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Don't Look Now, But The Subprime Auto Bubble May Be Bursting
Well, it’s official: the cat is out of the bag on what’s "driving" (no pun intended) record US auto sales.
Anyone who frequents these pages is by now well-versed in the idea of "originate to sell." It’s the dynamic that helped create the housing bubble and it’s now in full effect in the auto loan space.
The concept is simple. When demand is strong for paper backed by a particular type of asset, Wall Street obliges by cranking up the securitization machine. Thanks in part to the Fed-induced hunt for yield demand for auto loan-backed ABS has been strong. Supply should come in at around $125 billion this year - that’s up 25% from 2014 and accounts for more than half of total consumer loan-backed issuance. Here are the latest projections from BofAML:
In this environment, competition among lenders keen on getting in on lucrative securitizations heats up - the more fierce the competition, the less scrupulous the underwriting and before you know it, you’ve got tens if not hundreds of billions in paper floating around backed by loans to underqualified buyers.
It doesn’t take a securitized products strategist to figure out what happens next (although as Ben Bernanke showed us in 2006, it is apparently far too complex for a PhD economist). Borrowers who never should have been given loans in the first place start to default and the ABS collateral pools quickly transform from collections of pristine credits to steaming cesspools.
We’ve talked until we’re blue in the face about the lunatic terms being extended to buyers in the auto market, but the following bullet points (derived from Experian’s Q1 data) are always worth recapping:
- 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.
That's the story and it's one we've told before, but just so it's clear that everyone else is now catching up, here's Bloomberg with a summary of a new Nomura note:
Losses on car loans taken out by bad-credit borrowers are continuing to climb, thanks in part to the flood of rookie auto finance companies that have entered the market in recent years. You can see the rise in subprime borrowers struggling to make car payments in monthly data on bond deals sold on Wall Street. So-called subprime auto asset-backed securities (ABS) bundle together car loans and then sell them to big investors.
July reports show that annualized net losses on such bonds—a measure of the cost of bad debt—rose 1.45 percentage points over the past year to reach 6.6 percent last month, according to Nomura analysts.
What's driving the rise? Nomura has an idea.
"The significantly weaker performance in the subprime auto sector is being driven by an increase in issuance from the lesser established issuers," researchers led by Lea Overby said in a report.
Smaller, newer bond issuers fueled 37 percent of the sales of subprime bonds last year, up from 27 percent in the previous year, according to Nomura's figures.
As the small upstarts fight for market share, the concern is that they'll lower their standards too much and drag established lenders with them, inviting even greater trouble down the line. Many of the new players are backed by the biggest private-equity firms, which are under pressure to produce relatively quick returns.
For those curious to learn more about these "small upstarts" who may be "lowering their standards too much," look no further than "Meet Skopos Financial, The New King Of Deep Subprime," excerpts from which are included below.
* * *
Texas-based Skopos Financial has both raised and lowered the bar at the same time by setting a new standard for what counts as questionable collateral while simultaneously proving that in a NIRP world, investors are willing to plumb the FICO depths for yield.
Via Bloomberg:
Skopos Financial, a four-year-old auto finance company based in Irving, Tex., sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them—we dunno—sub-subprime?
Details from the prospectus show a whopping 20 percent of the loans bundled into the bond deal were made to borrowers with a credit score ranging from 351 to 500—the bottom 6 percent of U.S. borrowers, according to FICO. As a reminder, the cut-off for "prime" borrowers is generally considered to be a credit score of around 620. More than 14 percent of the loans in the Skopos deal were made to borrowers with no score at all. That means the Skopos deal has a slightly higher percentage of no-score borrowers than the recent subprime auto securitization recently sold by Santander Consumer, which garnered plenty of attentionfor its dive into "deep subprime" territory.
Who is Skopos Financial you ask? We’ll let them tell the story in their own words:
In 2011, Skopos Financial opened its doors with one goal in mind making tough, deep subprime auto loans easier to finance for dealers.
Leveraging our sophisticated, patented iLender technology and visionary management team, Skopos provides a streamlined process for franchise dealers to finance customers with low credit scores.
As an indirect auto lender, Skopos offers solutions for car buyers with no credit, low FICO scores, or a previous bankruptcy, repossession or foreclosure. And the best part is the speed. Skopos' dealers enjoy fast underwriting, fast approvals and fast funding.
Yes, the "best part is speed." We suppose the process is quite efficient considering there appear to be no underwriting standards whatsoever.
As for the "visionary" management team, have a look at the following profiles which seem to indicate that at least for some industry veterans, Santander Consumer isn’t quite subprime-y enough (note that there’s a Countrywide link in there as well for good measure):
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All the bubbles are created by the FED's excess liquidity or QE ad infinitum. What the FED has birthed is a monstrosity that will cause a financial chaos the likes of which the world has not seen>>
https://biblicisminstitute.wordpress.com/2015/08/14/when-money-is-the-pr...
Failing to extend loans to unqualified borrowers is racist.
No finance, no peace..
Deadbeats matter.
Deadbeat is a racist codeword for n*gger
Good thing cars are now being tracked 24/7 and remotely shut off even when driving on highways - how else would you force em deadbeats to pay?
True. But some cars are more equal than others.
Here's a list of cars equipped with data recorders: http://www.crashforensics.com/files/CDRVehicleList.pdf
Choose wisely, Grasshoppa.
subprime lives matter!
How about not destroying the used car market and not charging borrowers a fucking satanic loan rate of 15%+ how about not being greedy pieces of shit. Fuck these banks I hope every one of them implode like a fucking dwarf star in its death throes. This is goddamm criminal shit these motherfuckers are doing to people. These lenders are scum scum scum scum. The FED is stealing everybody's money thru this absurd ridiculous income tax kick in the teeth/rapest irs Soddomite smack. They steal our little bit of shit we work our asses off for and then treat us like we are the criminals?÷ ! This country can't continue like this. Thats a fucking fact. Sooner or later the wrong people are going to get pissed off and have nothing left to lose. And that is scary shit. Nothing is more dangerous than a man with nothing to lose. I suggest that the deep state continue its false flag shooting and actually turn them up by 2 to 300% so you can hurry up and take the 2nd Amendment. Because it's as obvious as a sunrise you morons don't know what the fuck you are doing. So at least take the American males guns before the final pathetic pus dripping, diseas filled fucking for Christsake.
The Fed encouraged all kinds of malinvestments by manipulating interest rates to zero. The bill on all these excesses will be due soon. The Fed itself could easily lose $500 billion to a trillion on its Treasury and MBS holdings.
Forward to the reckoning
Economists predict that the US Federal Reserve could lose half a trillion dollars in just three years thanks to policies enacted by the central bank under Chairman Ben Bernanke.
A study conducted by investment analysts at New York City’s MSCI Inc. suggests that Mr. Bernanke’s efforts to keep the floundering economy in tact on the heels of a recession have proven to be futile and will continue to collapse.
According to Bloomberg News, who contracted MSCI to conduct the study, the potential losses the Fed could see during the next three years are “unprecedented.” MSCI says the market values of Fed holdings are likely to shrink by $547 billion during that span.
http://www.rt.com/usa/federal-reserve-trillion-loss-565/
'death throes of the dollar' is the phrase you are looking for I believe.
...and why not, it is going to die anyway, why not splurge at the end and go out big...?...
I'm waiting for the interest only adjustable rate balloon loans to get a new car.
what about buyintg a car intrest only, add "improvements" aka shiny rims and flip for a profit, better yet make a chain of tv shows out of it, i mena dont you know cars only appreciate in value
If you hold out an extra week you can get the NINJA version.
I could easily get this if I looked at it probably, but thought it was a funny line, since to many, many people that would not be simple.
"The concept is simple"
the concept is simple - sell bad debt at par before impairment is recognized...
I thought it was 'create incentives for new loans', or more generally, 'create incentives for stupid things people would instinctively know not to do' if they weren't interfering.
In other words...Fuck the investor...Who cares about getting paid back...all I'm interested in is thrills and a cheap high.
Are there really boatloads of investors clamoring to buy moar sub-prime auto debt? Unless there is a financial trick like default insurance in there somewhere I'd say no. My guess is this stuff gets tucked in IRA's that the joe blow investor guy doesn't know everything that's in there...titled something like "conservative, sensible fund". The dealers, lenders, investment managers all make decisions about their fiduciary responsibilities, then blame it on some guy with no money or job buying a new car. It's just another racket.
I'm struck by how many taxi drivers here at the DFW airport have brand new cars. They tell me it's easy, just sign a note and zero down.
Oh, did I mention that effective this month DFW is allowing UberX to pick up customers at the airport?
Bingo bango bongo
It worked so well in 2006
"bad things happen to good people. bad credit , no problem, our lenders are waiting for your business. nothin' down!"
babylon' s here ZH'ers. just sit back, relax, hell on earth is just around the corner.
I was watching 'Mean Girls' the other day, remember this line:
Stop trying to make the apocalypse happen Zerohedge... The apocalypse is never going to happen.
I'm holding out for the 100 year 0% loan; then I can afford a new car.
And give up that AMC Gremlin muscle car - WTF
Just steal one. Less will happen to you if you get caught than if you default on a car loan.
Especially if you are an illegal alien er, undocumented person of color.
generally the dumbest mother fuckers sign and drive for say what; 72 or 84 months with ave payment of 488. now that is one dumb mo0ther fucker that would do that. never have equity cept residual value after 7 years. 100k miles and the repairs arrive. 6000/year for life idiots...\
cause im so cool sitten in my new ride feelin so bad ass and special- fuck that, looooooser...
05 4runner 175k runs like new
02 corolla 171k running great, everything works like new.
always buy 100k plus for cheap from these loooooooosers that sell and buy new. TIA for my next vehicle in 5-8 years. take good care of it for me...
good reasoning
i drive a 1999 mazda protege
about 140000 miles
my former car was a 1988 volkswagon cabriolet (miss that car wish i would have kept it)
I have had employees, people I thought were reasonably intelligent, but a four year old used car and pay $500 /month. When it breaks down there is no money to fix so its repo'd. The world lives off of the weak a the simple minded.
My 48 Ford F-1 is still going, well, not strong, but going...,wheezing down the road. Sucks gas and oil enough to piss off regulators but the damned things so old none of the regulations apply to it. It's all original, don't know how many miles are on it because the odometer quit around 1965 after my dad first bought it. Doesn't go fast enough to worry about speed so he never bothered to hook it back up. Once I got it fixed, I've put about 1,000 miles on it over the last five or six years. The odometer only has 5 figures and right now it's at about 89000. I have the cancelled check and original documents from 1963 when mom first bought it from a mexican fruit vendor. You can almost read the hand lettered sign on the door.
Hold out for a few more months and you can get an import out of China with sporty flames on the body for a song.
bobboo - you also forgot the no windows part - free air conditioning!
Ì hear they may need a detailing on the interior.
So.... good time to raise rates?
"visionary" management team"
Don't ALL companies have a "visionary" management team"?
What does the term "visionary" management team" even mean anymore?
The management team members all eat shrooms?
It means that they're dreamers who love psilocybin mushrooms. All of our politicians depend on them for their popularity.
Yeah it takes "vision" to issue loans at usury rates to deadbeats.....who could have thought of this?
What ever happened to paying cash for a decent low mile used car with other peoples money?
BTW? Why has the debt ceiling been locked for 153 days NOW!
150 Days: Treasury Says Debt Has Been Frozen at $18,112,975,000,000
Thank GOD, I started expatriating over 10 years ago.
"Thank GOD, I started expatriating over 10 years ago."
That may have been a good idea.
If you're looking for a good used car, I'm actually selling mine right now. It's a Toyota Prius stretch limo with a turbodiesel under the hood. Low miles, good condition. The purple paint is really "eye catching" according to people who have seen it. In retrosect, not as practical a car for daily driving as I originally thought, though.
Where could I as a average shit go?
I really despair at the stupidity of it all sometimes!
Now comeon folks, we're not risk assessing Greece here, stop laughing. This is serious.
no doc loans -lol. gee, do ya got a job? opps not sposta ask that...
is it ok to ask for a driver license? violation of civil liberties? citizen? felon?
i worked at northstar auction in 08 and it was amazing the fallout and prices thru the auction.
simply spell binding seeing 12 month chev impalas (cleared out on 12 month leases) with 12-15M go for 12-13 grand, 1/2 price. 45-50 k pickups for 25-30 k, it was crazy the repos- citibank got the nickname shity cars and they were, just fucking trashed by lowlifes...
No FICO score but they had a couple of credit worthy people like them on their Facebook page. Which makes me wonder..if you like someone on Facebook does that mean you are actually cosigning for their loans? No wonder they say the internet is dangerous. Could also be why my family avoids my page.
...looks like Skopos can be accurately described as a bunch of good ole' Santander Boys who got together at the water cooler one day (visionary) and decided to rig the auto loan approval process so that anyone with a pulse could get a car loan. Are we really surprised?
What we should be watching for is when they start to sell cars to people without a pulse.
Coming soon to a Surreal American Car Dealership near you.
... and then I was reminded that a car doesn't really need an owner at all to show up as sold on dealer records vis a vis channel stuffing.
Comrades, I suggest a program where the Fed pays unqualified buyers for the car they're trading in, in fact, pays them a little more than a new car costs. That way, buyers go home in a new car, with cash in their pockets, the excess auto inventory problem is solved, and the Fed simply holds the vehicle titles on its balance sheet until the economy recovers.
I got this idea by watching how the Fed solved the MBS problem.
I know working stiffs/EBTers that pay by the week at the used car lot.
Lots of transaction costs in getting a car for the subprimers. Tax, egistration, plates the inevitible late fees, and then the repo, towing.
Theres competitive cost savings to be captured. Or maybe that is the true real buisness. Not cars but turnip/muppet blood squeezing. Again and again until all that is left is some Obama care organ harvesting, or skin for lamps. Hence the phrase, "skin in the game."
You should be ashamed of yourself.
Wha....what? It's not like I soylent greened some pink slimed baby parts into burger paties at the local fedgov 'ute minimimun security day care palace for tax serf spawn.
Be brave about our new managerial world!h
Fuck the lenders. They charged interest which is for their risk. They took the risk knowing full fucking well a large # would not be able to pay off the loan. DON'T EVEN TRY to make this MY problem!
Skopos is buncha Texas boys legally rapin n' separatin the poor from their gubmint money and funded by Lee Capital, which is a Bain/Carlyle/Mercer frat boy club. Skopos lets them al-gore-rhythms do all the selectin for the loans. Push a button, get a result. Can't be wrong if the computer said so, right? Can't get gubmint money, then get it from those who are are gettin it. Sad that this is now a viable business model.
Current state of the US economy- high unemployment, anemic job growth and massive deficits. >90% of “new” jobs are temp positions, read low pay, no benefits, zero job security. How does a person working at WalMart, Burger town, McDonald's buy a new car? With subprime auto. Without this, auto sale will plummet. The begs the obvious question, will taxpayer bailouts be used to cover the inevitable defaulting on these loans?
I can speak to this car bullshit as I fuck around flipping them if I can and especially in the used car markets. I go to a lot of car auctions where I see a lot of the repo'd cars go on the block. That shit you see on TV with people buying cars cheap and flipping them? Complete bullshit. Duh. The auctioneer, who is a shill anyway, always tells the bidders if it is bank repo before the bidding starts. Mr's M wanted to go to one recently where I scared the shit out of her by bidding some large numbers but numbers that I knew I could make a profit on IF the car actually sold at auction. The repo cars almost never sell unless some retail sucker comes in there and starts bidding but that is not the norm.
When you are bidding by the thousands you need to know a few things and even though I bid the car up I knew where to stop. Mr's M asked how I knew that I would not win the car in question and I explained, "It's simple, the banks do not want to take the write-down to their balance sheets so they can sit on the car unless it is completely worthless for all I care." I proceeded to show her this over and over again. 90% of the attendees at the auctions I go to are used car dealers and they will sometimes buy a really nice car but that is only if they know they have a buyer/sucker lined up. You have a few guys like me who may or may not buy but will run the price up on the dealers. You have a lot of morons who you only see once who buy some old work out piece of shit and find out that there is a stiff buyer's premium on the $1000 special.
The reality is this though, most newer repo'd cars are not sold at auction because the bank set reserve. Sometimes the "Shilloneer" admonishes the bidders for not bidding higher. The last time I was there I had seen a car three times, a Pontiac G6 with issues, I got into a shouting match with the Dipshitaneer because he was bitching that the bank wouldn't make it's money back. "Aww, BooHoo! You have had this car in the last three monthy auctions and haven't received a bid from anyone. You are wasting everyone's time. Tell the bank it's over and they made a bad loan. Besides, it has cracked front clip and that means there is damage."
Remember, you don't get to test drive these cars. You can start them and listen to the engine and shift the transmission and that is it. So the geniuses at the banks are going to ask for their money back when it's north of retail? That is just not happening. Just because you bankers fucked up doesn't mean I should have to cover your losses again. There is a larger inventory of used 2010 to 2014 cars then anyone really realizes.
Here is my next auction. Only 35 lots right now. Bullshit!, that will turn into 150 lots by auction time next week as it always does and the silver Pontiac G6 will be back. I like the car and all but there is just no way that is going to happen. I actually see a fair amount of G6's. Interesting car.
Just out of curiosity, what amount of pocket money is required for this sort of auction?
You should spend a litte time on Gunbroker.com and Armslist.com for kicks.
What drives the defaults? Easy a government who preaches dependence and rewards idiocracy.
But its easy to be a dependent idiot
#bringbackmypinto
We'll im in this pool with one exception I paid cash. 2015 dodge challanger Hellcat waited 6 months for delivery ... Well worth the wait.
You bought direct from Government Motors. I will never give a dollar to GM, Ford or Chrysler. If I buy one it will be second hand. The last two new cars bought were Kias. And I have to say it, they're damned good cars for the money.
And the experts will say in the near future...oh there was never signs of a fucking bubble. Its not like standards for who passes as a potential borrower has been lower or something along with massive losses per car sold if dealers can't sell warranties. packages, kits, servies along with the overly priced vehicle.
More is less! Or is it less is more.
Cash for much nicer clunkers coming soon......
I was telling a coworker about this soaring risk in the auto-loan market and quoted him some of the stats above (like record loan length) as evidence a crisis was just on the horizon. He never batted an eye and was dead serious in responding, something along the lines of, "Yeah, I don't see a problem and that all seems legit. It's about what you'd expect given how much the quality of newer cars has improved lately. Nothing to see here." I laughed in his face and went back to my office.
As I ride the Long Island Railrod to Manhattan I see numerous lots along the 40 miles of rail full of new cars, Belmont race track has acres upon acres of land in the back parking lot full of new cars.
I'm short GM but it just won't crash.
When you short GM, you short 'merica.
Sure, but what does donald trump think? Wake me if he decides to weigh in on this. Maybe the tylers would make it a signature bit. "Stump Trump". Get it here first.
You can put lipstick on a feral hog but it's still a subprime pig.