Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can't Be Good

Tyler Durden's picture

If you're among the growing minority of investors still under the impression that  'everything if awesome' in the auto industry simply because new car sales volumes continue to hover around all time highs, while turning a blind eye to soaring incentive spending and that pesky little debt bubble, then we may need your help with how we should be interpreting the following subprime auto loan delinquency stats from Morgan Stanley. 

In a recent report, Jeen Ng of Morgan Stanley took a look at 266 subprime auto ABS deals to assess the underlying 'health' of the auto loan market and this is a recap of what he found.

First, despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows, 60+ day delinquencies and default rates are soaring back to 'great recession' levels for prime and subprime auto securitizations.



Meanwhile, loss severities are also starting to rise... 



....just as used car prices come under pressure...

Used Car Prices


...which likely has something to do with the flood of lease returns that are about to hit the market...

Auto Leases


Of course, it can't be that these deteriorating credit metrics are the result of 21 consecutive quarters of loosening lending standards from 2Q 2011 through 2Q 2016, right?

Lending Standards Have Eased...: While overall household debt remains below pre-crisis peaks, auto debt has ballooned to all-time highs. While this debt grew, the median FICO score of borrowers receiving auto loans fell roughly 30 points from peak to trough. According to the Senior Loan Officer Opinion Survey (SLOOS), auto lenders eased lending standards for 21 consecutive quarters from 2Q 2011 through 2Q 2016.


...but Lenders Now Appear to Be Reversing Course and Tightening Standards: While FICO scores did drop precipitously, they have recovered in recent months, and the SLOOS reports 3 quarters of tightening standards after the 21 of easing. A look at the weighted average FICO scores of loans going into subprime ABS deals reveals similar trends, with a number of lenders reporting increases in these scores over recent years. However, the overall trend has moved lower since 2013.



Meanwhile, just like in the past housing crash, the mix of "deep subprime" collateral being pawned off on the ABS market is soaring...because who else would buy it?

Shift in Deal Mix the Real Culprit: The main driver of this dynamic appears to be that, while individual lenders are increasing their weighted average FICO scores, the securitization market has become more heavily weighted towards issuers that we would consider deep subprime - those with a weighted average FICO score below 550. In fact, since 2010, the share of Subprime Auto ABS origination that has come from these deep subprime deals has increased from 5.1% to 32.5%.


Deep Subprime Driving Delinquencies: Since 2012, 60+ delinquencies of non-deep subprime deals picked up from 3.03% to 3.92%. While that 89bps increase certainly demonstrates deterioration, it pales in comparison to the over 300bps increase coming from these deep subprime deals.



But sure, 18mm new cars per year is probably a 'normalized' level of demand for the U.S. market...just like 1.3mm in new home sales was 'normal' in 2005.

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Francis Marx's picture

I wonder if people will be able to just live in their cars till the wrecker comes?   

Bigly's picture

Repo them all. Sell at steep discounts to cash buyers

El Vaquero's picture

Who sold CDSs on that shit?

Bigly's picture

Isn't the question "Who did NOT sell CDSs on this shit?"

JackT's picture

It's all entangled.

Offthebeach's picture

Car market is too big to fail.  Maiden Lane Used Cars is buying!

GunnerySgtHartman's picture

Repo them all. Sell at steep discounts to cash buyers

I'm up for that.  I'd like to have a high-horsepower late-model exotic at a bargain price!

GUS100CORRINA's picture

If the exonomy was so GOOD, then why is this happening? 

America is in recession, the anecdotal evidence is overwhelming.

It is time we give people a break from the BS and fix it.

richsob's picture

We drive late model cars (BMW and Mercedes) and the dealers are damn near begging us to trade.  No way, Jose.  I got both cars for a song and they're good to go for a long, long time.  My ego can live with driving something that isn't "brand new!!".  

Mikeyy's picture

"Good to go for a long time."  Haha!  That's a good one.  BMW's are notoriously unreliable (ask me how I know) and the repair and parts costs are astronomical.  Unless you're a good wrench, plan on spending a bunch of damn money if you expect to have that car for a long time.

richsob's picture

I've driven BMW's since the early 80's and have had only excellent luck with them.  I drive them fast on the highway but I never drive the cars hard.  I always buy a hellish warranty "just in case" but so far all I've done is waste my money because they just don't break down on me.  Same thing with all the Mercedes cars I've had except one that had constant electrical problems.  It was a beautiful car but who wants to go out to the garage just find the hazard lights are blinking again?  I traded it in and (knock on wood) have never gotten another lemon.  I believe it's all in how you drive them and take care of them.

Abbie Normal's picture

But how long do you own them?  Most of those cars need their plastic engine parts replaced every five years, regardless of the mileage or how you drive them.

SilverRoofer's picture

My 1970 challenger (MADE in the USA)

Is good to go for a much longer time

Have loved that car since high school 

And it has never lost its cool factor my ego has no desire to get rid of it

For one of those new imposter challengers they sell now

Just isn't the same thing

Atomizer's picture

Install a eye phone case in car. LOL. Love my buddy in Australia. You make me laugh in America. Edit.. the ransom comment at end was so funny. In tears laughing. 

EyeSmart iPhone Case - PARODY - YouTube


nukegm's picture

friend of mine runs 3 dealers. drastic new car sale slowdown since january. other dealers in his area are reporting the same....

Bunga Bunga's picture

I have a 19 year old SUV. They can have it for $10k.

Slingsby's picture

I pass a few dealers on my way to and from work each day. The lots are stuffed.

taketheredpill's picture



The securitizations will be fine since they are well over-collaterilized and geographically diversified.



Bammers's picture

I read an article from Ford I think that said prices will be going down. 

No_More's picture

Can't wait to see old beaters up on cinder blocks in front of the homes of banksters...redneck parking will look so lovely in front of their mansions.

Bill of Rights's picture

Triple " A " bitches

Consuelo's picture



"First, despite low unemployment, high consumer confidence and debt-to-income ratios at 30-year lows, 60+ day delinquencies and default rates are soaring back to 'great recession' levels for prime and subprime auto securitizations."


Ok...   So the $64k question begs:


Where is the disconnect...?


Is 'low unemployment', 'high consumer confidence' and low debt-to-income levels, nothing but smoke & mirror accounting and massaged reporting...?

CRM114's picture is your friend.

The short answer is: Yes, the Government / financial reporting is BS.

The slightly longer answer is:

Unemployment figures don't include those who've given up looking or have less working hours than they'd like.

Confidence figures have always been BS and are totally dependent on who you ask.

Debt-to-income looks low as an average, but the detail is that rich people have no/almost no debt and the poor are in way over their heads.

cowdiddly's picture

In my little town the entire thing is starting to look like one big used car lot with 2 new dealerships and now about 10-12 used car lots. All of them overflowing and going into additional lots. They keep bringing lots of cars from out of state. Tons of them are late model with some outrageous miles racked up on them. Commuter rentals I presume.

I have 2 pickups, a car and 2 farm trucks, All 9yrs old and older with less miles than these worn out newer POS they want 10-33k for.

Do these people ever get out of there freaking cars and enjoy their home or what? Running up and down, up and down.

Seen an slick looking 2015 Silverado the other day, opened the door and it had 259 freaking thousand miles on it. How the HELL do you do that? I have trucks 20 years old with less miles. Now that my friend is burning the wheels off one.

cbxer55's picture

My 19 year old Ford Ranger has 148,000+. My 13 year old Lightning has 63,000+. And my 11 year old motorcycle recently turned 28,000.

In my town, there is a Sam's Club with some dealers very local to it. I see a lot of new cars parked in the far corners of their lot. Wonder if Sam's is charging them rent for the spaces? LOL

Osmium's picture

You must not get out much.  My 3 year old bicycle has 13,000 miles on it.

shizzledizzle's picture

You ain't kidding. I got a 94 chevy diesel 3500 dually that I pull trailers with and a 06 ford ranger for my daily driver. The chevy has 250k on it so I have started looking for a replacement. I am not really brand prejedous, they all made some lemons and they all had some good ones. Leaning towards a later model dodge dually with a cummins but not dead set. 

I can't believe how much people are paying for trucks with 150k plus on the odometer. Like you, i seen a duramax 3/4 ton the other day with 235k on the clock. They wanted $28K! While I know the old 12 valve cummins will routinely run past 500k with little issue, there are still drive train/suspension components that wear. Not to mention the cost of replacement parts... a new set of injectors for a duramax are going to set you back $3500 - 4000 and that doesn't include labor! I guess my point is that everything has a life span and when 2/3rds of that life span is used up I need to see more than %20 off the price it was new. 

Manufactures can kiss my ass, I REFUSE to pay over $30k for a work truck much less a base model 1500. Until things change I will keep searching the market for gently used values. They are out there.

Atomizer's picture

Moody's needs a new tampon. Fitch will clean up the blood by Cleveland steaming. 

Able Ape's picture

We can park all our excess cars in Chinese Ghost Cities!  Keep making 'em, we'll find a place to park 'em!...

techpriest's picture

And then move the illegals into the ghost cities to populate them.

razorthin's picture

Prolly all sanctuary city snowflake illegals.  Don't bother to verify that fake SSN.

On the other hand, your goobermint doesn't pay its debt so why should you?

aloha_snakbar's picture

We need a *clunkers for suckers* program...

silverer's picture

I'm sure Santander Bank has all the paperwork ready.

BryanM's picture

Lots of stats but remember that the Cash for Clunkers program  back in 2009 destroyed a lot of the used car inventory forcing used car prices up artificially. Now they are returning to normal. That's what the NADA used car vehicle index looks to me.  A normal amount of used cars in the pipeline brings prices back to normal levels. 

GunnerySgtHartman's picture

That's exactly what our local tax assessor's office has told me regarding car values.

Houses Depreciate's picture

Let the prices crater, then buy later for 75% less.

silverer's picture

Do what the government does. Just give cars away. Someone will figure out how to pay for them. Yellen, for instance. Print the auto makers to prosperity. lol

Stormtrooper's picture

I think you've got it.  Yellen & Co. could print coupons to buy autos with a $30,000 dollar face value and send to every household in America.  Then as Americans use the coupons to buy cars, the Fed can just print more funny money to pay the dealers for the coupons.  Dealers are happy to sell cars and Americans still don't have a clue that the Fed is counterfeiting worthless money out of thin air to keep the Ponzi going.  Pure genius!  Americans will never figure out that if you can't put it on a scale and weigh it, it ain't money.

Peterman333's picture

That's unfair, immoral and in the words of chuckie Schumer just mean spirited (sob sob) that you want to give free cars to Americans and not migrants.

Dragon HAwk's picture

trade in guy said my roof was full of  dents, I replied well if the sheet metal wasn't the thickness of toilet paper maybe it wouldn't be dented.  didn't ask for a trade in price they come free with every service call nowadays. Please buy a new car. Please I think the dents are from sitting my coffee cup  up there when i unlock the hatch

Mtnrunnr's picture

maybe we should subsidize car loans too! that way costs can run forever!

Peterman333's picture

Yes, maybe like some program like ohhh cash for clunkers.

Peterman333's picture

Happy to drive my 2005, look mom, no payments and cheap insurance.

Cockoo's picture

Doom and gloom in the auto sector so far has not translated into any real deals on Main St thus far it only adds more fuel to the fire.  A Market 1929 crash or civil war will beat any real savings for the consumer maybe at that point they will realize it is time to reduce prices.  As prices head north for used vehicles will drive mine until it premanently breaks down.