While we are used to the daily flashing red headline from GM on recalls, today's was a lot more concerning:
- *GM RECEIVED SUBPOENA BY U.S. DOJ
- *GM SUBPOENA RELATED TO SUBPRIME AUTOMOBILE LOAN CONTRACTS
- *GM FINL: SUBPOENA ALSO FOR WARRANTIES ON UNDERWRITING CRITERIA
We have warned of the surge in subprime auto-loan lending (and lowering standards and rising delinquencies) [5]but this move by the DoJ should be very concerning. Once investors began digging into the details of subprime mortgage deals in 2007, the drastic credit risks reality was exposed very quickly... we fear the same in auto loans.
Auto-loans are surging... Subprime auto-loans were up 10-fold in 2013...
As OCC reports, [6]
Auto lending remained a highly competitive product segment, as strong growth continued through the end of 2013.
[7]
Banks reported year-over-year growth of 11.3 percent in the third quarter of 2013 and 12.9 percent in the fourth quarter of 2013 (see figure 18). Banks continue to hold a sizable market share of outstanding loans of $250 billion, or 31 percent of the total auto lending market.
But risks are rising... Signs of Risk in Auto Lending Beginning to Emerge
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident. Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing (see figure 26).
[8]
As we have numerous times... [9]
Of course, this is not the first time we have discussed this... As we discussed here "Auto Loan Delinquency Balances Rise 24% YoY" [10]:
[11]
And here... [12]
It Always Starts Somewhere …
However, what interests us about this development is mainly this: it shows that the credit bubble is beginning to fray at the edges. Every downturn starts with a seemingly innocuous report about things 'suddenly' and 'unexpectedly' going wrong in a relatively obscure corner of the market. We find ourselves reminded of how sub-prime real estate credit troubles began to show up for the first time in February of 2007, leading to the often repeated mantra that this particular disturbance in the force was 'well contained'.
That is however never how it works – in the end, it is all one big interconnected market. When troubles begin to show up at one end of it, they soon tend to begin to spread.
A car repo notice – at least the repo sector can expect a boom now.
Good-bye overpriced SUV piece of junk – it was nice to know ye while it lasted …
Conclusion:
One should certainly keep both eyes open henceforth; more anecdotal evidence of this type is likely to emerge in coming months, especially if the Fed continues with its 'QE tapering' course. Once problems become visible in one obscure corner of the low grade credit markets, it is often a warning sign for the entire market and economy.
We suspect the DoJ investigation stems from this
"Buying The Car Was The Worst Decision I Ever Made" - The Subprime Auto Loan Bubble Bursts [13]
* * *
Of course, the biggest irony is that it was the government itself that has been forcing GM to aggressively push NINJA loans onto any deadbeat consumer with mirror-fogging skills. And now it is going after GM for doing just that...