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Goldman Confirms Subprime Responsible For Collapse In Auto Sales
We’ve written extensively of late about the parallels between today’s subprime auto lending market and the conditions that prevailed in the subprime housing market on the eve of the collapse. Essentially the dynamic is the same. Lending to underqualified borrowers proliferates, leading to a large pool of securitizable loans. Issuance of ABS based on those loans rises as IBs see an opportunity to take advantage of investors’ hunt for yield. Rising demand for subprime ABS fuels demand for more subprime loans to securitize, prompting lenders to relax their standards in an effort to make eligible borrowers out of ineligible borrowers. New loans begin to carry longer terms (in order to lure buyers who need low monthly payments), lower FICO scores, and are often made for more than the total cost of the asset. Delinquencies rise. Cue collapse.
As we’ve shown, delinquencies are indeed rising as is the total amount of outstanding auto debt, the latter having touched a massive $1 trillion, putting auto loans in position to join student debt in full-on bubble mode. Our fears were confirmed last week when, in the surest sign yet that the subprime auto bubble has reached its peak, CNBC unveiled what we have dubbed the “car-stock arbitrage,” wherein viewers are advised to take out an 84 month car loan and dump the money into the stock market at all time highs.
Meanwhile, GMAC disclosed an SEC probe into subprime ABS origination and the higher ups at Wells Fargo (perhaps after someone in the research department suggested that a 60% Y/Y increase in banks’ tendency to originate loans for the purpose of selling them might be a red flag) suddenly got cold feet last month after financing $30 billion in car loans in 2014 and decided to put a cap on subprime auto lending.
Given all of that, we were shocked — shocked — when February auto sales turned out to be a BNSF-style trainwreck (even AutoNation CEO Mike Jackson’s “trucks, trucks, trucks” couldn’t save the day as Ford F-Series sales fell 1.2%). Of course to let the media tell it, February’s disastrous numbers were due to weather (snow in the winter) but we had our doubts and so were not surprised when a new note from Goldman confirmed, by way of an avalanche of data and charts, precisely what we’ve been saying all along which is that the risks inherent in subprime lending are materializing and that at the margin, growth has all been created by lowering credit standards and extending terms to a whole load of 'new' auto buyers.
From Goldman:
Subprime loans accounted for 21% of US new vehicle sales in January 2015, trending above the pre GFC level of just over 16% for seven consecutive months since June 2014. We attribute the ongoing strength in subprime to (1) pent-up demand by subprime borrowers as lenders pulled back significantly from subprime auto lending during the recession and 1-2 years afterwards, and (2) the low interest rate environment, which has made subprime loans more attractive for investors chasing yield. On the latter, the management team for Santander Consumer (SC), the largest subprime auto lender in the US, noted that the resulting liquidity (particularly the ease of funding through ABS or wholesale bank lines of credit) has enabled smaller, nonbanks to grow faster and become more aggressive with lending. On the demand side, low interest rates have enabled subprime borrowers to afford more expensive vehicles, which we believe has contributed to the outsized growth in new subprime car sales vs. used. A breakdown of loan value by FICO score, released quarterly by the Federal Reserve Bank of New York, shows an increase in loans to borrowers with FICO scores below 620.
Subprime loan to sales ratio is at record highs…
… while the number of loans made to underqualified borrowers is rising…
… and nearly two thirds of loans made by the market’s largest lender type are subprime ....
…while the second and third largest players in the market are seeing the highest loss and delinquency ratios since the crises…
…and here’s Goldman on the shifting regulatory environment:
Although the CFPB is not explicitly looking to tighten credit standards or reduce demand for subprime borrowers, its intent of increasing monitoring of large non-bank auto lenders and discriminatory practices may have an impact on subprime originations. On September 17, 2014, the CFPB proposed amending regulation to define “large participants” in the auto lending market and include non-bank lenders, which would include captive finance and other companies that make, acquire, or finance 10,000 or more auto loans or leases per year. The CFPB has estimated that about 38 new finance companies would be impacted. In addition, the CFPB has explicitly expressed concerns on discriminatory lending practices in the form of charging different mark up to different borrowers and has suggested the possibility of imposing a lower markup cap of 100bp rather than the more common limits of 200bp or 250bp. While these are not surprising to us given that non-banks account for roughly 65% of auto loan originations, increased regulation could lead to higher compliance costs and the reduced mark-up cap could pressure revenues of subprime focused dealers as markups tend to be higher on subprime loans.
As one might expect, US automakers are the most exposed to subprime, with GM, Chrysler, and Ford accounting for 50% of the US subprime market (GM and Chrysler also sport the industry’s highest percentage of subprime to total sales)...
***
In the end, Goldman comes to exactly the same conclusion as we did months ago, namely that despite the financial media’s parroting about snow in the winter, the simple fact is that as soaring delinquencies and government probes conspire to cut the least-creditworthy Americans off from debt servitude, bad things will happen in US car sales:
Based on our channel checks with US dealers we think GM and Chrysler have the highest share of sales coming from subprime loans at 14% and 15%.
We conclude that GM and Chrysler are the most vulnerable among OEMs with potential EBIT headwinds of 7%.
We believe the challenge for automakers will be how they go about unearthing new opportunities to expand in a low-growth climate without a bubble forming in the US auto market. Drawing on past experience, we think risk of significant defaults will be averted by limiting sales to subprime borrowers. However, our base case is that US auto car sales for 2015 will be flat as a side effect of these actions.
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Why should Goldman give a FF about anything except Ferrari & Lambo sales? When you pull the strings in an industry that counterfeits its own goddamned currency out of thin air, 'SUBPRIME' need not be part of your vernacular.
That ain't all that is collapsing.:
https://www.youtube.com/watch?v=WScj2kbRJNQ
Well in any case, it would appear that Goldman has hired some MIT 'apprentices' to shift from HIGH FREQUENCY TRADING algos to HIGH FREQUENCY 'JUNKING' algos because my first comment took all of about .666 milliseconds to get junked...
I love the smell of bailouts in the morning.....bullish!
I kno right?
That's the whole thing... After 2008, anyone can make any bet they want because the precedent has been established to hand the fucking check to the taxpayer [who will be forced to wash dishes for the rest of his life]...
Nice to be pre-CHOSEN I guess... Until it 'ISN'T'
GM Financial 83% subprime! No shit! Another bailout is coming. Those fucker will never learn. Correction: Those fuckers dont give a shit!
when you reward bad behavior, what do you get?
Looks like subprime holders picked the wrong day to quit snorting junk.
SUbprime isn’t destroying car sales.
RVS is destroying car sales.
I was drinving on the highway today and I was watching all the cars and I noticed that, even as most cars look new, most cars are actually almost 10 years old.
CARS DON’T RUST ANYMORE! (besides American cars but why would you buy one of those right?)
It used only to take 4 years for a car to show rust a decade ago, and engines can now take over 200k miles before they crack down.
So there’s your answer, to high quality (besides american cars again but hey...)
I made this point the other day, as a former auto repair owner.
I haven't seen a bad muffler in 15 years. All the pipes and muffs made from stainless.
You really have to be a consumer whore to keep buying new.
Tax structure forces a lot of sales also. A LOT!
Stainless muff. Uh huh huh huh huh huh.
That may be true, but who in their right
mind signs up for a 72 month car loan? As
much as I want a new car, all our's are paid
for, and you can't beat that, even at ZIRP.
"...who in their right mind signs up for a 72 month car loan?"
People who are living paycheck to paycheck that need a car. People that are only able to pay the lower payment. People that have had bad experiences/ disasters with used cars... and need to get to work... and that's a lot of the people out there.
Never heard of sub-prime auto loans - still - why am I not surprised. Are dealers sub-priming 400$ stickered Yugos that offer a total return of more than a thousand smakers and are fully warranted until the saw dust in the transaxel burns up - `bout 20 minutes away from the dealerships exit onto Skid Row.
Ya gotz to know goldman is flushing A paper, through to subprime, out of their book and loading up on PDL (Pay Day Loans) paper. 4-sure an understanding has been reached with our very dedicated ethical and selfless CSPAN gadflies and banker comped noonies at the Kiddie Brothels we are so fortunate to employ at the hest of the Diebold print, that all forms of debt will be bailed in and out (reach arounds are extra).
Shit - look at the fucking APR PDLs offer (low end is 360%, high end is over 800%). This article on insider investing suggests that one percent of payday loans are booked to individuals earning over 100K/year! 15% of all debt is sold without collateral. 40% is "soft" secured, like household stuff, meaning it is secured by a signiiture. Other "Total Debt, like store cards, consumer financing dropped from a high of near a half Trillion in 2003, to less than 300 Billion in 2012. So I guess the new play is shed the good paper and load up with junk?
This article kind of summarizes the how fractional reserve scam has always been run:
LONDON (Reuters) - British sub-prime lender Provident Financial (PFG.L Cotización) reported a 12 percent rise in full-year profit, boosted by strong growth at Vanquis Bank which provides credit cards to those turned down by mainstream banks.
The company, which targets the estimated 10 million people in Britain who are likely to be refused credit by the main lenders, also said it was increasing its medium-term customer growth target for Vanquis in the UK.
Vanquis offers credit cards to borrowers who have had credit problems or do not have an established credit record. It charges a relatively high annual percentage rate (APR) of about 40 percent to counter the extra risk, as around one in five of its customers default on their loans.
This part is beautiful, it's the eternal glory hole in the bottom of the 1 qt popcorn cup at the dirty picture show movie theater ...
The company, whose consumer credit division sells small loans door-to-door, reported a pretax profit before exceptional items for 2012 of 181.1 million pounds, up from 162.1 million the previous year.
Word to Vanquis debtors, Iceland the mutha farkers!
In the land where life and the rule of law are meaningless, junk is king!
The next big investment craze "Instant Water". Just open the bag of "Instant Water", pour it into a class and simply fill it with water. Simple ideas for simple minds! Franchises available. Please contact "For Simple Minds, Inc." to receive our prospectus at the Nigerian Prince Hotel, Nigeria.
Well, being a retard probably helped those red arrows show up. LOL.
Time to run away from the icy injun!
Meanwhile some good watchings and listenings...
https://aadivaahan.wordpress.com/2015/03/07/videos-worth-watching-pictur...
wait until the loss rate rises back to the 08-09 3% rate fromt he current 1%, that will be the confirmation that the recession is back in full swing.
RE
They probably would be on the hook for some of the loans (or derivatives) that they have on the the corporate books for most American car companies.
Having been in high end luxury import sales,
a LOT of buyers plunk down cash for their
Ferrari's, Lambo's, Maserati's, and Porsches.
It looks like time to write off Hymienomics for the good of future generations.
Goldman is looking for the next casino game.
Subprime is like playing the slots.
The futures market, thought up by one of the agency's computer programmers and backed by Admiral Poindexter, would allow punters to lay anonymous bets on future events in the Middle East, such as the assassination of Yasser Arafat or the overthrow of the Jordanian monarchy.
AdvertisementThe theory was that, just as bookies' odds were often a better predictor of political events than professional pundits, so this "policy analysis market" would tap into a hidden reservoir of inside information about the Middle East, and help the Pentagon foresee threats.
The plan was dropped by the Pentagon as soon as it came to light this week, and neither the defence secretary, Donald Rumsfeld, nor his deputy, Paul Wolfowitz, came to Admiral Poindexter's defence.
Instead, an unnamed defence official briefed Pentagon reporters, praising Admiral Poindexter's "very creative intellect", but announcing his imminent departure and wishing him luck as a private consultant.
According to the New York Times, the official made it clear that the Pentagon would not be seeking his advice in the near future.
The same official made it clear that the Pentagon realised Admiral Poindexter was politically tainted and that "it has become difficult for projects he's involved in to get a dispassionate hearing".
Admiral Poindexter is expected to leave his post within weeks.
Even as he prepares to go, some are arguing that the policy analysis market could have been a useful predictive tool.
And in other relevant news...
No worries...this will be contained just like the housing subprime market was. Oh wait!
Yup, "contained" via the Treasury and FED bailing out the banks with taxpayer money.
Lather, rinse, repeat. You sell more shit that way.
Who is the patsy underwriting the CDS this time ?
And just how many times is it 'overinsured' this time ?
We need moar leverage!!! MOAR!!!
How exactly do you take out a car loan and put the proceeds in the stock market? Doesn't the lender want to make sure that well, you are actually buying a car and nor monetary or physical heroin?
Insted of useing your money to buy a car you take a loan and use your cash to buy stocks and hope they make more than the loan payments , over seven years I am sure that will work out just peachy.
Whenever I have taken out a car loan, the bank has put a lien on the title and held it until I finished making payments. How do the shysters get around this now?
this was just some fanciful thinking by the jackoff king Steve Liesman. Instead of putting $10K down on a car put zero down and invest the $10K in stawks and you will be the next Warren Buffett (you too will be shitting in your pants)
"RISKS" in a subprime market? Who could have possibly known?
What's next? Are they going to offer 100% financing to people with marginal credit to buy houses? Oh, that's right, they're doing it again. There is some major can kicking going on...can't wait to see how it al ends up! (And how long its going to take).
The burning auto gives people ideas.
Carbeque! The bank can hardly ask a guy down on luck already to keep paying if his car gets burned. Right?
OCC (and FDIC) have been warning for months ... and main reason i signed up here ... knew subprime auto going sour was beginning of the next downturn.
OCC latest ... a snippet:
Lenders are now extending repayment periods up to 84 months on new and used vehicles,
compared with the 60 months we have seen traditionally. In the past two years, the share of 73-
to 84-month loans for new cars doubled as a percentage of the total market—from 12 percent to
24 percent. The share of long-term loans for used vehicles also doubled from 7 percent to
14 percent.9
Lenders also are making loans with higher loan-to-value ratios and to borrowers
with lower overall credit scores.
Let that sink in for a moment. That means it is not uncommon today for a family with
subprime credit to take a loan at 110 percent of a used car’s value that they will be paying off for
seven years. That means if the family bought a used car on these terms when their daughter
celebrates her ninth birthday, they will still be paying for it when she takes it for her first drive
on her 16th birthday.
At the same time that the auto-lending product has changed, tools used by banks and
thrifts to underwrite loans and qualify borrowers have also changed. Credit ratings now exclude
or downplay the impact of certain debt, such as medical debt. While the changes in the ratings
may be warranted, banks must understand what these changes mean relative to evaluating a
borrower’s total ability to manage new debt
http://occ.gov/news-issuances/speeches/2015/pub-speech-2015-28.pdf
Here's a business model.
You buy " prepackaged " transportation.
Consortium is put together, consists of vehicle, fuel, maintenance, insurance, financing, tolls, tags,....the whole shebang.
You make one payment, to one entity, and they sort it out and make a profit.
Can I register this, in case it happens?
Look better to have the cars driven than in a stadium getting rusty I remember the pics and if the fools looking for greedy gains get hurt isnt that their choice ? Bonds are not insured and whren you invest you take that risk so all looks fine atleast sheeple drivin in style
Sarc
Next up - to supplement ObamaPhones - ObamaCars.
Excellent used car deals are on the way!!!
Most of the new car's and pickups are only good for 200k after that they are junk , gone are the days when you could get 500k out of them , just like new generators three times the price and scrap after two years.
I agree but I would guess that sub-prime car loans default within the first year or two. 200K miles in that time period is not likely. More like 15K - 30K miles.
--- "Connection Reset" Double Post ---
Even a cheap Hyundai will run you $15K, which is about the premium cost for the "Afordable" "Care" Act for anyone who makes any money.
"Sorry Junior/Juniorette, no new car for you, take the 15 year old Explorer".
And the plebians "making a living" on $10/hour get a sign and drive loan.
Double whammy, on the mid-top all the way to the bottom.
Thanks FED, you treasonous wankers.
I was always confused about how Mitsubishi dealerships managed to get away with this.
I used to wholesale cars, and I was mistified by how they would put people into crappy piecies of ..... who could not hope to make the payments. Meanwhile they would often trade crapier pieces of .... from these people who STILL OWED. These were cars that they had to take a loss on, sometimes $3000 worth of loss and it was routine that they would do this.
Mitsubishi, Hundai, chrysler, Kia... Names one would expect to see with these practices.. Honda, Nissan, GM maybe not so much, but they ALL did it. only a handful did not, but those dealerships were owned by people who also owned Mitsubishi, etc dealerships, so the losses were spread around.
For DECADES this has been going on, and I am stunned that it has not caught up with them already.... Oh wait.....
So Goldman analysts are now getting their info from ZH -- how amusing!
Channel stuffing to keep the union working. $3,500 incentive lease purchase on dogs who can’t buy under a conventional loan.
How many of the billions of loans the FEDs purchased from the automakers are subprime?
Didn't take a bailout my ass, they're as shiesty as teh banks...
gm is backed by owebomba. it can't fail.
backed by the taxpayers. bend over bob
I'd like a new RAV 4 to take across the country and back this summer. I'd only have it for under 2 months. I wonder if I could get one.
Don't worry, "the problems in the subprime market seems likely to be contained".
I have a friend who traveled to the Ukraine
And reported an interesting phenomena. Flying into Germany for his
Connecting flight, he spotted multiple LARGE "fenced parking facilities"
filled with late model Audi's, all quite dirty.
Turns out they are repo's.
Audi is so concerned about the negative PR, that they are
constructing massive storage facilities out of
the area, so that inbound/outbound flights
will not see this.
And, there are several such facilities in the
boondocks of the Ukraine--Audi's and moar
pedestrian brands, too.
Nothing like cooking the books...
When those photo's came out AUDI denied all and said it was staging for transport to dealers and ocean transport...
Santander loans to folks who live on the REZ. Pretty funny when they think they can collect on the collateral and they find out the REZ has no street signs, no addresses. And most do not allow pictures to be taken nor sketches. When these folks found out how easy Santander was they flocked to the dealerships offering Santander financing. Rates high? Who gives a shit when you are not going to make the first payment. They buy a car for everyone in the family. I love it and so do the folks on the REZ. No clear title? Who cares, drive it for 300k miles and then scrap it!
High yield ONLY works when it works...when it doesn't, it wasn't your broker's idea!
we subprimed some folks...
Well, if the average vehicle will go 200 thousand miles, and the average driver drives 15,000 miles a year, then the vehicle will last 13 years. So, why not extend loans with a 13 year term, double the interst rate to about 25% per annum, and the problem is solved!