Subprime auto delinquencies have staked up so much that we are back at 2007 milestone levels.
There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.
“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.
Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.
“We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,” Chief Economist Amy Crews Cutts said in an email Tuesday. “In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”
The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.
“It isn’t a case of chasing a larger subprime share,” Cutts said in an email Tuesday. There’s been “almost no change in median credit scores. That means they are letting other underwriting characteristics slide,” she said, referring to the lenders that issue the bulk of subprime loans — so-called monolines that specialize in one area of the credit market and dealer-finance companies that work specifically with car sellers.
“As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,” Cutts said. “The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.”
The Next Big Short?
Some expect subprime autos will be the next big short, but there is plenty of disagreement.
- May 16, 2017: Steve Eisman says Don’t look for a sequel to ‘The Big Short’ anytime soon.
- March 27, 2017: The Daily Reckoning says “Big Short” 2017: When the Auto Industry Implodes.
- April 20, 2017: former Fed Advisor to Fed Richard Fisher makes the case that households have been squeezed to death and subprime auto loans could be the next major problem for the economy. Video below.
My Take
We likely will not see a credit meltdown in the US like we saw on 2007.
However, subprime loans of all sorts will get smacked hard. So will junk bonds.
A credit crisis in the Eurozone is possible, if not outright odds on. The European banking system is a mess.
Equities are due for a huge slide, but it may take many years to play out as opposed to a quick crash.
Eclipse Chasing
Greetings From Paducah, Kentucky. I will be just across the border in Goreville, Illinois on Monday hoping to get pictures of the total eclipse.
The amount of preparation for this has been incredible. I have been testing computer to camera interfaces to have my computer trigger ISO and exposure changes at the right time. Will do a final test today at the location where I will be tomorrow.
My article posting has been minimal the last couple days and eclipse testing is why. Monday will likely be another low-count article day.
Mike “Mish” Shedlock
My brother works at a national advertising company where the auto industry is one of its customers. They have warned employees of layoffs and will announce those affected this week.
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Auto subprime doesn’t have the potential to cascade in the way mortgage subprime did. And some borrowers will attempt to get back on track in ways they wouldn’t with homes. People will pay their car loans way and consider their car more important than a home, so it would not surprise me that some of these borrowers bounce back and forth between being current and delinquent. if you do decide to short, it must be specific, such as shorting a servicer or a cdx index.
just my opinion and we’re not talking big short profits
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Consumers are crazy but not entirely stupid. They believe, as our modern investors do, that past experience has shown them that there is no real consequence to default (even though we are not allowed to use that word). They understand that our economy is DESPERATE for us to maintain our consumption, and subprime proves it. If the economy drives consumption downward, the money changers will simply lower lending standards further. Sales DEPENDS upon forgiveness…of eventually ALL sins.
Sure, it all went out of control before and things got sideways for our financial wizards of growth, but no one believes that will happen again. The belief is that while things might regress, monetary flow WILL BE PRESERVED, even if it requires money falling from the sky.
As a matter of fact, our new found wisdom should inform us that our profligate ways will likely lead us….actually accelerate us, towards our Utopian final destination.
I hope everyone likes it.
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works that way in business too. Corporations, Donald Trump, etc
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Credit Acceptance Corp looks like a good one. Focuses on subprime, insiders selling (including selling Calls!), and questionable revenue accounting.
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I just checked out CACC. Their stock almost at all time highs. Their balance sheet is not bad. Now if their underlying business changes things can change ofcoutse but their last earnings was good.
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I am in the process of analyzing the 10-Q filing. What looks good can quickly turn south. Why is a major shareholder selling Calls???
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Yes, my brother DID work for them up until about 18 months ago. He moved to a media company that has a division concentrating in vehicle advertising.
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You should check their model. I thought they were a short candidate before, not so sure now. They are somewhat protected by their arrangements with the dealers.
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Some understandably argue that it is disfunctional to ‘wish’ for broad market corrections. Others see a financialworld wildly out of balance, desperately in need of a return to some semblance of equilibrium. I’ve often been ‘wrong’ in this life but I find myself in the latter camp.
The longer this situation continues, the more painful the correction will be for all races, creeds, and social strata, etc. my ‘wish’ is to return to something sustainable – what exactly that is, I can’t say. But it seems to me we are on a path to social, economic, and political disaster.
Here’s hoping I’m wrong one more time.
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“I find myself in the latter camp.”
I am too, but I’m in the periodic, non-catastrophic descent into stagnation and hell ala Japan camp. I’d prefer to see a huge crash with the proper extinguishing of VAST amounts of malinvestment debt through bankruptcies, FORCED due to an -INABILITY- to bail out the perps yet again without destroying currencies, followed by a proper, strong, real and sustainable recovery, but I doubt that will be allowed to happen.
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Those holding debt as an asset will never voluntarily allow it to be marked to zero. It’s not about getting paid back….they don’t WANT the money, they want the power of indebtedness to CONTROL.
The banks create this money as debt.
What did not exist at all is now LEVERAGE.
This leverage is sold and traded.
It OWNS people.
THEY own people.
And you want them to give that up?
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You don’t? Instead just having Japan’s situation x 100 worldwide leading to what end?
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What you described is a giant coiled spring of constantly increasing potential energy for economic destruction that will break free eventually in one way or another no matter what is done or is not done. That which cannot continue indefinitely won’t. The sooner that springs breaks, the better. Wiping the debt slate as clean as possible is the only way to, as I said, achieve a real, sustainable recovery rather than the phony one we have now financed entirely through a rapid increase in debt.
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You may not have noticed that those who own the vast bulk of this debt are the same ones sustaining it. As I say, they don’t want to end it, yet we know it’s ultimately NOT sustainable, and as you also say, this coiled spring will only get tighter and more destructive in its release…..and THEY DON’T CARE. They deny it’s inevitability, or acknowledge it in the belief that somehow they will escape the unwinds vicious wrath.
Denial is what keeps ALL of in the game. They are simply at the top of the grand pyramid, while most of us are closer to the bottom. Theirs is not a game of MOAR, it’s about being on top, for a dollar or a trillion, it doesn’t really matter, and as long as they can own the levers of power…our ruling politicians, they assume that no matter how large the pile up, they will still be in top.
Sure, we all want this corruption to end. Aside from its destruction, it is down right insulting in its transparency….they really don’t care if we know anymore. They feel so powerful, so untouchable, that they are free to practice their crimes in our face now.
The question is, as it has really always been, what are WE willing to sacrifice to change it?
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As a data point.
Warren Buffet just recently raise his stake of General Motors (GM) by 20% to 1.29% of portfolio.
It is a head scratcher to me. Car inventories at record highs. Plant shutdowns. Over saturation of the market. The subprime loan bubble about to pop.
Maybe he sees the market in China more than making up for all that. But with China in a bubble…
Or maybe future auto bailouts.
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The ultimate rent seeker, Buffet no doubt expects a bailout….
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As shown in the last eight years of obama… Buffet is the ultimate insider and gets deals that the public cannot not.
And he gets insider government info on which companies will not be allowed to fail.
That being said…I don’t see Trump bailing out any auto companies.
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You are kidding right? No one wants Armageddon under their watch. He and congress may hold their noses while doing it but they will bailout the auto industry. All people will care about is that if a significant part of the US economy crashes, the people in power will get the blame. Principles are only that if you are willing to stand by them when they are inconvenient.
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Unfortunately it is now rather clear that Trump, for whom I voted, has no principles at all other than doing what he feels like at the moment. Predicting what such a person will do is not possible. If you recall, immediately on winning the election he started appointing cabinet members from the vampire squid. I don’t recall him saying that was what he’d do before election day. He does have the primary qualification for a contemporary politician though being a pathological liar.
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Unfortunately it is now rather clear you parrot the progressive/liberal talking points we get from the fake legacy (and dying) media 24/7.
Why don’t you try answering the question or at least adding an intelligent remark to the conversation.
Obama bailed out GM/Chrysler, the auto unions, the financing arm of GM/Chrysler, major banks, solar companies, electric car companies, etc..
To the tune of nearly a trillion dollars that the taxpayer will never get back.
Buffet, with his insider government info, knew exactly which companies would not be allowed to failed and invested accordingly with deals not available to the public. But Buffet is a big obama fan – so no hard feelings, right?
Will Trump do the same?
I doubt it. Oh look – a small step in the direction.
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No president has EVER faced such headwinds, such vile resistance from the opposition party, from his OWN party and the media. The only thing Trump can do is what can be done without anyone else’s help and with NO legal jeopardy, and he is attacked for failing to advance his agenda….an agenda that while largely centrist, apparently NONE of the swamp wants. Evidently the only thing worse than a devil is an ineffectual one.
He could fill his administration with 100% swamp elite, he could have Pelosi replace Kelly and it wouldn’t matter.
He rejects bias and is attacked as racist because he refuses to condemn those legally exercising their free speech rights and points out that those there illegally and behaving violently share in the blame for violence.
I can only imagine how frustrated he is with his circumstance right now, and when he lashes out on Twitter, his only real communication of how he really feels, he is attacked for lacking measure and couth. He finds himself surrounded by snakes, seemingly no friends nor true allies. If I were he, I would be in prison for my outbursts as I would find this debacle completely unacceptable.
Trump’s ignorance was in his failure to realize the depth and breadth of the swamp, and common to swamps is quicksand, something Trump finds himself deeply stuck. The swamp will not be drained. It will consume or absorb everything that dares put a toe in.
The best we can probably hope for is that the swamp is fully illuminated in the flames of Trump’s loud and fiery crash.
What we do with that is OUR challenge. Rather than occupy ourselves with constant disparagement of any flawed and foolish character who attempts to change things, we find it totally and completely in OUR HANDS. Trump has put himself and everything he holds dear behind this, and if he is taken down, all of it will likely be taken down with him. Most of us will not go so far as risk ANYTHING to drain the swamp.
What will WE DO?
oh, I forgot, we are but simple sheep with no power to do anything but bleat loudly
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I don’t believe you voted for Trump. You parrot Morning Joe.
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bailouts, cash for clunkers with a different name, similar purposes
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This is yet another symptom/problem that arises from the very nature of our fraudulent, dysfunctional credit-money (debt) system.
Ever-increasing amounts of new credit-money (debt) must constantly be created, just to pay the interest owed on previously created credit-money (debt).
You know that this “system’ is on its last legs when serial defaulters (“deep sub-prime” borrowers) are being loaned astronomical sums (often $50,000+) to pay for a rapidly depreciating item such as a car or truck.
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Sounds like Greentree Financial, doesn’t it?
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I told the dealership my cat could not afford a $60,000.00 pickup, but the subprime lender gave him an extra $1,500.00 rebate to make the purchase today…
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LOL $1500 extra won’t even cover the registration fees + sales tax in NYC (sales tax is 8.875% + the fees to register it & the yearly inspection sticker). Besides god forbid someone buy a 5 year old used (or preowned ) pickup but then again people are so scared of being ‘looked down upon’ by others if they don’t have said $60,000 pickup (and of course a couple of bikes)
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Reblogged this on World4Justice : NOW! Lobby Forum..
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Bear markets typically last 1-2 years. We may or may not see a crash, but bear market likely will take its toll much quicker than you seem to expect.
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for mish
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Good luck with your eclipse photo project. I’m going old-school low tech on this one with a simple pinhole in a piece of cardboard. Haven’t decided if I should get all fancy and use some aluminum foil to make the pinhole better yet. Since I’m working tomorrow I didn’t want to bother going nuts with it. Besides, Wyoming says they don’t have enough fuel for everyone coming to see it.
http://www.coloradoan.com/story/news/2017/08/17/eclipse-2017-colorado-wyoming-traffic/573055001/
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A
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I’m not a superstitious or cristal ball reader but October is a hard month to ignore
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2banana wrote –> “Warren Buffet just recently raise his stake of General Motors (GM) by 20% to 1.29% of portfolio.”
As of March 2015 (two years and change ago), GM was 2.55% of Berkshire’s portfolio…. now its being raised to 1.29% ? They either sold a lot in the past two years, or else GM failed to keep pace with the rest of the portfolio…
A lot of other holdings grew substantially, while GM shares dropped 17% on the premise that Tesla would continue to get all or most of the taxpayer subsidies going forward. Tesla will collapse without continuous subsidies and additional capital.
Buffett might be rebalancing the portfolio to bring GM back up toward whatever weighting it had, trimming some “winners” in his portfolio (that are arguably overpriced anyway), and buying more of the laggers (like GM).
Alternatively, Buffett might be wagering that a rebalancing of taxpayer subsidies is going to hurt Tesla (which is not economically viable anyway), and will at the margin help GM. GM would also benefit when (not if) Tesla is unable to get further taxpayer subsidies, or find suckers to buy worthless Tesla debt/stock.
And Buffett collects a 4.3% dividend in the meantime, while UAW union workers take most of the risk.
Buffett may have been a good investor decades ago, but in the past couple decades all he has done is arbitrage government subsidies and bailout money. Very high probability that is what he is doing with GM
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PS — Good luck to Mish taking photos of the eclipse
Look forward to seeing a few on his other blog when he is ready
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Auto companies naturally use subprime loans to move their products. Growth at any cost often leads to disaster later on.
I am wondering who is actually financing these subprime loans. Are they shell companies of those heavily dependent on auto company growth. Steel, auto parts, others…..who is financing all of the subprime loans.
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Auto companies are sub-prime lending businesses that also happen to sell motor vehicles.
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I don’t see how today is any different than 2007 except personal, corporate, and federal debt is much higher. While the stock market may pursue the Japanese slow path down the real economy will be far worse. Central banks are like the wizard of Oz.
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All we need is Japan’s economics and Venezuela’s government and we will be on easy street from here on out.
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i’m in WNC, so a 10 mile drive to see the eclipse in full or stay home and see 98%.i hope you take along a plan B, like the cell phone or some cheap camera with an auto feature. sometimes a cheap camera takes a great picture. been down this road many times. I’ve used photoshop since v. 2.5 in 1992, lived in the same town as it’s creator thomas knoll(ann arbor). digital art and photography are a great intellectual bottomless pit.
sounds like you are having fun with this one mish. good luck.
and please post on this site too your experience and results.
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Completely ate two attempts at posting an image link, not even ‘in moderation’… think I upset the debt monster.
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Don’t forget to take some candles with you tomorrow, in case the eclipse gets stuck there or something.
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I’m going out tonight so I can see it early. I hate crowds.
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🙂 .
Same, but fortunately we will be tracking the whole path of the event from the privacy of the company Learjet.
Smug 😏 .
OK, not really.
I’m in Europe 😦 and its dark out, so I saw it first 🙂 .
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Damn! You ruined it for me!
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Yeah, sorry about that…but its a good’n on its way… lots of stars, and crickets too!
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Get rid of all regulations. 🙂
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I recall Mark Cuban complaining of Trumps agenda to create jobs while shrinking government, claiming that the two were incompatible. It takes a billionaire to miss the fact that government employees are a COST to every American worker…overhead we are FORCED to support.
We get rid of regulations, just think of what it will do to employment stats.
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I’ll try the image link with text (that was the text)…
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My question would be how much of the subprime auto loans are tied up in credit default swaps and/or junk bonds? Are unscrupulous financial instrument sellers peddling this stuff as AAA paper on inflated ratings by ‘friendly’ rating agencies? If not, you may see a squeeze and a few players may take a hit, but probably not a huge tumble. (as Mish has pointed out, there are other indicators of weakness in the economy) I hope no one is setting us up for a repeat of the previous downturn. I remember that that none of the mortgage purveyors or securities sellers made a peep when they were raking in money hand over fist before the last crash. Shortly thereafter, however, the blame game began in earnest.
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The subprime mortgage mess was largely created by Clinton and blew up under Bush. Looks like we will have a subprime auto loan mess created under Obama blowing up under Trump (like Obamacare). Is there a pattern here?
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