Subprime Auto Loan Default Rates Are Now Higher Than During The Financial Crisis

One month ago, when discussing the most recent trends in the US subprime auto loan space, we revealed how despite a virtual halt in direct loans by depositor banks to subprime clients following the financial crisis, the US banking sector now has over a third of a trillion dollars in indirect subprime exposure, in the form of loans to nonbanks financial firms which in the past decade have become the most aggressive lenders to America's sub-620 FICO population.

As we further explained, the banks' total indirect exposure to subprime loans – not just auto loans, but also subprime mortgages, and subprime consumer loans – could be pieced together through public filings, and according to FDIC reports, bank loans to nonbanks subprime lenders soared this decade, with the following 5 names standing out:

  • Wells Fargo: $81 billion, up from $13.4 billion in 2010
  • Citigroup: $30 billion, up from $4.1 billion in 2010
  • Bank of America: $30 billion, up from $2.8 billion in 2010
  • JP Morgan: $28 billion, up from $10.4 billion in 2010
  • Goldman Sachs: $22 billion
  • Morgan Stanley: $16 billion


But while the supply side of the subprime equation is clearly firing on all cylinders - as only the next crash/crisis will stop desperate yield chasers - things on the demand side are going from bad to worse, and according to the latest Fitch Autoloan delinquency data, consumers are defaulting on subprime auto loans at a higher rate than during the 2008-2009 financial crisis.

The highly seasonal rate for subprime auto loans more than 60 days past due reached the highest in 22 years - since 1996 - at 5.8%, according to March data; this is well over 2% higher than the comparable March default rate in the low 3%s hit during the peak of the financial crisis a decade ago.

The more recent April data, showed a delinquency rate of 4.3%, higher than the 4.1% last year, and the second highest April on record. Keep in mind, April is the "best" month of the year from a seasonal perspective as that is when the bulk of tax refunds hit, which are then promptly used to repay outstanding bills - it's all downhill from there... or rather uphill as the chart shows ever higher default rates. 

And while delinquencies have been rising, the number of auto loans and leases to subprime borrowers has continued to shrink, falling 10% Y/Y according to Equifax. However, as we showed at the top, it's not due to supply constraints at the nonbank subprime lenders, the slide in subprime loan volume is all on the demand side: auto-lease origination by subprime customers tumbled by 13.5%.

Meanwhile, as Bloomberg reports, the volume of bond sales backed by these loans are likely to remain the same because banks and credit unions don’t turn most of their loans into securities: “ABS is a fraction of the total auto credit market, which is mainly funded on balance sheets,” Wells Fargo analyst John McElravey told Bloomberg in an interview. “If the pullback from subprime is more from the balance-sheet lenders, banks, then maybe securitization keeps moving along.”

Not maybe: definitely. As the following chart show, the percentage of subprime securitization of all auto ABS as a share of total loans has not only surpassed th pre-crisis peak, it is at a new all time high.

Call it the latest "new (ab)normal" paradox: the underlying auto subprime loan market is shrinking fast, and yet the market for subprime auto ABS securitizations has never been stronger.

Subprime-auto asset-backed security sales are on pace with last year at about $9.5 billion compared to $9.6 billion a year ago, according to data compiled by Bloomberg. With new transactions from Santander, GM Financial, Flagship, and Credit Acceptance expected to hit the market this week, volume may exceed 2017’s total of about $25 billion.

And while it is safe to say it will all end in tears - again - as it did a decade ago, with the next recession the catalyst, the shape of the next crash will be very different. As we explained last month, this subprime bond market is vastly different from what it was even a few years ago, let alone during the last crisis as an influx of generally riskier, smaller lenders flooded into it in the post-crisis years, bankrolled by private-equity money and funded by big bank loans, pursued the riskiest borrowers in order to stay competitive.

“Neither banks nor credit unions have done ‘deep subprime’ lending,” Gunnar Blix, deputy chief economist at Equifax told Bloomberg. "That’s mainly done by smaller dealer-finance and independent finance companies” who rely almost solely on ABS for funding. According to Bloomberg, only about 10% of $437 billion of outstanding subprime auto loans have been securitized into ABS, according to Wells Fargo, which means that underwriters are generally massively exposed to the subprime auto loan crunch that is already playing out before our eyes, and which will be magnified exponentially in the next recession.

* * *

The latest subprime delinquency data seemed confusing, almost a misprint to Hylton Heard, Senior Director at Fitch Ratings who said that "it’s interesting that [smaller deep subprime] issuers continue to drive delinquencies on the index in an unemployment environment of around 4%, low oil prices, low interest rates — even though they are rising — and a positive economic story overall." In other words, there is no logical explanation why in a economy as strong as this one, subprime delinquencies should be soaring.

Unless, of course the real, unvarnished, and non-seasonally adjusted economy is nowhere near as strong as the government's "data" suggests.

Making matters worse, rising interest rates have made interest payment increasingly unserviceable for those subprime borrowers who are currently contractually locked up - hence the surge in delinquency rates - or those consumers with a FICO score below 620 who are contemplating taking out a new loan to buy a car, and suddenly find they could no longer afford it, an ominous development we first described one month ago in "Subprime Auto Bubble Bursts As "Buyers Are Suddenly Missing From Showrooms."

And even if the subprime bubble hasn't burst just yet, every incremental 0.25% increase in rates assures it is only a matter of time. For once, St. Louis Fed president James Bullard was not wrong when he warned this morning that he sees Fed policy as the reason behind the flattening of the yield curve, saying that "it’s been the Fed, I think, that has flattened the curve more than worries by investors on the state of the global economy."

"My personal opinion is the Fed does not need to be so aggressive that we invert the yield curve" he noted, adding that "I do think we’re at some risk of an inverted yield curve later this year or early in 2019," and "if that happens I think it would be a negative signal for the U.S. economy."

If he's correct, it begs the question: why is the Fed seeking to crash the economy and, by implication, the market?

We'll close with a quote from the last Comptroller of the Currency, Thomas Curry, who during an October 2015 speech said that "what is happening in [the subprime auto lending] space today reminds me of what happened in mortgage-backed securities in the run up to the crisis." It's only gotten worse since then.


chunga pelican Mon, 05/14/2018 - 21:57 Permalink

They've figured it out. They know the only way to steal money from people who don't have any is just give it to them. 

You want a car, house, tuition*, you're approved! The more the better.  Unscrupulous originators have zero fiduciary responsibility but take a nice big skim off the top for themselves. The real turbo fraud kicks when it lands on wall street as an awesome financial product. 

It's even better if the loans don't get paid back because they can simultaneously  make bets that they won't. If they do this enough it becomes a TBTF bailout and they get all the money and repossess everything anyway, then blame everyone else for being reckless.

*bk reform means *you* are the collateral

In reply to by pelican

gdpetti divingengineer Tue, 05/15/2018 - 10:51 Permalink

None of which matters, because these banks are OWO, and thusly, not needed in the NWO... so they are encouraged to load up on debt... as if there is no tomorrow... because, for the banks, there isn't... the  NWO doesn't need any of these OWO tools for manipulating the herd... its' graduation time... time to harvest the herd... Mother Nature is arriving within the next few years.. (9.5 or less)... which is what all that 2012 stuff was about.... but the Mayans didn't timestamp it... western researchers did... moon based systems have a transition period.. like our 'modern' leap year... and with their long count, that means years,  not days... just watch the signs.... sun going quiet as it shares the Birkeland energy current flow... dark star approaching for its cyclical flyby on the edge of our system... give a shout out!... then the real trouble begins with the return of the 'old gods'... comet cluster, freshened up anew by that dark start punching through the Oort Cloud... total EM field realignment... transition to next level etc. etc.

Banks are OWO.. not needed... same with all the other tools of herd managment... but not to worry, if the current hidden SG crew isn't up to the task... some of the old team is set to arrive for 'assistance'... as the 'game' opens up to expose all that's been hidden for so long... and isnt' that what is happening to these banks? and everything else related to the OWO? being exposed... and disposed of... same will happen shortly with the markets. Yes, you can then play it to the down side... but when will they do any overnight freeze? and then where will you be? Like any sinking ship, be it like the Olympic renamed to its sister ship Titanic, there is a time to stay and a time to go.

In reply to by divingengineer

I am Groot Mon, 05/14/2018 - 19:56 Permalink

Apparently nobody in the entire car industry has mastered the concept of supply and demand. Fucking idiots. No more bailouts for these retards. Let em drown in their own stupidity and go bankrupt.

Wakesetter Mon, 05/14/2018 - 20:01 Permalink

Lots of new cars on the road average loan being around 76 months I believe which is insane. Back in 08-09 houses were selling for the price of a Honda Accord with a V6.

Bought a 2010 Sierra SLE about five years ago with 33000 on it for $21K; it was a lemon law buyback that the guy before me had in his corporation for two years then claimed loss of power. I've put about 90K on her with synthetic every five thousand plus brakes and the usual stuff. Love the truck and pulls the boat like a dream in the mountains and with trailer mode barely need to use the brakes.

That same truck brand new is probably almost $65K.

peippe Mon, 05/14/2018 - 20:23 Permalink

these sub-prime buyers are purchasing lease/trade-in autos. 

Odometers well beyond 130,000 miles, three day guaranty kinda cars.

They buy used up stuff, vehicles you can't hop in & drive to NYC & back.

Amazing the defaults aren't at 33%.

SantaClaws Mon, 05/14/2018 - 20:29 Permalink

The lenders know that vehicles to most drivers are like heroin, crack, and meth to addicts.  No wheels, no life.  They'll do almost anything to keep the vehicle.

Umh Mon, 05/14/2018 - 20:41 Permalink

It is hard to produce an inexpensive vehicle when you have to add things like backup cameras. One of the reasons we need backup cameras is the field of view being reduced by high doors, and other safety features. I use to be able to look behind my vehicles much easier than now, I am not small and the doors prevent me from putting an arm out the window comfortably. Besides some idiots are going too place the child in the car seat just out of the camera and sensor range, like under the camera on these huge SUVs.

TheStressMan Mon, 05/14/2018 - 20:58 Permalink

This is all ---->   Beeee   Esssss   !!!!

The car market is STRONG!  Just today; I received in the mail yet another flyer from the Toyota dealership I bought my 2010 Corolla from, BEGGING me to trade in my car!  For giggles I went into the dealership (I LOVE dealing with those salesmen), to see what they would give me.  5k for my 130k mile car is what they said they'd give me.   BUT, here's the kicker... not on a Prius, Corolla, Tundra, Sequoia, or Land Cruiser.  Only on the RAV4, Tacoma, and Highlander.  So, from what I can tell, some of the dealers may be having trouble getting rid of make/models not selling, but there are NO DEALS on the ones that are popular.  I'm in Portland, Or (VERY DIFFERENT FROM THE REST OF THE US) and the interesting thing I've noticed is that about 1 in 5 cars on the road is a KIA.  There are tons of them on the road here.  Low price point, and a great drivetrain warranty.   I love my corolla, but I can get a new KIA that appears to be just as reliable for 1/2 the price.   I'm gonna have to check this out.

peippe TheStressMan Mon, 05/14/2018 - 21:50 Permalink

late KIAs are da' bomb as the kiddies say.....

changed a purge valve for a friend's friend. 

No bolts, all hung on rubber isolators, big needle-nose pliers 

& eight minutes & ENGINE light off. Had 170k+ on it, 

if it were waxed it would've looked like a two year old car with 24k on it.

Solid S.Korean engineering. No wondering why Ford is Giving Up On Compacts.

In reply to by TheStressMan

TheStressMan peippe Mon, 05/14/2018 - 22:26 Permalink

Hey...thanks for the reply!  I'm seriously looking at one for my next car.  After seeing so many on the road here, my neighbor bought a KIA Rio earlier this year.  They LOVE it.  Granted, it's pretty no frills, but we're older and can give a shit less about impressing the Jones'.  It's a little smaller than my Corolla, but brand new it's about 1/3 less than the price of a new Corolla.  11k vs 17k for a car with a much better drivetrain warranty totally works for me!

In reply to by peippe

peippe TheStressMan Tue, 05/15/2018 - 00:38 Permalink

I was stunned with the way that car looked (it was Rio, several years old, 174k,)

purred real nice with the emissions valve change, didn't mark it's spot, interiors wear well too.

Looked like a sub-100k car, lady has to use it FOR work & getting to & from corporate. 

Solid stuff from our Korean friends. Boring? They run clean, efficient & long, so yeah, boring is okay.

In reply to by TheStressMan

agcw86 Mon, 05/14/2018 - 22:12 Permalink

Let me guess: the lenders won't be held responsible for any of these bad loans, right? Do the world a favor; run your lender over with the car before it gets repossessed.

flyonmywall Mon, 05/14/2018 - 22:50 Permalink

Bad loans are soaring because everybody and their mother wants to drive a late model SUV or truck. Try getting into one of those for anything less than $32k. Not gonna happen.

Plus, they roll over the negatively amortized previous loan into the new one, and then stretch out the term to make the payments fit their supposed budget. Basically, pick what your payment will be, and they will find some stupid lending company to do it.

The writing is on the wall for this one.