Housing Bubble Redux: Subprime Auto Market Begins To Crack

Tyler Durden's picture

As noted last week, the aggregate amount of loans for new and used cars will in short order eclipse the $1 trillion mark, joining total student debt in full-on bubble mode. Better still, early delinquencies on auto loans are now sitting back at their 2008 highs (both for all borrowers and for subprime borrowers, with 9% of the latter now missing a payment within the first 8 months of origination). Despite this, and despite the fact that nearly a third of all auto loans in 2013 were made to subprime borrowers (the same amount we saw in 2006 at the very height of reckless underwriting standards), Experian says everything is fine. 

Meanwhile, Wells Fargo recently noted that although lending standards had indeed gotten back to “normal” (and as a reminder, “normal” now means how things were in 2006) it’s beginning to look like some households “might be overleveraged.” Simultaneously, lenders are again showing a propensity towards origination for the purpose of selling loans rather than holding them; that is, originating loans and then happily passing them on to the Wall Street securitization machine, which explains why despite a collapse in the issuance of ABS backed by home equity loans since the crisis, total ABS issuance in the U.S. hit its highest level since 2008 last year. 

These are things that Wells should know something about as they made some $30 billion in auto loans last year and indeed it now appears the bank may be getting concerned about the market it’s helped to build. As the NY Times reports: 

Wells Fargo, one of the largest subprime car lenders, is pulling back from [subprime auto lending], a move that is being felt throughout the broader auto industry…


Wells Fargo has imposed a cap for the first time on the amount of loans it will extend to subprime borrowers.

The bank is limiting the dollar volume of its subprime auto originations to 10 percent of its overall auto loan originations, which last year totaled $29.9 billion, bank executives said.

The decision, detailed in interviews with top Wells Fargo executives, along with other large auto lenders, is a sobering moment for the booming market. Other lenders may decide to take their cue from Wells Fargo, one of the nation’s largest lenders.

The Times’ description of industry dynamics could easily be mistaken for a recap of the buildup to the housing bust, as investors chase returns, Wall Street chases fees, banks ease lending standards to increase volumes, and borrowers who are jobless (which must mean they aren’t experienced waiters) throw every semblance of prudence out the window: 

Large banks, weathering a slowdown in other types of lending like mortgages, have increased their auto lending. And much as in the housing boom, investors in search of higher returns, like insurance companies and hedge funds, are buying billions of dollars of investments backed by subprime auto loans.

Such growth, though, has given rise to concerns, like those at Wells Fargo, that growing competition is fostering lax lending practices, including longer repayment periods and increased loan balances.

Federal and state authorities, meanwhile, are examining whether dealerships have been inflating borrowers’ income or falsifying employment information on loan applications to ensure that any borrower, even some who are unemployed and have virtually no source of income, can buy a car.

Just how bad has it gotten? This bad: 

Last week at the annual conference of the Global Association of Risk Professionals in New York, Darrin Benhart, a senior regulatory official at the Office of the Comptroller of the Currency, which regulates Wells Fargo, noted that lenders had extended repayment periods to 84 months — 40 percent longer than the typical period — and were making loans that were far greater than the value of the car.

This is perhaps the clearest sign yet that we have learned literally nothing from the crisis years. That is, this is precisely the same dynamic and it will end precisely the same way: defaults will rise, investors in assets backed by these loans will suffer outsized losses, and the assets themselves will become completely illiquid. Indeed, the dominoes have already started to fall. Here’s Fitch with the last word: 

Weaker seasonal trends led to annualized net losses (ANL) on U.S. subprime auto ABS reaching their highest level since 2009, according to the latest monthly index results from Fitch Ratings.

Subprime auto loan ABS ANL rose 4.5% month-over-month (MOM) to 8.19% last month, the highest level since February 2009 (9.07%). Prime ANL also crept higher in January. 

In the subprime sector, 60+ day delinquencies rose to 4.75% in January, a 7.7% move higher and were 24% above the same period in 2014. This is the highest level recorded since October 2009 (4.76%). Meanwhile, ANL rose 4.5% MOM in January hitting a five-year high when 9.07% was recorded in early 2009. Asset performance has slowed over the past two years driven mainly by softer underwriting and collateral credit quality in securitized pools.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
pods's picture

Oh great, another impending credit implosion.  

Why is anyone surprised at this?

It is not like the last implosion taught them anything other than when you fuck up, make sure you fuck up big enough that it becomes everyone's problem.


doctor10's picture

how come the act of purchasing tranches of bundled loans hasn't yet been declared a fiduciary irresponsibility by the adults?

localsavage's picture

When you reward a bunch of soulless fucking CEOs  on short term gains instead of long term results, wtf do you expect?

KnuckleDragger-X's picture

If it looks good on a balance sheet it MUST be great... right? Selling cars to the same people who couldn't afford a house is a special banker opium dream.

Parrotile's picture

Think of it as a "more affordable" form of shelter, as  well as a method of "reducing expectations" for the masses.

In "The Old Normal" people used to live in McMansions in leafy suburbia (per the RE Agencies expensive brochures).

In today's (and certainly tomorrow's) "New Normal", people live in "mobile homes", and in the same way as housing, there will be a hierarchy of ownership, ranging from the wealthier in the giant RVs, (aptly described by a colleague as "McMansions on wheels"), via the smaller RV / "Campervan" / Caravan crowd, all the way down to the Station Wagon / MPV residents.

Might not be such a bad idea to invest in a secondhand dealership specialising in "Pre-Loved" MPV / Minibus / Minivan type vehicles - seeing as the future of the US (and Western) economies are so bright you need to be wearing sunnies 24/7 . . . . . . .

J Pancreas's picture

The ones that have Lamborghini doors on their Escalades!

NotApplicable's picture

Cuz Kevin Henry does it with free money, of course.

NihilistZero's picture

I jumped in. Got a 2014 pickup for 12k off MSRP as a year end clearance. At 1.49%, why not? If you can afford it... You only live once and contractors need tax deductions :-).

NotApplicable's picture

I just bought a 2006 Honda CR-V for cash. Took it into the dealer this morning to get it serviced, and noticed all the sales guys sleeping at their desks. Meanwhile, the service dept. was packed.

Greenskeeper_Carl's picture

I just paid off my wife's car about a year early, mines been paid off for 3 years now. Both run great, no reason to get rid of them. Only good thing about all this nonsense is that prudent people will be able to get a good deal on a 3 or so year old car that these morons couldn't afford, since they will get even cheaper once this subprime thing blows up again and creditors will require something other than a pulse to qualify for a loan

Son of Loki's picture

Sadly, not one person or financial institution that profits from reckless subprime loans will loss a penny when they go bad.


All losses passed on the sheeples. Originators should be forced to hold onto 20% at least of the loan and suffer that much when it goes under.

JRobby's picture

$12k off works if the truck retailed for $24k. Then you got it for cost. Otherwise...................

NihilistZero's picture

It's All relative bro. I got a 45k listed sport truck for 33k. Doge Ram with a HEMI that, at least relative to most modern cars, isn't over engineered to shit. I'll be driving the thing for the next 12-15 years. Gets pretty good MPG for a full size crew cab as well...

I'm just saying we all know challenging times are here, but I'm not prepared to go doomsday prepper. As the site says, on a long enough timeline we're all dead anyway... Gotta live in the now at least a little bit.

dicksburnt's picture

 I got a 45k listed sport truck for 33k

you got a 33k Dodge Ram for 33k - free market principles apply here it's a buyer/seller thing.  Just sayin, bro.

NihilistZero's picture

Not quite accurate no other dealership had it at that price and if I waited another year the interest rate would likely be higher. The free market equations always factor in opportunity costs... Not to mention it was the exact color and feature set I wanted. What your saying is if I go out of my way to find a lower price that has no intrinsic value since the item was priced that way to begin with. Classroom versus real world economics IMHO.

J Pancreas's picture

I thought that only zombies buy Chrysler or GM products. My scruples will not allow me to buy a POS from the bailout babies. Im saddened any "awakened" ZH'er would do so. Respect lost for you man no matter what kind of real you got.

NihilistZero's picture

Not that your respect was all that important to me... ;-)

And tell me what part of the current HEMI/8 speed transmission design, which gets the best fuel economy of any V8, do you object to?

Be specific or STFU :-)

...and EVERY large corporation is a "bailout baby" suckling at the FED teet.  Perhaps you're not as "awakened" as you perceive yourself.

...and if coming off as a dick was your goal, you were only marginally successful.  You sound more bitter than anything ;-)

J Pancreas's picture

Please explain what gave you the idea that I'm somehow bitter? I merely found it ironic in your above posts you were talking about a free market and then buy some truck from a corporation that couldnt stand on its own (in Chrysler's case again).

Last time I checked MMM, MKC, JNJ, LOW, MSFT, etc. didnt get bailout cash, I could be wrong though. Not many Taco Bell's (YUM) took government bailout money either. You are just another hypocrite parading as an enlightened internet warrior. And why are you winking so much? Please keep your snapchat and twitter lingo out of a ZH reply. Enjoy your truck...

NihilistZero's picture

Not many Taco Bell's (YUM) took government bailout money

So accerpting EBT from customers to keep franchises afloat isn't getting bailed out by government???  Every single large .corp in America benefited from QE and hyper government spending.  Just because there's a middle man doesn't change the fact that they benefited from .gov.

Anyway, you gotta admit your comment came off as a little uncool.  Have a good day :-)

Winston Churchill's picture

Writing it all off in the first year with your s179 allowance only makes sense.

For the other smucks with no income tax to set off, not so much.

Use those accelerated tax savings to buy PM's though.

pods's picture

I think you might need to Upgrayedd those stock rims my friend.  You need something to make you stand out from everyone else.


DriveByLurker's picture

Sadly, there's more than one player in that space...



you can pay weekly if you're too disorganized to pay monthly.

Captain Willard's picture


And the funny part is that GM stock is dead in the water with subprime loans growing at this pace. Where will the stock be when this bubble pops?

pyro225566's picture

I bought a car for 800 lasted me 2 years with 250 worth of work they need to bring back small personal loans you can buy a decent car for 5 grand or less and don't have to drown in debt

Zirpedge's picture


Meet the new $6800.00 Elio. Get's 84MPG and can be serviced at any Pep Boys location. 

Great little daily commuter car for a desk jockey who is just siting in traffic.

Not sure why the mainstream media doesn't promote this..84mpg is revolutionary.

Dumpster Fire's picture

Maybe because the "84mpg" powerplant doesnt exist yet.

Parrotile's picture

Daihatsu Domino 3 cylinder diesel.

Getting almost 100MPG in the 1990s . . . . . . . (OK, continuous 50 MPH on the MIRA test track, but could be done, and was done. . . . .)

Parrotile's picture

The "Urban Cycle" was pretty OK too, even in heavy (London) traffic. Crash worthiness - see below . .

Zirpedge's picture

Some folks at Shell Oil Co. wrote “Fuel Economy of the Gasoline Engine” (ISBN 0-470-99132-1); it was published by John Wiley & Sons, New York, in 1977. On page 42 Shell Oil quotes the President of General Motors, he, in 1929, predicted 80 MPG by 1939. Between pages 221 and 223 Shell writes of their achievements: 49.73 MPG around 1939; 149.95 MPG with a 1947 Studebaker in 1949; 244.35 MPG with a 1959 Fiat 600 in 1968; 376.59 MPG with a 1959 Opel in 1973. The Library of Congress (LOC), in September 1990, did not have a copy of this book.

There is a very good reason for you not to have a fuel efficient vehicle. Same reason you don't have quality tools or lightbulbs or anyhting. There is no profit in things that work well or last long, dummy. Same story in medicine, there is no profit in a cure.  

fastrakn1's picture

"Great little daily commuter car"

Until you get in an accident with one of the many pickup trucks, SUV's, etc. on the road, and become a piece of ground beef that has to be pried out with the Jaws Of Life.

Looks like a casket on wheels to me.

As dangerous as driving actually is, it's amazing how much more dangerous humans will make it just to save a few hundred dollars a year on gas.

And actually they are not even saving the money...they are just spending it on some other thing they don't really need....

Parrotile's picture

At the moment of impact momentum is shared equally between all bodies.

Daihatsu Domino, the "Smart" car(s), and other mini / micro cars might "pass" low - medium speed collisions with concrete walls, but any interaction with anything "big and moving", and the "Economically Aware" will soon be no longer aware (or alive for that matter).

Why do you think the wealthy prefer their road tanks (Volvo)? So they will survive the consequences of their bad driving - "Privatise the gains, socialise the losses" - on the smaller car occupants . . . . . .

fastrakn1's picture

Everytime I pass one of those little 'Smart' cars with my Ford F250, I laugh to myself thinking how 'smart' are they when the get plowed into by a Suburban or a Navigator.

All you sub-compact car drivers should go to this site and click on 'Road Accidents'. Then you will see how much 'size matters' when 2 moving bodies collide at high speed.



Zirpedge's picture

I recommended it to a desk jockey who lives in a dense urban environment and likely spends 15% of their day sitting in bumper to bumper traffic. I know it's hard to imagine what others needs may be, the better question is, why would a desk jockey in this day and age need to physically be in an office to do his work?

A simple four banger like this with minimal on board computer and sensors is exactly what the market needs. We should have access to the VW XL1 diesel that gets many hundred of miles per gallon but this just isnt in the cards for US wage slaves.   

Canadian Dirtlump's picture

Bring it the fuck on. I have a stack of silver set aside for a house ( preferably a small plot of land where I can put a decent sized cabin, 2 smaller cabins and a quonset ) as well as a hellcat charger or challenger.


Until then I'll just shake my fist at the sky, rent a house and paint intersections with my 08 srt8 challenger.

Elliott Eldrich's picture

"It is not like the last implosion taught them anything other than when you fuck up, make sure you fuck up big enough that it becomes everyone's problem."

Sure, but when you learn something that is super potent and gets you everything you want, what else do you really need?

As the old-timers might have put it, "He's a one trick pony, but he does that one trick very, very well." 

glenlloyd's picture

None of this surprises me one bit, just look at the response to reduced price of gasoline, people go out and buy monster gas guzzlers, trucks have never been hotter for sales at this point. Now gas prices are rising while oil is still low and already I'm hearing complaints about how much it costs to fill.

Rule #1 - People never learn.

They make the same mistakes over and over always expecting a different result.

In my neighborhood a tiny house just sold for over $162 / sq ft when not so long ago you were lucky to get $100 / sq ft. Granted the mid-west is a more stable real estate area but still....outfuckingrageous.

El Vaquero's picture

My POS '92 is paid for.  All I need is new wiper blades, and when it's time to change the T-Case fluid, I need a new chain.  But hey, I actually use my 4wd.

papaswamp's picture

Tip of the iceburg.....

JRobby's picture

Rush out and buy that car NOW while you still qualify!

Osmium's picture

Bring on Cash for Clunkers II.  I'm ready to buy this time.

Of course that's an ongoing thing in California.

83_vf_1100_c's picture

  My wife talked me out of doing that. She felt it was just wrong to participate in such a foul practice. I set my greed aside and followed her advice (as if I had a choice). In hindsight I am not still making payments on some now very used POS car. I am instead driving 2 good used cars that were paid for in cash.

  Sub-prime lending is a foul institution. otoh, I am hoping our NC house in fact sells to the young couple with a 614 credit score who need $2100 down to close the $65k loan. We did 20% down on our TX home. Paid off in 13 yrs. I am learning! :-)

holmes's picture

Excellent. Hope those used car lots start filling up so I pick something up cheap.

Elliott Eldrich's picture

"Excellent. Hope those used car lots start filling up so I pick something up cheap."

I've been telling everyone I know that if they are thinking of buying a car, don't. Hold back and wait a couple of years, and you'll see the price of high-quality used cars drop through the floor. Unlike the housing market, cars can't be held off of the market for years and years while you hope to see the price come back, they depreciate at a ferocious rate and so the lenders will need to turn over the repos as fast as possible, while selling into a saturated market.

Oversupply, meet no demand. Prices are going to drop SO hard... 

the grateful unemployed's picture

bought gasoline last week for 293, the next day it was 303, and not its 359. its not the car its what it costs to operate

Hohum's picture

Gasoline is the least of your worries when it comes to the cost of maintaning a car.