If you were interested in learning about the conditions that conspired to create the great American housing bubble which burst in spectacular fashion in 2008 and brought the entire global financial system to its knees, you might start by reading the history of Fannie and Freddie, or you might take a hard look at Blythe Masters and the wizards who created the credit default swap, or, if you wanted to save yourself quite a bit of time and effort, you could just look at the current market for subprime auto loans.
You see, the much maligned "originate to sell" model - which was instrumental in making the American homeownership dream a reality for underqualified borrowers in the lead up to the crisis - is alive and well and is 'in the driver’s seat' so to speak when it comes to auto sales in America.
As we noted last month, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit) auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers.
The push to feed the securitization machine begets more competition among lenders for a shrinking pool of creditworthy borrowers and when that pool dries up, well, the definition of "creditworthy" must necessarily be relaxed, otherwise the securitization machine stalls for lack of fuel. For those who missed it, here are three charts which tell you everything you need to know about the market for auto loan-backed ABS:
First, note that auto ABS issuance is set to hit record highs in 2015.
Next, consider that the percentage of prime loans backing new supply is now at an all-time low.
Finally, here’s a look at the percentage of new financing extended to non-prime borrowers. As BofAML observes, the prime segements are losing share.
Now, the NY Fed is out with what is perhaps the most shocking statistic yet (with the possible exception of the 137% average LTV ratio we highlighted earlier this month) on auto loans in America.
As the following graphic shows, the rejection rate for auto loans was just 3.3% in June - the lowest on record:
And here's Bloomberg's take on why virtually anyone who wants a car, gets a car:
One reason for the looser credit has been the renewed appetite for securities backed by automobile debt, including to the riskiest borrowers, with subprime loans feeding about $13.2 billion of bond sales on Wall Street this year, according to data compiled by Bloomberg.
Finally, to drive the point home, we'll leave you with a set of statistics which speaks volumes about why this will certainly not end well.
Q1 data from Experian:
- Average loan term for new cars is now 67 months — a record.
- Average loan term for used cars is now 62 months — a record.
- Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
- Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
- The average amount financed for a new vehicle was $28,711 — a record.
- The average payment for new vehicles was $488 — a record.
- The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.