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Subprime 2.0 Spreads To Cars: OCC Warns Of Auto-Loan Risks

Tyler Durden's picture




 

It would appear that the exuberance over today's better-than-expected car sales data should be tempered significantly. Confirming our warnings, as the Office of the Comptroller of the Currency (OCC) explains, across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. With average loan-to-value rates above 100%, they have an ominous warning: "risk in auto-lending is beginning to emerge." We are sure this will be dismissed (just as the BIS' warning has been), but with surging charge-offs and increased repackaging (CLOs), and banks holding a lot of this debt, this 'bubble-financing' has all the ingredients for subprime 2.0 contagion.

 

Auto-loans are surging... Subprime auto-loans were up 10-fold in 2013...

As OCC reports,

Auto lending remained a highly competitive product segment, as strong growth continued through the end of 2013.

Banks reported year-over-year growth of 11.3 percent in the third quarter of 2013 and 12.9 percent in the fourth quarter of 2013 (see figure 18). Banks continue to hold a sizable market share of outstanding loans of $250 billion, or 31 percent of the total auto lending market.

But risks are rising... Signs of Risk in Auto Lending Beginning to Emerge
 
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident. Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing (see figure 26).

The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender types over the last year (see figure 27). These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.

*  *  *
Close your eyes and keep buying... the water is warm... Risk is "contained"

 

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Tue, 07/01/2014 - 11:48 | 4913963 PlusTic
PlusTic's picture

buy stokks/sell treasuries...welcome to fantasyland!

Tue, 07/01/2014 - 11:49 | 4913972 Manthong
Manthong's picture

Who could possibly have seen that coming?

Tue, 07/01/2014 - 11:56 | 4914019 max2205
max2205's picture

LOL...LTV , the V goes down every month while the L not so much

Tue, 07/01/2014 - 12:09 | 4914064 Arrowflinger
Arrowflinger's picture

Yeah, the LTV for those US Government Hummers left in Iraq is infinite. The Loan is on your kids. The Value is in the hands of ISIS.

There will be no Repo man called, only a drone operator.

Tue, 07/01/2014 - 12:27 | 4914124 NotApplicable
NotApplicable's picture

Hey guys, it's no big deal, as the risk has all been transferred...

...somewhere.

Tue, 07/01/2014 - 12:35 | 4914155 dontgoforit
dontgoforit's picture

Two years ago we traded in the 14 year old for a new one, 3.9%, 60 month.  Then the missus needed one to replace her gas-eating luxury car, 12 years old, 3.9%, 60 month.  So last week we put the two together at 1.95%, 48 months.  Savings around $1200 in interest and shaved 14 months off the second one.  We have income but no 'touchable' pile right now - just finished putting the last one through school.  The value of a credit score over 800 cannot be overstated.  If you're working and have made good on all your promises, you get the lower rates.  And most importantly, you have access to credit if you want or need it.  Those cars (and the mortgage) will be finished in four years - the month we retire. 

Tue, 07/01/2014 - 13:33 | 4914397 StacksOnStacks
StacksOnStacks's picture

TARP 2.0 in 2014

TARP 2.0 in 2015

Tue, 07/01/2014 - 12:31 | 4914132 graneros
graneros's picture

.

Tue, 07/01/2014 - 12:21 | 4914104 Oh regional Indian
Oh regional Indian's picture

America represents the pinnacle of un-earned entitlement due to these weird credit policies (make that debt policies called credit policies).

And I can see India getting prepped for the same debt tsunami and NO lessons learned. Not even from all the millions of Indians in the US telling their bretheren here to watch out....

The bankster jaggernaught...

Lucky for me, they won't even lend me money if I asked. :-)

 

See the pic at the bottom of this post:

http://aadivaahan.wordpress.com/2012/02/10/san-onofre-update-and-its-rai...

Tue, 07/01/2014 - 13:19 | 4914321 bagehot99
bagehot99's picture

It IS raining money. Provided you are a banker.

Tue, 07/01/2014 - 12:00 | 4914040 asking4it2k
asking4it2k's picture

Welfare queens driving in Cadilac Escalades?

Yep and their 27% interest rates they cant afford.

 

Bailout coming?

Tue, 07/01/2014 - 12:19 | 4914099 NotApplicable
NotApplicable's picture

People look at me funny when I drive through the hood in my old clunker, as I no longer fit in.

Tue, 07/01/2014 - 12:39 | 4914168 TBT or not TBT
TBT or not TBT's picture

In my case, it may be that I look like a native born American who is clearly not up to no good.  

Wed, 07/02/2014 - 01:15 | 4916776 Carpenter1
Carpenter1's picture

I'm waiting for all the 70% off sales on 6 month old cars I know is coming. Pick myself up an 80k something or other for 25k, or less.

Tue, 07/01/2014 - 11:48 | 4913967 Jayda1850
Jayda1850's picture

What the hell else is GM gonna do with 28.5m cars?

Tue, 07/01/2014 - 11:51 | 4913982 mayhem_korner
mayhem_korner's picture

What the hell else is GM gonna do with 28.5m cars?

 

Apparently, recall all of them.

Tue, 07/01/2014 - 12:12 | 4914078 Rubbish
Rubbish's picture

$600 mo. for a car loan and registration? Don't think so, how about a 12 yr. old SUV with $15 a month registration

and

 

GOLD bitchez....................

Tue, 07/01/2014 - 12:19 | 4914098 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

What the hell else is GM gonna do with 28.5m cars?

Eat the cost by liquidating them in Mexico then beg for a bailout from Obammy.

Tue, 07/01/2014 - 12:40 | 4914176 TBT or not TBT
TBT or not TBT's picture

Build reefs.  Or even islands.   They could be called the UAW's.   

Tue, 07/01/2014 - 12:45 | 4914198 BurningFuld
BurningFuld's picture

They just have to make sure they go Bankrupt before the end of Obama's term.

Tue, 07/01/2014 - 12:32 | 4914142 graneros
graneros's picture

LOL   Good one.

Tue, 07/01/2014 - 11:50 | 4913977 Tsar Pointless
Tsar Pointless's picture

You can always count on Americans to do the right thing - after they've tried everything else.

Winston Churchill

Hey, Winston. We aren't done trying everything else, nor are we done repeating everything else we've done wrong before. So there.

Tue, 07/01/2014 - 12:12 | 4914075 Arrowflinger
Arrowflinger's picture

"nor are we done repeating everything else we've done wrong before"

Bankers get their fees through ever cycle of it, meaning this will never stop short of a collapse.

 

Tue, 07/01/2014 - 11:50 | 4913978 mayhem_korner
mayhem_korner's picture

 

 

Lots of dealers have seen their credit go sub-prime, and their lots have become "elephant graveyards" for channel-stuffed factory "sales".

Tue, 07/01/2014 - 11:53 | 4913986 NoDebt
NoDebt's picture

LTV over 100% is not all that unusual for an auto loan (value of the car drops dramatically the minute you drive it off the lot).  

All those deadbeat sub-primne borrowers will be money-good.  You'll see.  And who cares if they're not?  Banks?  No.  It's all gonna get heaped on taxpayers, just like the student loans starting to go seriously sour eventually will, too.

Tue, 07/01/2014 - 12:22 | 4914106 NotApplicable
NotApplicable's picture

I bet my local credit union repos a dozen vehicles a week. That part of their lot is always full, and I never see the same one twice, so they obviously don't keep them long.

Yet another fucking jobs program. Can't we just get to the digging and filling holes routine already?

Tue, 07/01/2014 - 12:58 | 4914255 TBT or not TBT
TBT or not TBT's picture

Because the next stage involves digging and filling long trenches.  

Tue, 07/01/2014 - 12:43 | 4914190 TBT or not TBT
TBT or not TBT's picture

Nah, it will all be heaped on bond holders.  The U.S. govt runs on debt denominated in printed money.  Just get out of bonds and into physical stuff leveraged to the moon at fixed rates with the right timing.  

Tue, 07/01/2014 - 11:52 | 4913988 Cthonic
Cthonic's picture

This is just noise.

Tue, 07/01/2014 - 13:02 | 4914272 Blues Traveler
Blues Traveler's picture

yep, what difference does it make.

Tue, 07/01/2014 - 11:52 | 4913992 jay28elle
jay28elle's picture

So short is our...  our...., crap, forgot what I was saying.

Tue, 07/01/2014 - 11:54 | 4914003 wmbz
wmbz's picture

The how much a month crowd would gladly sign on to 20 year auto loans, if they were availible. They do not look at interest rates or depreciation, don't care how upside down they are. It's all about the monthly nut, many/most have no idea what they are actually paying for the vehicle. Just gimme a new ride! 

Tue, 07/01/2014 - 11:55 | 4914008 IANAE
IANAE's picture

Ask yourself who buys this non/sub-prime paper and trade/hedge accordingly...

Tue, 07/01/2014 - 11:56 | 4914018 firstdivision
firstdivision's picture

I asked, and the answer is "don't worry, be Yellen"

Tue, 07/01/2014 - 12:23 | 4914107 NotApplicable
NotApplicable's picture

You sellin' to Yellen?

Tue, 07/01/2014 - 12:02 | 4914050 FieldingMellish
FieldingMellish's picture

Taxpayers.

Tue, 07/01/2014 - 11:56 | 4914017 tarsubil
tarsubil's picture

I swear that I saw 84 month financing at a hardware store for grills and mowers. This is so obviously insane, I don't get how anyone can miss it.

Tue, 07/01/2014 - 12:02 | 4914048 FieldingMellish
FieldingMellish's picture

They will be long term financing weekly grocery purchases soon. S&P 3000 anyone?

Tue, 07/01/2014 - 12:40 | 4914172 dontgoforit
dontgoforit's picture

I will gladly pay you Tuesday for last year's grocery bill.

Tue, 07/01/2014 - 12:22 | 4914094 cowdiddly
cowdiddly's picture

You think that's insane? My neighbor bought a new RV 5th wheel camper. He works out of town a lot for the electric utility and wanted to save on motel bills.He told me that they can get financing of up to 17 years. INcredible, I guess they are now considered a mortgage or something. Maybe they are being realistic as this will be the next housing type people can afford? Most of these  things are built every bit as good as a fema trailer.

Scary really when you think about it. A nation full of people camping.

Tue, 07/01/2014 - 12:27 | 4914121 FieldingMellish
FieldingMellish's picture

Maybe they subcontracted the manufacturing to GM? Quality...

Tue, 07/01/2014 - 12:31 | 4914140 cowdiddly
cowdiddly's picture

I have an old junky one I use for fishing trips and such but heck 30yrs ago I bought 240 acres and only financed it on a 15 year note. Well they say if you live long enough...........I just look around as an old man and shake my head these days.

Tue, 07/01/2014 - 12:41 | 4914184 dontgoforit
dontgoforit's picture

Who would have ever thought: 10-cent bubblegum?

Tue, 07/01/2014 - 12:33 | 4914139 Peak Finance
Peak Finance's picture

New RV's are fucking crap. It will not last the 17 years. They start to delaminate the first hot day, they are not sealed properly and always leak, you need to re-do the roof yearly instead of every few years like the old days, just terrible construction. 

He would have been better of finding one in pretty good shape from the late 80's or early 90's.

My next "RV" is going to be a gooseneck horse trailer "converted" to a living space instead of animal space. All steel and aluminum construction. Those horse trailers are un-killable.  

Tue, 07/01/2014 - 12:52 | 4914192 cowdiddly
cowdiddly's picture

I have a friend that has something like that. He has competition cutting horses he hauls around to events. His trailer is all aluminum. It has an area for 5 horses at a slant in the back and the front area is a super nice living space with satelite TV tinted windows, shower, flat screen monitor. Its nice but I was afraid to ask what it cost or how long he financed that.

Tue, 07/01/2014 - 12:47 | 4914214 TBT or not TBT
TBT or not TBT's picture

Just put wheels on a shipping container and trick that out.   Those shipping containers go through a lot.  Very solid. Like the hummer of RV bodies.  

Tue, 07/01/2014 - 12:41 | 4914179 dontgoforit
dontgoforit's picture

You can take that interest off your taxes as a second home if you itemize. 

Tue, 07/01/2014 - 12:00 | 4914035 IANAE
IANAE's picture

...check out the current lease deals, too... nothing like a little residual value arb when the sales cycle is overheated and money is cheap.

Tue, 07/01/2014 - 12:24 | 4914114 NotApplicable
NotApplicable's picture

Did that once, the fuckers still expect you to pay the property tax. They actually had the nerve to send me a bill for their property.

Tue, 07/01/2014 - 12:01 | 4914043 FieldingMellish
FieldingMellish's picture

Keep shifting those Cadillac ELR's boys! Its the only incarnation of the Volt that actually makes money... perhaps. Just don't expect to win every drag race you get into, especially if its against a Honda Fit.

Tue, 07/01/2014 - 12:05 | 4914059 QQQBall
QQQBall's picture

Everyone in Socal is driving a new car. Anything that can be financed should be avoided. They must be given giving Chevys away. honestly not meant to be rayciss, but blacks seem to drive the vast majority of orange and purple cars.

Tue, 07/01/2014 - 12:26 | 4914117 NotApplicable
NotApplicable's picture

Easier to hide the purple drank / gin and juice stains?

Tue, 07/01/2014 - 12:53 | 4914227 TBT or not TBT
TBT or not TBT's picture

It's too soon, man.  Please, for the memory of Trayvon.  

Tue, 07/01/2014 - 12:10 | 4914071 Dingleberry
Dingleberry's picture

Why is this a problem?

Are we running out of ink at the Fed? 

Tue, 07/01/2014 - 12:27 | 4914118 IANAE
IANAE's picture

...same as subprime ever was ONLY with a heavier credit risk tail due to extended terms and rising LTVs.

 

...this has no doubt all been taken into account, esp since these are uncharted waters... right?

Tue, 07/01/2014 - 12:44 | 4914194 dontgoforit
dontgoforit's picture

If the Bozo's wouldn't loan to people without jobs....there wouldn't be a problem.

Tue, 07/01/2014 - 12:54 | 4914237 Professorlocknload
Professorlocknload's picture

Hope they don't run out of ink before they start printing the free Disneyland Tickets.

Tue, 07/01/2014 - 12:20 | 4914101 yellowsub
yellowsub's picture

Like housing on wheels...

Tue, 07/01/2014 - 12:31 | 4914135 IANAE
IANAE's picture

...will be exactly like housing on wheels...as a bonus one fewer key to worry about.

Tue, 07/01/2014 - 12:31 | 4914136 IANAE
IANAE's picture

...will be exactly like housing on wheels...as a bonus one fewer key to worry about.

Tue, 07/01/2014 - 12:54 | 4914228 Fix It Again Timmy
Fix It Again Timmy's picture

When the OCC speaks, 0 of 535 listen - they're too busy opening up contribution envelopes.....

Tue, 07/01/2014 - 13:42 | 4914429 Emergency Ward
Emergency Ward's picture

...big, fat, bursting manila envelopes.

Tue, 07/01/2014 - 12:55 | 4914239 orangegeek
orangegeek's picture

Get it on financing and then sell it back to this gewbmint for MOAR cash.

 

Here we grow again!!!!!

Tue, 07/01/2014 - 13:02 | 4914269 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

This is why you see such good numbers from GM--financing. I always wondered why you saw so many new GMs running around, and not as many Subarus, for example. I thought it was a matter of taste or something, and was always surprised that a higher quality car wasn't as popular....but now I realize that it's just that Subaru won't provide subprime financing while the US automakers will cut any deal with anyone. 

Tue, 07/01/2014 - 13:05 | 4914278 SillyWabbits
SillyWabbits's picture

Why should the quality of credit be any greater than the quality of the cars??

Tue, 07/01/2014 - 13:12 | 4914300 world_debt_slave
world_debt_slave's picture

It's a disease, my 11 year old daughter told me she wants an Escalade when she can drive. I have driven a 1998 Chevy Astro mini cargo van for 12 years and over 245k miles.

Tue, 07/01/2014 - 13:39 | 4914422 Emergency Ward
Emergency Ward's picture

My kids wanted Audis and Mustangs, they got used subcompact Toyotas.

Tue, 07/01/2014 - 13:12 | 4914301 SmittyinLA
SmittyinLA's picture

My lil bro , whose a hard working mechanic is always bitching about the fresh off the boat illegal aliens drivng around in $40K brand new SUVs, explains a lot, the real question is why isn't the 3rd world consuming at the same rate?

Tue, 07/01/2014 - 13:24 | 4914336 world_debt_slave
world_debt_slave's picture

I'd say all fresh off the boat and illegal here already, also shipped in by religious orgs, get all the handouts that come with illegality. Welfare, EBT, housing, etc. etc.

Tue, 07/01/2014 - 18:21 | 4915428 AdvancingTime
AdvancingTime's picture

Many of the new cars hitting the road are really leases which show up as a sale, and many of them may be motivated because an automobile owner faced with a costly repair doesn't have money to put into their current vehicle. This allows someone in a weak financial position, such as those living on disability or student loans, to put themselves into an ego boosting vehicle that they cannot in reality afford, or need.

I contend that super low artificial interest rates are making much of this possible. If I'm correct, much of the idea of "so called pent up demand" is secondary. It should be noted even with surging sales US auto companies are "hyper boosting" the economy by producing more cars than are being sold causing inventories to build. More below on the subject of a shift in consumer spending that hints of problems ahead.

http://brucewilds.blogspot.com/2014/05/consumption-of-autos-healthcare-a...

Tue, 07/01/2014 - 18:29 | 4915457 AdvancingTime
AdvancingTime's picture

America imports around five hundred billion dollars more from other countries every year than they export. This means we have a giant trade deficit, when we add this to our massive government deficit it is easy to see that we are living far beyond our means.

The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop. The Fed  must at some point begin to ponder a real exit strategy from QE and end the massive and corrosive stimulus that the economy has come to expect. To make matters worse little has been done to address our structural problems and make America more competitive, this will thwart growth going forward. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...

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