When last we checked in on America’s auto loan bubble (which recently ballooned past the $1 trillion mark) the “visionary” ex-Santander execs over at Skopos Financial had just finished selling [6] some $154 million in paper backed by a collateral pool wherein 75% of the loans were made to borrowers with credit scores less than 600.
14% of the loans were made to borrowers with no credit score at all.
That deal followed a $150 million securitization the company sold earlier this year [7] in which a fifth of the borrowers had FICOs between 351 and 500.
What this represents is the resurrection of the infamous originate to sell model that was instrumental in exacerbating the housing bubble. Put simply: if you can offload the credit risk to investors, you don’t really care who you’re loaning money to. It’s moral hazard at its finest and it’s enabled by Wall Street’s securitization machine.
Skopos’ latest abomination of an ABS deal came just weeks after Comptroller of the Currency Thomas Curry warned that [8] what's happening in the auto loan market “reminds [him] of what happened in mortgage-backed securities in the run-up to the crisis.”
Obviously the market isn't nearly as large, but auto loan-backed ABS supply is expected to grow 25% this year. Here's an up to date look at consumer ABS supply:
Auto loan-backed issuance will only grow as the bubble expands ... and boy oh boy, is it expanding:
[9]
Of course in order to keep the US car sales "miracle" alive and thus perpetuate the ridiculous myth of an American auto renaissance, lenders will need to continue to lower their underwriting standards. After all, the pool of creditworthy borrowers is finite and so in order to expand it, you need to make inelligible borrowers eligible and that means the proliferation of subprime lending.
In what amounts to evidence that the subprime auto problem is indeed growing, The New York Fed's Quarterly Report on Household Debt and Credit (out today) shows that lenders extended more than $110 billion in auto loans to borrowers with credit scores below 660 over the past six months alone. You can view that figure in context by taking a look at the following chart:
[10]
But don't worry, because Phil Lebeau and Experian's perma-auto-loan bull and senior director of automotive finance Melinda Zabritski will tell you that talk of a subprime auto loan bubble is nonsense (from a CNBC interview earlier this month):
Zabritski: "I don't see a bubble in subprime loans. This is a very steady market in terms of loans to high-risk borrowers."
