Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations

Tyler Durden's picture

It will come as no surprise to our readers that sales of automobiles in the U.S. have bubbled over in recent years and stood at a SAAR of 17.7mm units at the end of September.  To put that number in context, an assumed 15-year useful life for vehicles would imply that's more than 1 car for every driving age person in the United States.  Obviously that's likely not sustainable which is probably why Ford executives admitted on a recent conference call that U.S. auto sales have reached a "plateau."

As we've argued in the past, the main reason auto sales have bubbled over is due to the continuous degradation of lending standards over the past 6 years fueled by the Wall Street securitization machine.  Of course, the problem with "rigging" new car sales in this way is that eventually all of those vehicles come back to flood the used car market with excessive supply resulting in lower used car prices and higher securitization losses...and that's when the whole ponzi starts to unravel.  Which, as the Wall Street Journal points out, is exactly what is starting to happen right now.

Several large companies have warned that prices of used vehicles are likely to weaken, potentially leading to higher losses on loans on which cars are the collateral. That, combined with looser terms for loans and the growth of loans going to subprime borrowers, is sounding a warning for the long credit boom that has spurred auto sales.


Auto-loan balances topped $1 trillion for the first time ever this year. Actual default rates remain low, but losses are starting to tick up, leading some big lenders to scale back. That has the credit underpinnings of the auto boom looking shakier.


“Losses are going to go higher—there’s no question about that,” said Hylton Heard, senior director at Fitch Ratings.


Earlier this year, J.P. Morgan chief James Dimon warned about a weakening auto market and the potential for used-car prices to drop. Indeed, prices of used cars that are up to eight years old are down 3.6% in 2016 through September versus the same period a year earlier, according to the NADA Used Car Guide, a division of J.D. Power.


“It is the first time since 2008 that prices have fallen by any material amount,” said Larry Dixon, director of market intelligence at the NADA Used Car Guide. The firm is projecting prices will finish the year down by an average of 4% compared with 2015.

While data from Manheim suggests that overall nominal used car prices have not yet collapsed, they have certainly stalled in recent months...



...while used car pricing as a percentage of new car pricing has been on the decline.



As we recently pointed out, rising delinquencies are already apparent in GM's subprime securitizations where 31-60 day delinquencies have been on the rise since 2012 and now stand at over 8% of outstanding loans.

Subprime Auto


Meanwhile, the year-over-year change in 61+ day delinquencies for GM securitizations have been growing at double-digit rates for several months now.

Subprime Auto


Finally, just like in 2008, wall street is starting to bet against the bubble they created as S&P warns that downgrades of certain subprime securitizations are imminent in the face of mounting delinquencies and write-offs.

"The auto industry has also become intensely competitive, which has led to price competition, loosening of credit standards, and higher charge-offs," S&P said. U.S. car sales have been growing for six years, but the growth rate is showing signs of slowing after a record 2015.


The ratings firm said it may have to downgrade some subprime auto loan securities that have high-yield grades because of the increased delinquencies and loan losses, a statement it first made last month.


Some investors believe that subprime auto loans will continue to deteriorate, and have looked for ways to bet against them. After the financial crisis, mortgage lenders have been required by law to verify that applicants can repay their debt, but car lenders do not have that obligation. In the 12 months ended in June, only 5.2 percent of car loan applications were rejected, down from 11.1 percent in the 12 months ended in October 2015, according to research from the Federal Reserve Bank of New York. Lenders are making longer-term loans than before, and used car prices have fallen, which also could hurt loan recoveries, S&P said on Tuesday.

With used car prices coming under pressure just as delinquencies and charge-offs start to mount, it's just a matter of time before the subprime auto bubble bursts.  Just another sign of the Obama "economic recovery."

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HedgeAccordingly's picture

God forbid they have to start securitizing cellphone payment plans and dinner tabs. China has 190 million cars

NotApplicable's picture

Surely there's a buyer of last resort out there willing to buy up all of the securities backed by all of these millions of extra cars?

major major major major's picture

They should get the Fed to buy the fucking cars and drive them off a cliff... just don't look down

max2205's picture

My stripper has 5 used cars to flip....get real

yippee kiyay's picture
yippee kiyay (not verified) max2205 Oct 27, 2016 9:30 PM

While our congress critters are flipping America.

philipat's picture

Hey yippee kiyay (Soon to be banned and will then use the next new names letsit and lonnng) , previously:

Aristotle of Greece


You are a serial spammer and a serial pain in the ass. Might I politely suggest that you go fuck yourself? And get a life.

Your MO, always the same, is to post a provocative comment which SEEMS to be relevant but you have no interest in joining the discussion (and NEVER do) and your sole objective is to mislead readers into clicking on your falsified links to your BS site. That wastes everyones time is blatant SPAMMING.


post turtle saver's picture

I won't shed a tear (edit: for the auto makers) when fools finally realize they shouldn't rent money to buy depreciating assets...

Cluster_Frak's picture

They should securitize 'likes' on facebook.

mkkby's picture

Just keep adding zeros to the derivatives until they'll finally net out in the end.

Bunga Bunga's picture

They almost do, at least they count Twitter tweets as GDP.

bigfire's picture

Dont you worry, President for Life Clinton will sign Presidential Finding to outright destroy all of those cars as soon as possible to spur clean technology forward.

booboo's picture

Her life or mine, I doubt that she makes it another year before she has a major stroke and she shits on the rug in the oval office

Donald J. Trump's picture

The white house will be a lot like the current state of the Playboy Mansion if she gets in

Doppelganger71's picture

Cash for Clunkers 2.0 in 4..3..2.........

ACES FULL's picture

Generally speaking, when new car sales are low that means less trade-ins and higher used cars prices. When new car sales are high there are more trade-ins with forces used car prices lower. Simple supply vs demand. However, when this bubble pops, which has been recording record new car sales, there will be a glut of repos and off-lease cars to hit the used market. That will severely depress used car prices and therefore the collateral behind existing loans will be diminished which will cause all sorts of problems. That may very well lead to another Cash for Clunkers. Last time there were a ton of quality used cars and trucks that went to the shredder. I saw it firsthand.

yogibear's picture

Most are leasing cars.  Somehow millennials think leasing a high-end car car to appear to have a higher status is better.

There is a reason they call them fleeces. 

1980XLS's picture

God help us all.


Cankles for Prison

Stormtrooper's picture

"High Treason" Cankles for the firing squad.  I volunteer to fire the live round (or 2, 3, 4 or more).

Ban KKiller's picture

Securitized and JAMMED  into pension funds! Why worry? Golly all that high yield means there might be risk? No! Ha-ha. There is not a single bank holding this on balance, right? Why not just sell to....MUPPETS. 

Fuck you Roosevelt Loan Management and your stooges at Rushmore Loan Management Services. What a bunch of asshats. 

My juvenile comment of the day.

rosiescenario's picture

Can't Goldman bundle up all these sub prime loans, run it through Standard and Poor's and then sell it as Triple A paper to some European country? Perhaps not Iceland this time, but maybe France or Portugal?

Nobody For President's picture

Greece. They need the solid income stream.

Yen Cross's picture

  Used car prices have been falling since 2008 in nominal inflation adjusted terms.

 I think .gov used every cent of that GM stock sale to restock all the LEO's in the country and ISIS.

BurningFuld's picture

Quit borrowing money you retards!

CJgipper's picture

No one OWNS anything now.  The only way to survive with the current price versus income ratio is on credit.  And that's the fundamental problem.  Prices have to drop, or incomes have to rise.  We're running out of debt to paper the situation over with when your entire monthly income is spoken for by your debts.

Mr. Universe's picture

...but, but, it's almost free!

TradingTroll's picture

Lets get this straight. So Wall Street bankers, earning north of $500k per year, have figured out they can provide car financing to Americans making minimum wage and when the whole thing blows up, just follow Obamas orders:

Stick it to the taxpayers!

CJgipper's picture

Go with what works.  It worked in 2008 with houses didn't it?


new game's picture

manheim will have abooming business recycling this shit at bust pricing.

some very good deals are coming again. they will never learn because they have no ass in the chipper.

and any losses are legally born to the loser. payment with no car. lol to those fucking idiots.

bankruptcy 103, insolvency with 99 payment at 24 percent interest for a toilet with wheels...

aliens is here's picture

This is where illegals and refugees comes in to the rescue.

booboo's picture

The new car names should be fun

Ford Fatwa

Chevy Enchilada

Toyota Refuge

Nissan Jihad

tarabel's picture





Ford Freeloader

Chevy Chihuahua

Toyota Transgender LX

Nissan Nueva

Pumpkin's picture

Toyota Transgender LX


or Toyota Crossdresser.

Offthebeach's picture

Toyota EBT
Honda WIC
Dodge Disability
Ford Fedpension
Chevrolet SS
Hundi Parole
Porsche Illegal
Lincoln Defendant
Cadillac Obama

yrad's picture

I'll take two synthetic CDO's please.

ali-ali-al-qomfri's picture

15 year useful life for a car, seriously? maybe, maybe 5 years at best.

SPONGE's picture

I drive a '95 Corolla wagon and, up until recently, a '92 Toyota truck. Only sold the truck cause it didn't have airbags but both still run great, almost never need repairs, only expense is a few bucks a month for liability insurance.

They ain't chick magnets, but the last thing I need is women who are attracted to wealth.  Don't like them women.

Cars last so much longer now. If I totaled my car, wouldn't even bother me, just grab a handful of cash and get another one. 

bkboy's picture

92 Lexus 400, 272k miles; 1998 Durango, 220k, 1969 Datsun 1600, 132k.

All running, some better than others.  My usual depreciation cost is less than 5 cents a mile.  Buy them 7 years old with 100k miles and drive 'em 'til they drop.  You just have to buy from an idiot who believes cars last only 100k miles.

bkboy's picture

92 Lexus 400, 272k miles; 1998 Durango, 220k, 1969 Datsun 1600, 132k.

All running, some better than others.  My usual depreciation cost is less than 5 cents a mile.  Buy them 7 years old with 100k miles and drive 'em 'til they drop.  You just have to buy from an idiot who believes cars last only 100k miles.

JoeSchmuckatelli's picture

Yeah, that 15-year life is a bit of an exaggeration, the average of the US car fleet is 11.5 years, so 15 is closer to reality than 5. Perhaps you should consider maintaining your cars?

red1chief's picture

You hit the nail on the head. Fluid changes are vital. I've got a 15 year old Honda that is still great, no plans to get rid of it.

spooz's picture

A well maintained car these days can easily go 200,000 miles.  Two of our family cars are well over 100,000 miles.  So I guess the number of years depends on how many miles you drive in a year.  Since the average person drives 12,000 miles per year, that means cars last 16 plus years.

Abbie Normal's picture

Maybe the newer models with "lifetime fill" coolant, transmission and other fluids will only last five years, but anything from the mid 2000-era should last for 15 years.  Heck, the newest vehicle in my fleet is nine and the oldest is over 20, and they're all still running -- of course, none are US brands.

Curiously_Crazy's picture

I have a US car - 2004 WJ/G Grand Cherokee. Even though it has the much maligned 4.7HO V8 engine it's done over 250,000kms and still running strong. No rattles (which surprises me because the XJ I had in the 90's had rattles within rattles) and the leather still looks like new. No rust. I guess looking after a car does that.

Do all servicing myself. Spending the extra on Mobil1 full synthetic and other top quality bits and pieces makes a difference.

It is however an export model meaning it was made in Austria instead of the US. Not sure if that's a contributing factor or not. 

Will drive it until it dies, which won't be for a very long time.

DemandSider's picture

In a used car, look for something with a Vulcan, all iron, 6 cylinder 3.0 Ford engine, or, any S class Saturn, (change oil every 3,000, synthetic). Many old, straight six Fords wil have diesel like longevity. The 3 Buicks in our family went over 200,000. Three years ago, I bought a 1993 Plymouth Sundance with the fuel injected 2.2 liter K Car engine for $2,000.00, and it was from Arizona, so it had no rust anywhere.  The 2.2 liter K Car Chrysler engine design was bought by the Chinese and is still being produced. It's a very plain car, but it has been absolutely flawless transportation through even -30 F. Minnesota winters.

My point is, if you remain objective, you will find some American cars are the best value if you really need to drive as cheaply as possible, for as long as possible. Parts are almost always cheaper and easily obtainable. Look for older cars with low miles, as Kelly Blue Book really undervalues these cars.


Mtnrunnr's picture

About time. Used cars should be cheap.

brown_hornet's picture

My pre Government Motors '01 Siverado 120K still runs like a top. Knock on wood. 

Mrs Hornet works for Toyota Financial. They make 140% loans to anyone with the income and 720+ FICO