuse for more extraordinary measures that will fill the pockets of the leader-elites.
@Madash — you often have really good comments, but this was not one of them.
The Fed can print currency, like Zimbabwe, but they cannot print wealth (the Fed destroys wealth).
The socialists can rant about the rich and the banksters and other tin foil hat nonsense — but the middle class needs WEALTH, not CURRENCY. This isn’t just an issue for the rich, its an issue for the middle class and even the poor (who also need WEALTH, not CURRENCY).
The Fed is destroying America, and whatever conspiracy you dream up — you have to ask how it is in Congress’ interest to destroy their own tax base. They can’t steal from taxpayers who don’t have anything to take
Self driving nowhere near ready.
Need big infrastructure push first to build roads (or update) with sensors. I live in a rural area with plenty of pot holed gravel roads. Trees that form canopies over roads (good luck with your gps). Etc.
Anyways, with new vehicle sales hitting the skids am I to believe car manufacturers are suddenly going to start spending $billions and $billions on capital expenditure for self driving? Not to mention state / federal government spending on updating roads as revenue crumbles?
Not saying it won’t happen … eventually, but the coming recession will shelve plans for YEARS.
I’ll reserve judgement when self driving takes off until there’s a real success story. Not some prototype that worked for a trip or two with a person behind the wheel. An actual implementation where it provided a real benefit. At the current pace, I don’t see that happening for several years at the earliest.
We all laughed at the autonomous vehicles attempting to navigate the DARPA challenge obstacle course that first year. Most of them had trouble getting off the starting line, and none of them finished.
2008 – https://www.youtube.com/watch?v=uWLjgs2CEyE
2016 – https://www.wired.com/2016/09/self-driving-autonomous-uber-pittsburgh/
Don’t look at what’s happening today, look at how quickly the technology is developing. Look at how despite concerns, Moore’s law continues to play out. In 8 years we went from vehicles that could barely navigate a closed test track to traveling around a city. That to me is pretty darn amazing.
That said, I still think I’ll wait for version 3.0…
level 4 beta testing is widespread TODAY !
my guesstimate is level 4/5 vehicles will capture 20-40% of new sales by 2026.
Anyone buying a car today needs to realize its resale value will plummet to near scrap value once level 4 enters widespread retail in 3 years
I’m not aware of ANYONE who has level 4 in “beta” right now. Google, Uber, nutonomy are all still in alpha/development testing. None of them are testing without trained check drivers. For that technology to be in “widespread retail” in three years, we should be seeing self-driving Ford, GM, BMW, Mercedes or Volvo’s running around without check drivers right now.
Even if Level 4 was really in large-scale beta testing right now, to translate that into “widespread retail” in three years is incredibly ambitious….7 to 10 years is more likely. We’re talking about a complete engineering design cycle on a completely new platform, new sensor suites, and major new computer boxes that need to be developed, life-tested and made production-ready. BMW claims a five-year engineering cycle on a new car design that includes no new technology whatsoever.
7 years would be 2024
By 2022 or so on highways, most trucks will be self-driving
Designs started years ago
Ford expects a fleet by 2021. Is everyone wrong?
… and your behicle can be remotely switched off like a stolen IPhone (“bricking”)
Again we see the ratings agencies reactive rather than pro-active in their analysis when they talk about recent delinquencies, default rates and recoveries. It’s as if they let the originators talk them into basing their analysis on a rosy period instead of taking a longer term view of what could go right or wrong. But we’ve been here before.
“It’s as if they let the originators talk them into basing their analysis on a rosy period instead of taking a longer term view of what could go right or wrong.”
Money talks.
Simple question. The bond rating agencies are paid by
1) the bond originator
2) the bond buyer
if you know the answer the rest makes sense … as in you give me a bad rating I WILL NEVER EVER USE YOU AGAIN.
Shamrock is probably right for short term. Went looking myself several times myself. Minnesota prices for used are higher. Trades #s are pathetically high. Still leasing at silly rates. Sales down as even zero % interest is not of interest. To buyers my guess if all is true the crash for autos’ will come this fall.
Well, I don’t have the feeling that GM shuttering Pontiac, Saturn and Hummer was their idea.
Once on their knees, Daddy Warbucks will write the checks and the rules again.
With all of the channel stuffing filling dealer lots and more, used car prices MUST crash and burn…the process may take longer than predicted, but be patient…
buying a new car has never made fiscal sense, whether you pay cash or lease or take out a 7 yr loan. $200-300 cell phone bills/month don’t make sense either.
I noticed today that gasoline price for regular was $2.05/gal. –that’s all folks can afford, what does that tell ya?
make America great again, buy a new American car for $45K
Volkswagen has 1 million Diesels in cold storage.
Where? In North America?
I look around my area and most of the cars are new. MBZ, Tesla, BMW, Volvo. Especially common, however, are premium/high end pickup trucks. I live in a city. Why are jacked up pickups with knobby tires and raised suspensions everywhere? Its not like many of them are actually put to work. There is too much money sloshing around satisfying everyone’s urges instantly. This is going to lead to great deals for many who wait for the defaults/repos, but you have to have a job to afford even that, and the next economic dip is going to be epic and severe.
Hear, hear. In thailand, where they recently doubled the minimum wage to 9,000 THB a month, many a lured into buying vehicles they cannot afford. Teachers with extremely low starting salaries of around $ 300 a month have access to 1% financing and are seen driving new cars.
I bought a Yamaha Spark 115i bike as a repo from a middle man at 55% the new price. 10 months’ old, 6,000 km. Tax and insurance paid for 2 years. Hello 100 mpg.
Many people work to pay for their cars. This will change. Desperation driving inventions or car-sharing or even cycling.
Bankers have printed such outrageous auto inflation that many people can’t afford cars anymore. Auto prices are to the moon. 8 zillion year loans won’t solve the inflation situation.
Shoppers need some good CPI deflation so we can afford to buy stuff.
I think it has more to do with production costs. They have to get better gas mileage every year with fewer emissions and new cars are basically giant cell phones on wheels.
Here is a German example for the smallest MBZ white van with a Diesel engine:
Vertragslaufzeit 48 Monate
48 Monatsraten1 à 212,63 €
Einmalige Sonderzahlung 0,00 €
Gesamtbetrag 10.205,76 €
Sollzinssatz pro Jahr2 4,05 %
Effektiver Jahreszins 4,50 %
Nettodarlehensbetrag (Anschaffungspreis)3 16.263,18 €
Listenpreis 18.778,20 €
And the service costs? Paying >100 € an hour. Cam chain belt replacement? Unrealistically low mileage allowances like 12.000 km a year? Many users will curse these offers when the piper wants to get paid 4 years down the road.Source: SIXT Leasing
ALDI and LIDL (German deep discount grocers) are coming. Their German food prices make your eye water.
They sell 2 liter own brand sodas in the UK for 17 p / $ 0.25.
I got a mouth wash for 0.75 € for the big bottle ($ 0.88). 1.5 kg small juicy oranges from Spain @ under $ 2 (they adjust prices daily).
Malls, grocey chains like Albertson’s & SAFEWAY have been buckling under debt and hurting. Whole sectors are suffering when you look closely.
And the BLS is lying all the time: just ask someone with kids at a kindergarten and university with an Obama-Plan policy rising some 49%. Meanwhile the FED pretends to shoot for a silly 2.0% inflation number. (The stock and bonds markets should be included in inflation calculations). http://www.safehaven.com/article/40658/lies-damn-lies-and-bls-statistics
watch a huge shakeout in US grocery stores once Aldi arrives. We’ll see plenty of BKs.
shoot when Trader Joe’s came to NYC, it caused a wave of restructuring. Trader Joe’s has high prices compared to Aldi.
“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.”
“Septuple Industry Whammy”
The elephant in the room is missing from this story. Massive auto loan fraud. Fog a rear view mirror, get an auto loan. One major auto lender was only checking 8% of applicants. Essentially, a no doc auto loan.
The FED insider who wrote the book FED up, said that autos were going to be the issue housing was in the last recession.
Hate to say this but unless I see Toyota used car prices dropping, I ain’t buying this report.
‘Self-driving vehicles are right around the corner.’
Seriously?
Yes
absolutely
Wait till the first massive law suit hits. That will put an end to this nonsense.
Would you get into a car that is being driven by a computer?
Do you also believe we are moving to Mars soon?
would you get into a car driven by a human ?
you are parroting the argument made against cruise control when first introduced – LOL
Since you believe whatever the MSM spews out — then I guess you believe we are bound for Mars too right