New Warning Signs Emerge For Subprime Auto Securitizations

Tyler Durden's picture

Last month, we pointed that one of wall street's largest underwriters of auto debt was suddenly slashing their own holdings of auto loans while simultaneously ramping up the issuance of auto securitization facilities thereby pawning off the risk to 'suckers' who have no idea they're jumping in front of yet another financial freight train (see "Deja Vu: JPM Slashes Auto Loans For Their Own Book; Ramps Up ABS Issuance For The Suckers").

Now, according to Bloomberg and Wells Fargo, new signs are emerging which suggest that auto ABS facilities, like their RMBS cousins of last decade, aren't quite as bullet proof as the 'suckers' thought they were.  While a subtle degradation, Wells Fargo points out that fewer auto borrowers are suddenly paying off their loan balances early.  And while that may not sound as dire as say a default, it suggests that auto borrowers may be finding it more difficult to find new financing when they go to trade in their 3-year old clunker for that brand new BMW.

Fewer subprime borrowers are paying off their auto loans early, a possible sign that consumers with weaker credit scores are struggling more, according to a report by Wells Fargo & Co. researchers.

 

Borrowers are making fewer extra payments on loans that were bundled into bonds in 2015 and 2016, compared with loans in 2013 and 2014 bonds, according to Wells Fargo analysts led by John McElravey. The data on prepayments may offer another sign that subprime consumers are having more trouble paying their bills, the analysts wrote in a note dated Tuesday. Borrowers are already defaulting on a growing amount of auto debt.

 

Last decade, slower monthly payment rates on credit cards were an early sign of the consumer credit cycle changing for the worse, the analysts wrote. For auto loans, slower prepayment may be more of a coincident indicator than a leading one, they wrote.

Of course, just like 2007, the largest seller of auto ABS, Wells Fargo (just as Bear Stearns did in 2007), is telling investors that they have nothing to worry about...unless you think slower paydowns and a massive declines in used car prices are a problem...

The researchers at Wells Fargo, the number one seller of bonds backed by subprime auto loans, have said that the bonds pose few risks to bondholders, even though they recommend investors cut their risk exposure because of valuations.

 

Slowing prepayments can hurt investors in bonds backed by car loans, said Peter Kaplan, a senior portfolio manager at Merganser Capital Management. They can result in a deal’s bonds getting paid down more slowly, which can hurt the riskiest securities in a transaction.

 

“I think downgrades are completely possible,” with a remote possibility that the riskiest securities will take losses, he said.

 

Lenders and big bond graders, such as S&P Global Ratings, have pointed to the debts’ fast amortization and possible upgrades as reasons for investors to have faith in the securities.

Of course, this is just the latest sign of trouble in auto ABS...below are recent developments in delinquency and default trends courtesy of Morgan Stanley.

***

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.

Subprime

 

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

Subprime

 

....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.

Subprime

 

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.

Subprime

 

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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ebworthen's picture

If you can fog a mirror you can get an auto loan, and a mortgage.

Farmerz's picture

They're desperate to get inv. moving again

ebworthen's picture

Sure, helps out bailout cronies GM, Chrysler/Fiat, and the bankster cabal.

Same thing with mortgages; FHA loans handed out like candy, Fannie/Freddie and all the banksters bailed out when the time comes just like post 2007-2008. 

Complete scam, all over again.  Prices rolling over for Auto like they are starting to do in Housing.

Mr. Universe's picture

Speaking of housing,

Over the past two years, institutional investors such as Invitation Homes, Pretium Partners and American Homes 4 Rent have spent more than $20 billion to acquire 130,000 U.S. homes destined to become rentals, according to investment banking firm Keefe, Bruyette & Woods.

How hard is it to see the writing on the wall, eventualy owning a home will be reserved for the very rich. The corporatazation of housing is a result of money for nothing, rents, not for free.

Offthebeach's picture

So are you saying we shouldn't be.putting $6k worth of spinners on our Chrysler 300's that we're late on the payments?

Lets Buy The Dip's picture

so true. hey scratch your ass the right way, great, you get a loan! LOL

they are planning something with the stock market, like rothchild....these newsletter writers from sent trader, hvae called the market very accurated, and say look at VIX chart.... its too low and big drawn down could be coming for S&P  -  See here -> http://www.bit.ly/1fMcakI

this is all going to end up in hell in a handbasket, everyone knows it. Yet no one willing to talk about it right?

Obadiah's picture

I tell you what I can get a 2016 Sonota with 40k on it for 10,500  wholesale, three years ago the same car wouldda cost 13,500.

 

Wouldn't be surpirsed, given this pressure to see these at 9,500 by nov.  whata steal that is, great car.

 

I bet the rental car cos didn't have these figures in mind. ooops

Farmerz's picture

I ll walk before I drive a kia or hyundai

acneman's picture

Lol, come on now. We all know americans have lost the ability to walk.

silverer's picture

"Hey, just take the car, pay me when you get some money."

JamesBond's picture

"...slower monthly payment rates on credit cards."

Slower (behind payments)or lower (paying less each month)?

Loki Libertarian's picture

Hell yeah bring on the flood .... The price on new trucks is fricking ridiculous...wouldn't mind picking up a used one on the cheap.

Hagridpirate40's picture

The price of used trucks and SUVs is also absurd. I've been waiting for this bubble to pop or at least affect prices and so far nothing. While there were some wild sale this past weekend you couldn't touch a used 4x4 for under $25k.

CRM114's picture

Canadian used truck prices are being held up in many places because it's easy to take advantage of the dollar/loonie gap and ship 'em to the 'States.

However, in more distant from the border parts, prices have started dropping.

sirsmokum's picture

I suspect that a stealth cash for clunker program is in play as well.

CRM114's picture

Some companies are being open about it. I think Hyundai are doing it locally. Not calling it that, of course. Doesn't count if it has a different name, does it? QE is not fraud because it's not called fraud.

Stormtrooper's picture

Hey, have you seen the soaring prices of Big Macs.  How can anyone afford to make extra car payments when the price of their basic foodstuffs keep increasing so rapidly.  I gotta have my horsemeat burgers.

Mr. Universe's picture

$30 for an XL combo pizza everywhere, $8 for a burrito in the hood, and $12 for a basic hamburger in tony Burlingame. Things are getting downright scary. Car payments? No problem, just extend it out to 120 months, 40K @ 1.99% is only $368 a month, less than a typical PG&E & cable bill. The really sad part is at the current rates, you only add 10% to the total cost of the car.

pparalegal's picture

But the slugs wrapping the burger are getting $15.00/hr. You don't sound happy to help them put Tawanashia and her loan through ancient ethnic history studies Jr. college.

Phillyguy's picture

This is another “house of cards” that preys on the avarice desire of working people to obtain the “car of their dreams” but unfortunately, they cannot afford. The solution- subprime auto loans, leasing, etc. We all know how these stories end- someone is going to lose big time.

Farmerz's picture

Hey Philly guy, I used to live there in the 60s. WTF happened to the Tastykakes and pies? My aunt sent me some last week and they were garbage, could they put more sugar into the pies?? Can't eat em.......I could kill for a Ginos cheese steak though.....and  a Drexel Hill style pizza

charlewar's picture

as P. T. Barnum said "there's a sucker born every minute".

pparalegal's picture

When you have no money to go there who needs cars.

New count shows LA County homelessness is up 23% despite housing efforts

The LA County homeless population has soared 23% over the last year despite increasing efforts to place people in housing. The latest annual count of nearly 58,000 was released on Wednesday. 

The successful housing of the current homeless is being outpaced by people becoming homeless. The housing efforts that include rent subsidies, new construction, outreach and support services got more than 14,000 people permanently off the streets last year.

“Staggering,” Los Angeles County Supervisor Janice Hahn said in a statement.

http://kfiam640.iheart.com/articles/local-news-465708/new-count-shows-la...

 

Blankfuck's picture

NO WORRY! Throw those unused cars in the ocean!

NATIONAL FED FUCKERS DAY is in June! Its when interest rates rarley and hardly adjust.  Any pull back just buy the fucking dip! These FED FUCKERS are rulers of the stock markets bond markets every market! Its part of their Ponzi Plan, you know the trillions in debt bag holder american little people have to pay back. Yes all debt down the road it was pushed! No worry, not one fed fucker arrested as yet. Ponzi continues! Use these cars as lawn orniments or caskets, there you go!

WakeUpPeeeeeople's picture

Tossing in the ocean worked for wheat in the '30s. Just might work with cars today. What's the difference???

RaoulDuke66's picture

Create the fraud. Buy the fraud. Pump the fraud. Sell the fraud. Collapse the fraud. Rinse. Repeat.

RaoulDuke66's picture

Come on in sir. Please take this brand new car. Also, have $2000 in cash. No catch. Just sign here.

yogibear's picture

Nobody went to jail for 2008 so this time all the schemes are larger.

Sandmann's picture

Jeff Skilling used to be a Banker.....once he went to Enron he lost immunity

Stan Smith's picture

    I've mentioned this on previous threads,  but it bears repeating.    We've hit a point where credit scores are fucking meaningless.    We've hit a point where folks who simply wouldnt have gotten loans 20 years ago get them, usually at a rate and terms that they'll never be able to handle.   

    The Misses and I purchased our latest family truckster (and hopefully the last one btw) -- a slightly used Toyota Sienna -- last week.    With 50% down and 800+ credit scores,  this was an easy peasy deal for both us and the dealer.   But Im supremely confident that someone walking in there with half the income, nearly half the credit score, and no money down would also be walking out of there with one if they wanted one.   Sure, the rates and terms wouldnt be the same, nor should they.   But both of us would still be getting the same car.

   Call it pandering, political correctness,  call it the work of all the usual fucking grifters.    We've taken "we dont wanna offend anyone" to the lending industry to the Nth degree now.    It feels like the fucking twilight zone.    We had this issue 10 years ago in residential Real Estate,  and now were doing it in the auto industry. 

   This wont end well, unless of course you can pick up a bunch of used cars in bulk using cash when the fit hits the shan.   I would have liked to waited longer on the family truckster.   The other one crapped out after 200k miles, so no complaints there.   Me thinks I would have paid 20-30% less a year and half from now with the flood of vehicles, but who knows.    I'll pick up a car carcass here or there if the deal is right though.

   We do live in interesting times.

Sandmann's picture

US is just like UK.........Move The Metal........here's your Incentive Plan

Germany just the same  - Tageszulassung - dealer register car, discount heavily, and finance at 1.99% unless you prefer this.......

http://www.sixt-neuwagen.de/finanzierung

 

If you cannot offload Autos you haven't tried hard enough since 2008 to recover

ihatebarkingdogs's picture

About an hour ago, I saw a nasty pile-up on the 405 in Long Beach, Ca. Only one lane clear of 5 to get by. It had just happened, the smoke was still clearing, no emergency response on-scene yet. At least 10-12 cars, fairly new models, all of them really fucked up. Two weren't on their wheels any more.  It was a good one. It occured to me that by the time the cars are replaced, insurance premiums are paid, health care, emergency services, doctors, PT techs, insurance adjusters, et-all are paid off, this accident probably generated about a Million bucks in economic activity.  One individual was probably responsobile for starting it. Million bucks. Hope he has good policy limits.

But hey. 10-12 cars need to be replaced. Forward Komrades.

Offthebeach's picture

You are lucky our pubic heros hadn't shown up from their shift break.   You would of never gotten by.  Here each fender bender needs 2-5 fire trucks, with crew, 2-3 loco cops, 2 state cop cars, a accident investigation van, and a broom and shovel crew.  All for a tail light, quater panel and bumper.  Usually for 2 hours.  At rush hour. 10 million dollars lost in labor, waiting, $50k in gov hack expense, and $5k in car damage on a $2,500 POS car.

 

gruden's picture

And that health care item is a gift that keeps on giving. In an accident like that chances are a few people will have severe injuries that will require surgeries and years of rehab, plus pain meds. If any of those occupants had managed to avoid the sick care system before, they're in it now.

Sandmann's picture

Main source of donor organs - car crashes

Sandmann's picture

Need lawyer involvement to really boost GDP ! The Russians haven't a prayer at growing GDP with State-owned Armaments Manufacturers and low-bill lawyers

buzzsaw99's picture

60+ delinquencies nearly identical between prime and subprime. The new normal.

Iconoclast421's picture

At the rate it is increasing it wont be a problem for another 3-5 years. Nothingburger.

Sandmann's picture

What kind of a zombie buys Auto-CDOs ?

Sandmann's picture

Buy a GM car at 0% over 7 years and let GM get rich on the spare parts