GM Extends Plant Shutdowns As Toxic Trifecta For Auto Loans Fuels Carmageddon

Tyler Durden's picture

In yet another unsurprising headline, The Wall Street Journal reports that GM will extend the typical summer shutdown at certain U.S. factories to deal with slumping sales and bloated inventory, a sign the industry’s hot streak is grinding to a halt.

The No. 1 U.S. auto maker in terms of sales will idle its Chevrolet Malibu factory near Kansas City for five weeks starting in late June, Vicky Hale, president of the United Auto Workers Local 31, said. Job cuts will be needed if GM is forced to slow assembly-line speeds when those workers return.

 

Additional downtime is also slated in Lordstown, Ohio, a small-car factory already stung by deep layoffs related to a pullback in demand for passenger cars. A GM spokesman declined to comment on specific plans.

 

GM enters the summer with a glut of unsold inventory after running production lines at relatively high rates to prepare for factory downtime related to plant upgrades. WardsAuto.com estimates GM’s production increased 2.9% over the first four months of 2017, even as the broader industry pulled back.

 

As a result, GM’s inventory spiked 43.5% at end of May compared with the prior year. It has nearly 1 million vehicles sitting on dealer lots, WardsAuto.com estimates, representing 101 days’ worth of supply, or 23.4% of total industry stock.

Here is what GM's auto inventory since emergency from bankruptcy looks like.

Will this time the GM inventory cycle indicator be different? With widespread operating shutdowns planned in the coming weeks, it better be, or else something is far more broken with the US consumer than even the paltry 0.7% GDP would suggest.

And as WolfStreet.com's Wold Richter explains below, it is not about to get any better.

Subprime Auto-Loan Backed Securities from 2015 on track to be Worst Ever.

Institutional investors that manage other people’s money grabbed subprime auto-loan backed securities because of their slightly higher yields. These bonds are backed by subprime auto loans that have been sliced and diced and repackaged and stamped with high credit ratings. But those issued in 2015 may end up the worst performing ever in the history of auto-loan securitizations, Fitch warned.

And then there are those issued in 2016. They haven’t had time to curdle.

The 2015 vintage that Fitch rates is now experiencing cumulative net losses projected to reach 15%, exceeding the peak loss rates during the Financial Crisis.

Fitch Ratings’ Auto Loan Annualized Net Loss Index shows the strong seasonality, with either May or June forming the low point each year and the winter months forming the peaks. A terrible trend took off in 2014. The winter peak last year occurred in November with a net annualized loss of 10.9%. The latest data point is for April, at 7.8%, up from 7.4% last year. The index peaked in February 2009 at 13.1%. The trend is pointing that way (via Fitch Ratings ABS):

Fitch analysts Hylton Heard and John Bella Jr. wrote in the report, cited by Bloomberg:

The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages.

So let’s see.

Negative equity hits all-time record. The average negative equity in vehicles that were traded in for new vehicles during Q1 2017 has reached $5,195 per trade, the highest ever, according to Edmunds data, cited by AutoWeek. The percentage of trade-ins with negative equity has surged to 32.8%, also the highest ever! Average negative equity exceeded $4,000 in Q3 2013 and hasn’t looked back.

This negative equity in the trade is then rolled into the new loan, thus increasing the negative equity in that vehicle from the first second, which sends net losses soaring in the event of default.

Why is negative equity such a growing phenomenon? Because of the toxic trifecta in the auto industry, now happening.

Lengthening loan terms. The average new-vehicle loan term in Q1 2017 reached a record of 69 months, up from 64 months in 2011, according to Edmunds data. Terms between 73 and 84 months (7 years!) accounted for a record of 32.1% of all new-vehicle loans in Q4 2016, up from 29% a year earlier. Among used-vehicle loans, they accounted for 18%, up from 16% a year earlier. The value of a new vehicle declines sharply over the first few years. But the loan doesn’t amortize at this pace and doesn’t catch up with the dropping value of the vehicle until the later stages of the loan. As many consumers like to get a new vehicle every few years, these longer terms add to the negative equity at trade-in time.

 

Rising transaction prices. Vehicle prices have surged in general. And consumers buy more expensive models because low interest rates and longer loan terms make this possible by keeping the payments down.

 

Falling used-vehicle values. The seasonally adjusted Used Vehicle Price Index by J.D. Power Valuation Services (formerly NADA Used Car Guide) in May has declined for the 10th month in a row, now down over 13% from its peak in mid-2014 and at the lowest level since September 2010 [Used Vehicle Trade-in Values Sink, Hit New Vehicle Sales].

These factors, along with aggressive lending, propelled new vehicle sales to new records in 2015 and (barely) in 2016. But now the blowback has started. The net effect going forward translates into greater losses for lenders and investors in case of default after the car is repossessed and sold, and ultimately – now happening – lower sales for automakers.

Fitch isn’t alone in warning about soaring defaults and net losses of subprime auto-loan backed securities. Moody’s also warned. And S&P Global Ratings pointed out recently that net losses even on prime auto-loan backed securities have risen at the fastest pace since 2008.

For now, downgrades of subprime auto-loan backed securities are still modest. Ratings agencies cite structural enhancements, such as the slices that take the first loss and that have been retained by the lender. Investors that bought the highly rated slices might be spared initial losses. If losses continue to surge, even highly rated slices are starting to take losses.

But auto lenders that sold the subprime securities are starting to get hit. Fitch warns particularly about those that have sprung up since the Financial Crisis and have specialized in subprime auto loans, using looser underwriting standards. Lending by these weakly capitalized lenders has grown at magnificent rates in recent years. Some of those lenders have specialized in “deep-subprime” auto loans. And those lenders might be at risk.

And at least one of them, Santander Consumer USA, the top subprime auto lender in the US, verified income on only 8% of the loans, according to Moody’s. So here we go again. Read… Liar Loans Dog Subprime Auto-Loan-Backed Securities

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ParkAveFlasher's picture

Every thug in Baltimore oughta have an Escalade, it's simply Constitutional.

Ghost of PartysOver's picture

We might all want to get an Escalade.   With the Bullet Proof option of course.

Cognitive Dissonance's picture

I'd better order my Tesla before they're all gone.

silverer's picture

You hit it on the head. LMAO! We can't bail them out anymore. Nothing to bail with. They've punched too many holes in the taxpayers bucket! lol

JRobby's picture

GM knocking on 1 million unsold units by month end. Might want to shut some plants down....................................

silverer's picture

This is a more comprehensive list, but yes. We've got a lot of artificial reefs ready to install. Just pull motors and transmissions, make sure all fluids are off board, and presto! A housing bubble for fish!

Erek's picture

Another idea would be to melt them all down and make a containment dome for Fuk-You-Shima.

fbazzrea's picture

think "micro homes"... the new tiny tiny houses.

. . . _ _ _ . . .'s picture

It looks to me like women are to blame for this problem. Why aren't women buying cars?

Most of the cars in these lots are white. Men don't buy white cars.

Maybe a new paint job will move all these cars. /s

yellowsub's picture

Looks mainly like fleet vehicles.

SilverRoofer's picture

Why don't you idle all your plants in Mexico as well 

If I am going to buy a car I will not buy a so called American car made in Mexico

I would rather Buy a Japanese Car made in Louisiana

 

cesarsp_us's picture

The problem is that we give an auto loan to everybody even people who can't afford a loan just to inflate numbers.

JRobby's picture

He didn't say they were spinning

Maynard G Krebbs's picture

How so ? Thugs are not a Race....unless, of course, you've already assigned one to them.

unplugged's picture

so this matters squat

GM stock will be up at close of week

silly wabbits

cesarsp_us's picture

Make AmeriKKa great again bitches..

Dr Strangemember's picture

Bring back the Aztek and watch sales skyrocket! 

Callahan's picture

The Aztek with the Tent/Hatch option was so money, brah!

Maynard G Krebbs's picture

I have one ! the tent that is.

GeezerGeek's picture

The designer of the Aztek should have been spreadeagled on the roof of the vehicle and had his heart torn out. Just like the original Aztecs did.

Bodhi's picture

Recently helped my daughter purchase a used car at the local GM dealer.  I can confirm, at least anecdotally, the lot was jammed packed with inventory. Plus they had an additional lot down the street storing another 20+ trucks.  Could barely find a place to park there were so many unsold cars and trucks.

Cognitive Dissonance's picture

Nothing Cash for Clunkers 2.0 can't fix. /sarc

SDShack's picture

More accurate name would be "Debt for Clunkers".

83_vf_1100_c's picture

Never heard of CraigsList? Or, did you need the GMAC credit?

moorewasthebestbond's picture

Auto finance sucks.

 

Home finance swallows.

Consuelo's picture

 

 

Who needs cars - or anything which requires hands-on building of items for purchase or export...?    Well, we do need Tesla because  - well he's cool and forward thinking.

 

We're a knowledge-based economy now.   Punching up code on a keyboard and then having a meeting about it with your fellow Metrosexuals & lean-in feminists in a Facebook conference room.

Get with the program...

/s

 

 

 

matinee55's picture

F tesla that parasitic teat sucker!

Erek's picture

Since we are in a knowledge-based economy, then all the Wall Street  and .gov thugs can get known - in the biblical sense - right up their rear vent.

J bones's picture

Bad news is about to spill over across the board!

Silver Savior's picture

They should have seen it coming.

aloha_snakbar's picture

If they need a place to store some of their excess inventory no one wants and/or can afford, Ive got room for about fifteen new cars at my house....have to leave the keys, though...

Cognitive Dissonance's picture

Fifteen new, soon to be heavily used, cars...right?

GeezerGeek's picture

One or two would be sufficient for me, as long as they were Corvettes.

A. Boaty's picture

Looser underwriting standards? Haven't we seen this movie before?

silverer's picture

Now the only thing left is "Your first payment not due for one year". Oh yeah!

aliens is here's picture

The Russians hacked the car sales. I smell collusion between GM and the Russians.

silverer's picture

Now the Russians buy up the unsold cars through the black market, scrap them out for the materials and build luxury private jets. Or something that ridiculous.

SDShack's picture

Sell them to ISIS, or the Free Syrian Army, or some other terrorist group the CIA created. Then let the CIA bomb them so the MIC gets supported. Winning, Winning, Winning!

sinbad2's picture

ISIS prefer Toyota to GM, and who can blame them.

QQQBall's picture

just but the neg equity on the new loan... That's what the gubbermint do

Silver Savior's picture

Don't worry there is always some bonehead buying a car brand new and taking the big hit as they drive it off the lot. Must be an ego thing tied into the illusion of success. I don't mind the used car scene. Someone else already took care of the big financial hit.

Bam_Man's picture

Higer interest rates should help.

LOL....

Cardinal Fang's picture

Lol, rented a Malibu from Hertz a few weeks ago...

Over 20k miles on it. It was a roached out dog.

Even the rental companies are keeping cars longer...

No wonder they need to pause production on the Malibu

Silver Savior's picture

You are lucky. Hertz won't let me rent anymore. They ruined my vacation.

youngman's picture

Mine from Budget had 35,000 on it......strange...