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Auto Loans In "Untested" Territory Blackstone Warns As Subprime ABS Sales Accelerate
Earlier this month, we gave readers a snapshot of the US auto market on the way to explaining why it was that car sales hit a 10-year high in May. To recap:
- Average loan term for new cars is now 67 months — a record.
- Average loan term for used cars is now 62 months — a record.
- Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
- Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
- The average amount financed for a new vehicle was $28,711 — a record.
- The average payment for new vehicles was $488 — a record.
- The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.
We went on to note that despite the worrying statistics shown above, optimists (like Experian) will likely point to the fact that the average FICO score for borrowers financing new cars fell only slighty from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that's all well and good, there's every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street's securitization machine is involved. in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit), auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers. Put simply, those subprime borrowers are getting subprimey-er.
In other words, the same dynamic that prevailed in the US housing market prior to the collapse is at play in the auto loan market. Lenders are competing for borrowers as lucrative securitization fees beckon, and this competition is directly responsible for loose underwriting standards. Bloomberg has more on the interplay between auto ABS issuance and “stretched” auto loan terms:
Demand for automobile debt in the U.S. is enabling lenders to make longer loans to people with spotty credit, stoking concern that car shoppers are being lulled into debt loads they won’t be able to sustain.
Of the subprime vehicle loans bundled into securities, 73 percent now exceed five years, up from 64 percent during the first three months of 2014, according to data from Citigroup Inc.
Loans as long as seven years are increasingly being put into more bonds as auto-finance companies and Wall Street banks sell the securities at the fastest pace since 2007.
The longer loans make it easier for consumers to afford rising new and used car prices by spreading out and lowering payments. While the securities are attracting plenty of buyers with high loss buffers and AAA ratings, some investors are beginning to question the wisdom of lending at terms that have never before extended beyond five years.
“Everyone has used the argument that borrowers pay car loans because they have to get to work,” said Anup Agarwal, a money manager who oversees $65 billion at Western Asset Management Co. and hasn’t bought a subprime auto bond in a year and a half. “But borrowers only pay loans if the car is working. We have not seen this cycle come through yet.”
A debt offering recently marketed by American Credit Acceptance LLC demonstrates some of the risks. About one-third of the 14,628 loans in the deal are tied to borrowers with credit ratings under 500 according to the Fair Issac Corp. grading system known as FICO -- or with no score at all, according to a prospectus obtained by Bloomberg. The company is charging interest rates of between 27 and 28 percent for almost one-third of the borrowers, and more than half of its loans exceed five years.
While cars are lasting longer than in the past, regulators are concerned that the value of the vehicles will fall faster than borrowers can pay off the debt.
“Because cars depreciate quickly, a borrower is typically upside down or underwater toward the end of a long loan term,” Date said. “If times are tough you might have to sell your car, but you’re still going to owe more than you can get through the sale.”
The riskiest auto bonds offer compensation of up to four times the coupon of comparably dated Treasuries, Bloomberg data show.
History is also on the side of investors. Since 2004, S&P has upgraded 371 classes of subprime auto deals and downgraded none, data from the company show.
Even with the built-in protections, some market participants are starting to caution that buyers may be letting down their guard for the sake of higher yields.
Auto securities sold in 2014 have registered the highest loss rate of any period since 2008, according to data from JPMorgan Chase & Co.
Some finance companies are avoiding the longer terms. Exeter Finance Corp., a Blackstone Group-backed subprime lending firm based in Irving, Texas, isn’t offering them because the risk is too high, said the firm’s treasurer, Andrew Kang.
“At this time we have no intention of going longer than 72 months,” he said. “The risk is that you extend a loan that a borrower cannot afford over its term schedule. Inching out to 75 and 84 months, I don’t think that has been tested yet.”
Here's a visual overview of the auto loan-backed ABS market (note the resurrgence of subprime as a percentage of total issuance post-2009 and the rising net loss rates):
* * *
The takeaway here is simple: under pressure to keep the US auto sales miracle alive and feed Wall Street's securitization machine (which is itself driven by demand from yield-starved investors) along the way, lenders are lowering their underwriting standards and extending loans to underqualified borrowers.
Particularly alarming is the fact that even as average loan terms hit record highs, average monthly payments are not only not falling, but are in fact also sitting at all-time highs.
This cannot and will not end well.
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Why would anyone want to drive a new car off the lot, and instantly depreciate it more than $2000.00?
That's for rockstars and professional athletes.
So says the insurance company.
But not the dealer reselling.
Who do you believe?
84 months on a used car.... fucking fantastic. Not even I can keep these piece of shit modern cars together for an extra 84 months if it's already 3 years old when I buy it. It's not the mechanical parts- I can do those. It's the computer/electronic shit that is often non-repairable by anybody other than a dealership (at ludicrous cost). They aren't even required to keep inventory of replacement parts past 7 years (and often don't).
Finance a 2-3 year old used car for 84 months and guess where that leaves you?
Fucked. That's where it leaves you.
When I was young, we had a couple of rules of thumb for buying cars.
First, never buy a car that costs more than 1/2 of a year's salary.
Second, never finance a car for more than 36 months.
My, how things have changed!
I would make that a 1/4 of a years salary...or, perhaps a 1/5th and pay cash.
regardless...last night I see and advertisement for mattresses here in Houston. They are offering 96...yes, I said 96 month financing on ONE freaking mattress. Which happens to be 24 months LONGER than your home mortgages in the 40's.
we have become numb.
Really? A mattress? Reality is more fantastical than fiction. I'm waiting (and waiting) for the auto market to crash so I can start looking for a properly priced 4 x 4. Only used from now on.
Hint: Craigslist.
Use the search feature, be willing to travel to get a deal.
I bought my last 3 cars that way- 1 for me, 1 for each of my children.
4+ years, no problems outside regular maintenance, and saved thousands compared to any other avenue.
Used mattress on Craigslist?
I'd rather sleep on the floor, thanks.
CL is a bit dicey. Don't know how much, but...
When I was a kid, in the 70's, dad would put us in the car and drive to the " ghetto".
Kids running around in diapers and no shoes. Able bodied sitting on stoops or congregating on the corners. Houses falling apart, no paint,windows broken, bedsheets for curtains.
And Cadillacs from one end of the block to another. All washed and shined.
Some things never change.
factor in defaults and you always end up with treasury rates at best or losing money at worst. it just isn't worth the headache imo.
Well, there isn't much scheduled macro over the next 36-48 hours.
Go ahead and take all your ABE~¥ and divest into a new Ferrari 488.
No racing in parking structures<> NO NO
My '92 pos is running, goes places that make butts pucker, I can work on it, and it is paid for.
i drive a 1999 mazda...
140,000 miles
expect to get 300,00 miles out of it
2000 Subaru. Bought crashed for $250.00. Invested about $1500 in new and used parts, my labor . Rebuilt the top of the engine, did the body work.
165,000 miles, runs like a top, gets 24 mpg. Wife calls it a pos, because it is paid for.
2006 F250 6.0 Diesel. Just replaced the board in the FICM. $124.00
192,000 miles. Starts and runs great.
I get great pleasure in driving 75 mph in a vehicle whose internals have been fondled by my own hands. And knowing I'm fucking a financier out of fiat is icing on the cake. And hey, it's good for the environment. I'm the ultimate recycler.
As a side note, today's "men" on average, have no fucking clue what goes on under the hood.
Keep your new crap. If I hit the lottery, maybe.
“If times are tough you might have to sell your car,
Actually, if times get tough you won't be able to sell your car (the one with the underwater loan), since you would have to bring cash to the closing.
"if times get tough you won't be able to sell your car"
Where there's a will, there's a way.
Stretch the fuel injector line and make the liability catch on fire. Total the MFer.
Collect an insurance check.
Guess what you could buy a lightly used landscaping or construction pickup for in 2009.
You can't say "nobody will buy this" unless you also define the price at which nobody will buy it.
The insurance route is perfectly valid from an economic point of view, but people do actually go to jail for insurance fraud. 'Little people', I mean.
Stripping the transmission park gear and leaving it parked on a hill by the water.
Just so many ways so it occurs through wear and tear.
Want others?
I wouldn't do it, but when people get inovative and want the money there are just so many ways.
Blah Blah Blah
What the Fuck good go wrong?
Lots of smart folks out there. Wow
Who cares about tomorrow... I just do what I have to do to make the sale....:)
I just saw a really badass looking 77 Trans Am in all black. Those were the days.
In all seriousness, would anyone be willing to bring the conversation back to the old-school ZH model? That would be the era before the invasion of the new generation of member who revel in Yellen cursing and shallow snarky venting, when we used to maintain high intellectual discourse. Basically pre-bitcoin.
How does this end, fellas? In hindsight, the housing collapse went down somewhat predictably- with bank bailouts, chain mail and quasi-permanent squatters enjoying bank's obsession with avoiding mark-tomarket and keeping bad loans off the books. Will auto's collapse proceed similarly? Will having the auto unions as a powerful voting block (vs. a bunch of illegal immigrant home builders who dispersed quietly back south and to other industries) change this adminstration's policy intervention to "save the Merican $100K autoworker with the Cadillac insurance plan." How does the fact that Fords are made elsewhere and Toyotas are made down here in TX change the bailout dynamic? And who actually gets bailed out, manufacturer, dealer and/or borrower? And how- another demand pulling cash for clunkers maneuver? With rates at near-zero and the lending machine at full speed, when flipping these underwater morons into never-ending, serf-like new loans hits it's wall, and people not only can't borrow- but wont borrow, at any rate- what fills the void (like multi-family renting does for housing?) Will it be public transportation? Will Time be chronicling driverless ride sharing w/ coworkers and neighbors? (Gasp) bikes or walking? Will this industry experience the same revolution that will follow the student loan explosion? Or will .gov pull something a trick out of its hat that is inconceivable to us today (like the last six years of QE and ZIRP)?
I'm genuinely interested in intelligent predictions on how this could play out? And, harkening way back in the ZH-day, how could one benefit/profit from this eventuality, from the seemingly infinite stupidity of the useful idiots who will no doubt bemoan their "bad luck?"
Cars are so overvalued today it's surreal. Every poor person in my town is driving a late-model car. The stupider the driver, the nicer the car. The industry is so dysfunctional it gives higher education a run for it's money. A friend of mine was rear-ended in a used car they just financed thru USAA 6 months prior. USAA's black-box valuation formula offered them 60% of the value of the car, and essentially beat them up for declining "gap insurance." Part of me thinks that holds a hint of what's coming. Thoughts?
+1
Thanks for the head's up about USAA, I'll drop them in the morning.
My guess is more leases, until people can't even afford to lease most of what's out there, and we all know the profit at the lower end of the car spectrum is break even or, for quite a few makers, at a loss.
Pop some popcorn, shit's about to get real.
A 84-month used car loan? Right, like that's going to perform well...
It is only a question of time before these subprime loan defaults take off.
Mike Whitney has written extensively on subprime auto- links follow.
1. Subprime Auto- Easy Lending to Risky Borrowers Makes a Comeback
by Mike Whitney Dec 09, 2013
Link: www.counterpunch.org/2013/12/09/easy-lending-to-risky-borrowers-makes-a-...
2. Subprime Loans and Auto Sales Debt on Wheels by Mike Whitney Nov 05, 2014; Link: www.counterpunch.org/2014/11/05/debt-on-wheels
searchtempest.com
autotempest.com
'95 Grand Cherokee from down South, bought it some time ago. Currently 213K on the clock, running strong, had one big repair which was done before I bought it (transmission). Do all of my own maintenance and repairs. Paid $2200 for it.
6+ year loans on used cars??? And people still think this economy hasn't gone full retard???
Cash4Clunkers 1.0, BOHICA.
We bought our last car new for cash, 19 years ago - a honda civic. We just replaced it by buying a new (2015) honda civic for cash, since after 19 years the old one (our only car) was getting unreliable. MSRP was 20,110; we paid $16,488 (the dealers are desperate at the moment). If you keep a car long enough and maintain it, it can be okay to buy new; the advantage is that you avoid someone else's lousy maintenance.
I saw something new and interesting the other day. Near our local " car store area" ( every town has one or two), there is an old building with a big fenced lot that has been vacant for years. Just a block or so off the main drag.
It is now loaded to the gills with brand new Dodge pickups. There must be over a hundred, easy. I look at this, and think WTF? I started my working life in a dealership. I learned the ins and outs of the car business at an early age.
There is not enough end user business in our area,(construction, etc) to give these trucks away in 2 years.
WTF is going on? Channel stuffing? Massive overproduction?
This I can say though. I see a lot of Hispanics driving trucks I could not afford. I parked my 06 F250 at HD yesterday. Came out, and there was a brand new F250 parked next to me. 2 Hispanics leaning on the bed, having a nice, casual, in depth conversation in Spanish.
I don't forsake anyone from advancing their position. But WTF is going on anymore? I feel like a stranger in my own land.
You need to understand the system.
Mexicans (smarter then most ghetto blacks) get on the free welfare / Medicare/ housing/ food/ education bandwagon by signing "non working" mama and the kids up as "no daddy" in the house. Meanwhile daddy works for cash. Now you have lots of discressionary income to get your OK FICO score homie to get the new Denali/ RAM trucj/ Silverado and pay him in cash for the payments every month. A very popular sport in California, where state fraud investigators don't work very hard.
FFS I'm so fed up with all this bullshit...Ireland took the opposite direction to Greece yet the problems remain (just under the surface). The euro project is doomed but it will limp on for years crisis after crisis dragging everyone down with it.
BUT ITS NOT JUST THE EURO... ITS ALL FIAT CURRENCY.. ITS REACHED THE END OF THE ROAD...
Reading ZH convinced me to own gold to try remove myself from this madness as best I could but like nearly everybody I had F..K all extra cash to convert into bullion.
6 months ago I had no cash and no gold and a shed load of credit card debt.. Now I have a some extra cash.. a few ounces of gold... and I'm rid of the dreaded credit card debt..all from reading Zero Hedge and its commentators, taking that knowledge and doing something with it!!! thanks guys I owe you.
If you find yourself in the same position as me and you're willing to try your hand at network marketing, you could use the commissions earned to acquire gold bullion from Karatbars. Its not for everybody and I'm not pushing it on anyone it's just another option for you guys. All I can do is testify that its working for me - There is no reason why we can't make it work for all of us..
if you're interested in what is a decent opportunity visit www.teamramgold.com my own site - email me for info it costs nothing to have a chat. I would be delighted if the some of ZH community teamed up with me because we all have an understanding of underlaying problems causing the pain for people and phyical gold is the kryptonite to those issues.
Rampant stupidity.
Cars and trucks are not the only commodity that is in oversupply.
Went to the local grocery the other day and wanted one of those "salad in a bag" deals. Sign said, "Buy 1 get 2 free." Since I am single, and camping for the summer, one bag is all I needed and the other two would likely go bad within days. Price for the "deal" was $3.89. These bags normally go for $1.25-1.50 each, so no big deal.
Went to the manager and complained. Ended up buying one bag for $1.30, but, but, I had to sign a non-disclosure statement and produce my driver's license. Additionally, I was banned from ever shopping in the store ever again upon threat of death or incarceration.
OK, everything after the $1.30 in that last sentence is there for pure entertainment value, but I did have to check out at the customer service desk and received an undeniable, disparaging glare from the store manager (owner). The fuckwad didn't even have the balls to introduce himself or talk to me; just a mean stare, as if to say, "you're not supposed to be smart or question our pricing policies."
My take is that the new brand of "Shure-fine" salad bags which replaced the "Dole" bags are in severe oversupply and the store is wishing to unload them ASAP because they don't keep longer than a few days before spoiling. Trouble is, we're deep in farm country here and every other house has a garden and probably are producing more than enough of their own lettuce and vegetables.
So, oversupply from the good folks at Monsnto, Cargill, et. al., and "no salad for you" unless you buy lots of it.
Oversupply is "the" problem of the 2010s. We are in year six or eight of a 15-18-year depression and it's likely to get worse before it gets better.
In 2012, I said I'd wait until silver hit $17 to buy more. Acutally waited until it hit $15. My next purchase will be at $12, then maybe $6, when the bottom falls completely out of the oversupplied commodity market.
In Amer0fuck-yah-Ka, at least, we have too much of everything except common sense (h/t to Mencken).
TPP will accelerate the process of bringing American wages in line with the rest of the planet. Cops, politicians, bankers and schoolteachers will be wealthy in coming years, but as many begin to retire, the defaults on pensions will also accelerate.
Can't fix stupid and can't beat math. A rigid dichotomy, for sure.
All the best. Eat well, live well, die hard.
Let me defend the person who waited on you. The one who has to endure the rudeness of cellphones or having money thrown at them or being told fuck you by their customers. Yep, it IS that bad in America. Civility, if it ever existed is gone. Manners, what are they? No one says "please" or "thank you". Most just bark their orders at the csr who is probably paid minimum wage to endure it.
I would bet that fuckwad, as you referred to them, had just had some fucking idiot say something like "motherfucker, don't you know WHO I AM?" or just had some asshole try and use their EBT to buy cigarillos, shots of vodka or something else verbotten.
I have come to really despise the retail public, a bunch of very self important demanding rude group of people.
Ahh the price of a new Escalade. All that plastic shit on the inside will turn to dust before it's paid for.
Isn't that great, FICO changes it scoring method so low scores come up and then they can make the claim " that the average FICO score for borrowers financing new cars fell only slighty from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015".This is not going to end well.