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Subprime Nation: Risky Loans Are In The "Driver's" Seat
Amid a cacaphony of pundit parroting about strong US auto sales — which culminated in CNBC’s now infamous “car-stock arbitrage” recommendation — we have said repeatedly that at the margin, growth is being driven (no pun intended) by lenders’ willingness to extend credit to underqualified (read: subprime) borrowers. This was later confirmed by Goldman in a note which pointed out that subprime loans accounted for more than a fifth of all US new vehicle sales in January, which is 500bps above the post-crisis norm of 16%. Furthermore, as of January, the percentage of new vehicle sales attributable to subprime loans had been running ahead of the post-crisis average for 7 straight months.
It doesn’t take a leap of logic to determine the reason for the trend towards subprime (via Goldman): “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.”
In other words, it’s the same story everywhere you look, whether it’s elevated HY issuance by insolvent E&P companies or heavy demand for ABS backed by subprime auto loans: investors are starved for yield and they’ll take it wherever they can find it even if it means forgetting that an 11% coupon on a new issue from a struggling oil producer likely spells trouble or disregarding a 550 average FICO on the latest billion dollar subprime auto ABS securitization.
As we’ve pointed out on a few occasions, the appetite for Santander Consumer’s “deep” subprime DRIVE 2015-A demonstrates the extent to which the hunt for yield is once again driving Wall Street’s securitization machine which is in turn incentivizing lenders to lower their standards in order to lure more buyers.
For those who demand still more proof, consider the following which shows that the subprime and leasing sub-sectors of the auto-related ABS space are the only two sub-sectors to show Y/Y growth in issuance every year since 2012, and looking at the figures for Q1 2015, it certainly appears as though this could be a banner year for subprime ABS issuance.
And as the following commentary from BofAML makes clear, auto-related securitizations are driving the market for consumer ABS issuance:
The auto ABS market continues to dominate new issue volume with 53% of the total ABS volume. Prime auto loan ABS represents the largest sub-sector with 32% of auto ABS volume and 17% of total ABS volume. Non-prime auto loan and auto lease ABS saw nearly the same amount issued.
In this type of environment, one would certainly hope that credit fundamentals are not deteriorating in the subprime auto space. Unfortunately, they are:
The trend in credit performance for the non-prime auto loan sector is clearly more negative than the prime auto loan sector. The 30+ days delinquency and net loss rates for the non-prime sector continues to trend up, while the same for the prime sector have been relatively stable. Even though net losses for non-prime loans are below normalized levels and employment situation continues to improve, the trends in 30+days delinquency and net loss rates argues for tighter lending standards in the sector. Based on normalized levels we expect to see net losses increase by another 50bp in the prime auto loan market and 110bp in the nonprime auto loan market.
Meanwhile, the trend is not your friend when it comes to subprime net loss rates which despite having ticked lower in February, are still at their widest levels compared to prime in years...
...and predictably, the percentage of buyers opting to finance is trending higher as interest rates remain suppressed by Fed largesse...
Here's more, via Deutsche Bank:
With interest rates still low, buyers today rely more on financing to purchase their vehicle. According to Experian Automotive, in Q4 2014 84% of new vehicles and 55% of used vehicles were financed via lease or loan. This compares to 2009 when 74% and 46% of new and used vehicles, respectively, were financed.
This has supported auto ABS issuance, a trend which we expect to continue
throughout 2015. Auto ABS issuance totaled $7.7 billion in March, bringing
YTD new issue supply to $30.1 billion. Nonprime auto ABS issuance totals
$7.2 billion year-to-date. Overall, auto ABS issuance is up 13% year-over-year.
* * *
We'll close with this, because nothing spells trouble like the idea that if you have the cash, you should take out a loan with a rapidly amoritizing asset as collateral in order to invest in stocks or, in other words, it's a good idea to pledge a devaluing asset to buy an overvalued asset..
Bonus video (F-Series pickup sales fell nearly 5 percent in March): "Trucks, trucks, trucks"...
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1.99% ladies and gents.
That's the advertised rate for "home equity" (tee hee) loans being flogged by BB&T all over the area. (adjusted after a year or two, of course)
So.... if you just gotta have that boat, fancy smancy car, or an investment adventure to Las Vegas, step right up.
Da boyz got a deal for you. Haven't we seen this movie?
1.99% would buy a sweet jetski like Mr. Powers'!
https://www.youtube.com/watch?v=QmW-gMWci1o
We need a name for this; let's call it the "W.T. Grant strategy" after a department store chain that dramatically boosted sales by offering store credit cards to anyone who walked in the door. Predictably, many of those accounts went delinquent, and in 1976 W.T. Grant became the second-largest bankruptcy in American history.
Major exporters like Germany and China have been doing the same thing for decades, and it'll likely have the same result.
"Predictably, many of those accounts went delinquent, and in 1976 W.T. Grant became the second-largest bankruptcy in American history."
"The credit was recovered in 1976 by Irwin Jacobs who with the backing of Carl Pohlad purchased their consumer accounts receivable account of $276.3 million for $44 million and 5% of first-year sales (The Wall Street Journal July 30, 1980)." https://en.wikipedia.org/wiki/W._T._Grant
https://en.wikipedia.org/wiki/Irwin_L._Jacobs
The banksters need to repay us.
Hey I remember that store I was just a teen at the time and we had one in our neighborhood, now I know the rest of the story.
Worked at a toyota dealership a year ago for a couple months. New car prices were 20k upwards of 80k for the sequoia..LMFAO..
Whats wroing with this picture? Drive it off the lot and it loses half its value. And if Im not mistaken this paper is being sold in tranches and
sent up stream? Do i have that right?
Shit I bought a one year old Camry with 22K miles on it for 30% off. Still had the new car smell and plenty of warranty. Never buy a used car. Let some other schmuck take the depreciation hit and you get the discount
I think you meant "Never buy a new car" Right?
Right!
Yup, these cars cost more than houses in my area. Yet I keep seeing minimun age workers driving these things and I wonder how can they afford this, not really I know they can't afford them. Meanwhile I tool around in my 86 Camry that gets 30mpg and has cost me a total of $2000 in the past 4 years inculding purchase price LMAO
I actually know a subprime auto buyer.
He coughed up $500 for a down payment on a new car a little over a year ago. He has paid nothing since. He got the car repo'd, but filed a bankruptcy claim that got the car back in his hands. He has paid nothing since the bankruptcy either. He's still driving it. He just rolled over 32K on the odometer too.
It's a much better deal than being responsible.
Responsible, yeah. Having spent my whole life that way I can tell you it's spelled,
S.U.C.K.E.R.
I hate to admit this, but my Grandfather, who was one of my best teachers about finance and business (I have quoted him on ZH from time to time), looked EXACTLY like Mike Jackson from AutoNation. Same dead 'used-car-salesman' eyes. It was his "tell". You knew he was spinning a line of bullshit a country-mile long to close some deal for something when he got that look.
Want to have some fun at the dealership? Try and get the ' i'll write you a cheque right now price' on a vehicle, it doesnt exist. Its payments for years or nothing.
Putin has no future.
Interesting variant of Tourette's you're showing there.
Putin has no future.
Beginning when, you miserable dumbshit?
On a long enough timeline......
My wife and I had an absolute blast at several dealerships last autumn. Her 2000 Mazda had 140,000 miles on it. Ran fine, but we were getting close to the next timing belt/water pump and similar maintenance and it just wasn't going to be worth it. My wife had just come into about $15,000 from her grandmother's estate, and she will only, but only, drive a stick. She does most of her driving in city traffic and absolutely hates how every automatic she's ever driven hunts back and forth at 30-35 mph. Plus, she likes to be in control of the car she's driving, and she's actually capable of it, so what the hell.
She was dreading walking onto an auto lot, so I went with her. I told her whenever anyone came up to us, answer the questions, tell him what she wanted, and emphasize over and over again that she's only going to buy a car with a stick. She followed the instruction to a "T." The manual transmission requirement got rid of most of them. Her demands of no heated seat bullshit or internet in the car or bluetooth or DVD players or whatever other marked up crap got rid of most of the rest of them.
We found the car she wanted (2012 Toyota Corolla with 20,000 miles on it; 5-speed stick), and they gave us a $500 trade-in for the old car. They were already sick of us, but when she pulled out her checkbook to pay for the thing on the spot that stomped all over their last nerve. It was hilarious. They were barely putting up with us as it was. When they realized she was just going to...pay for it...the sales guy disappeared and we never saw him again. The paperwork lady rushed us through as fast as she could. She tried to sell the oil change plan, but some of us know how to do that and have a mechanic pal who takes the oil and filter, so the poor lady couldn't even sell us that. No extended warranty. No nothin'. As we drove away, my wife commented, "We were lucky to get out of there before they kicked our ass."
You have a cool wife man!
You aren't kidding. I just went through the process of finding and purchasing a used car for which I paid cash.
The salesmen became much less interested after I told them that I was a cash buyer. Paying cash also places you at a pricing disadvantage.
Like so many other things today, that's backward compared to how things were before the country was completely financialized...
That's why you never buy new. Let some other schmuck take the tax hit and the depreciation. There are gobs of recently Repo'd cars out there, literally millions with under 20K miles. Hell, the engines are barely broken in. That's the way to buy with cash.
Yep. New cars are for SUCKERS, the very wealthy, or those few that plan to drive 'em 'til the wheels fall off.
It's hard to decide the dumbest thing in sub-prime auto...
A: the guy making 17k who buys a 40k pickup?
B: the car selling place that let's the guy in "A" just "sign and drive"based on his FAKE-O score
C: the investors that buy sub-prime auto backed securities
I go with number "D" it's all dumb.
DRIVERS SEAT ~ Sniff -n- the Tears (Extended)
What's next? 7 year $50K loans at 1.9% for Walmart purchases?
The 60 year mortgage backed by Fannie/Freddie has got to be waiting in the wings.
Probly.....
Fucking hilarious.
Or not?
Perhaps, since the hundred year mortgage rolled out long ago...
http://archive.fortune.com/magazines/fortune/fortune_archive/1990/05/21/73567/index.htm
‘growth is being driven… by lenders’ willingness to extend credit to underqualified (subprime) borrowers.”
Relax, lenders know what they are doing.
Their aim is to sucker people into buying large assets with zero, or near zero down, loans; then, when zero-interest rates recoil from their suppression, all large assets (from stocks and bonds, to houses and cars) will experience an unprecedented slaughter; and, borrowers will find their assets to be worth 20% to 50% of their debts.
Result? Borrowers with destroyed credit rating; lenders will sell their uncollectible loans to the Federal Reserve at face value; such loans, then will become liabilities of the US Treasury (that is, American taxpayers).
That’s how a destroyed credit rating turns into a crushing tax burden.
Federal accountants will tell you how “unsustainable” the situation is (in their Financial Reports). It is actually worse than “unsustainable”; it is civilization-destroying.
It's spelled cacophony. If you're gonna use 10 dollar words you must spell them right :-)
cacophony: (ka-kof-a-nee)
1. Jarring, discordant sound; dissonance:
2. discordant noise. — cacophonic, cacophonous, adj.
Sound emanating from Duc888 after too much dark beer and Chilli.
I love the detail Nazi's.
I actually do.
Actually I was just having a little fun with the author for his verbose use of uncommon language. Since this is often done to lend an air of superiority to one's writings I thought needling him on his spelling was a justified jest :-)
America is a sub-prime country, as planned.
Being weakened intentionally for slaughter.
Soon, your constitution and flag will be destroyed.
The bankers win, again.
Young fools.
And you think the enemy is ISIS?
LOLOLOLOL..........................
Astute comment, except me and my buddies, AK, AR, and Glock,take offense to, "The bankers win, again."
We'll see.
The banksters need to repay us.
"I shoot alone. Just my buddy .223 ,and his brother 7.62. Yeah, I shoot alone."
Idiot Brother-In-Law has a used Infinity he borrowed a bunch of money to buy from some quack used upscale autos lot. He drove it for a couple years and now it's not roadworthy - he can't steer it or stop it. He asked me to fix it for him but I told him I don't "know anythig about imported luxury sedans". So he took it to an import repair shop. The front end and the brakes are completely shot - $4K estimated repair bill. Idiot Brother-In-Law doesn't have $4K, and no means of borrowing $4K to fix a car with.
Idiot brother-In-Law and Sisiter-In-Law go to Carmax and buy a used Camry for $10K, financed through Carmax somehow, so they'll have something that drives. The Infinity sits in their driveway inoperable.
If it's insured, pay someone to steel it.
Tell your BIL to use a personal check.
LOL.....
"Steel"
Really?
OMG.
They're probably paying $20K over six years for that $10K Camry, but hey, the monthly payment is AFFORDABLE. lol
itstippy: Idiot Brother-In-Law has a used Infinity he borrowed a bunch of money to buy from some quack used upscale autos lot. He drove it for a couple years and now it's not roadworthy - he can't steer it or stop it. He asked me to fix it for him but I told him I don't "know anythig about imported luxury sedans". So he took it to an import repair shop. The front end and the brakes are completely shot - $4K estimated repair bill. Idiot Brother-In-Law doesn't have $4K, and no means of borrowing $4K to fix a car with.
Idiot brother-In-Law and Sisiter-In-Law go to Carmax and buy a used Camry for $10K, financed through Carmax somehow, so they'll have something that drives. The Infinity sits in their driveway inoperable.
Well, there's a flip side. Take a Saws-All and lop the roof off of it. Stick it in the front yard and load it up with dirt and geraniums and pachysandra , he'll have the most fukken Bling flower pot in da hood. Guaaarrraaaannnteeeed. It's better than the rubber tire lawn planters by miles. A few lantern holding Lawn Boys and he's good to go.
Tell your idiot BroInLaw to buy a factory service manual offa ebay, some tools from Harbor Freight and order parts from Rock Auto. Watch some youtube vids that will usually show the whole job on that particular vehicle. With the learning curve he might kill a week to have it back in running shape. Then sell that over priced Nissan before the tranny/engine goes South.
I've had a few guy friends who literally could not change a spare tire. Maybe the planter is a better idea for him?
Haven't bought a new car since '91. 4 yrs and a few months later it was just another used POS with peeling paint, thanks Chevy. Craigslist, AutoCheck and some cash in hand have scored me some nice rides. Vehicle forums are wonderful for doing research before the buy to avoid the factory lemons.
How stupid can these people get? Their lack of financial acumen is astounding.
Instead of a Camry, he should have financed another Infiniti and cannibalized it while making no payments.
meanwhile Carmax just shot up 20% and now sports a $16 Billion market cap
We attribute the ongoing strength in subprime to (1) pent-up demand by subprime borrowers
Are you fucking kidding me? the definition of one is to someone who can't fucking afford it? Pent up demand? Hey, dipshit on a stick!! It's the econonmy stupid!!!!!! Jeeezzzuuuusssssss.
Any paper denominated in FRN USD is risky.
I get pre-prroved GM credit offers for $40k every month. I don't get it. People didn't learn from the 2000's?
What's the fuss, everybody knows subprime borrowers (goyim) will power us into the new paradigm. Just get back to work and mind your own business.
well, the difference between subprime auto debt and subprime student loan debt is that atleast a car gets you somewhere
the student loan will brain wash you into communism and whenthey bring back debtor prisons- the new era of GULAGS!!!
get to work goyim!