If you frequent these pages, you may remember Skopos Financial, the subprime auto lender that’s been busy packaging all manner of questionable auto loans and offloading credit risk to investors via some of what can only be described as the most noxious looking ABS deals in the history of securitization.
Earlier this year for instance, Skopos sold some $150 million worth of paper backed by a collateral pool wherein 20 percent of the loans were made to borrowers with a credit score ranging from 351 to 500. In other words, a fifth of the loans backing the deal are to the least creditworthy borrowers in the country. Here’s a look at the details:
This comes against a backdrop of rising US auto sales (see the numbers for October, out earlier today) and it's not difficult to explain the gains. Just take a look at the following data from Experian on the lunatic loan terms being extended to borrowers (from Q1):
- 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.
Or, visually, here is America's $1.1 trillion auto loan bubble:
The amusing thing about Skopos is that the management team is essentially just a collection of Santander Consumer veterans.
In their own words:
In 2011, Skopos Financial opened its doors with one goal in mind making tough, deep subprime auto loans easier to finance for dealers.
Leveraging our sophisticated, patented iLender technology and visionary management team, Skopos provides a streamlined process for franchise dealers to finance customers with low credit scores.
As an indirect auto lender, Skopos offers solutions for car buyers with no credit, low FICO scores, or a previous bankruptcy, repossession or foreclosure. And the best part is the speed. Skopos' dealers enjoy fast underwriting, fast approvals and fast funding.
Yes, the "best part is speed." We suppose the process is quite efficient considering there appear to be no underwriting standards whatsoever.
As for the "visionary" management team, have a look at the following profiles which seem to indicate that at least for some industry veterans, Santander Consumer isn’t quite subprime-y enough (note that there’s a Countrywide link in there as well for good measure):
Of course we all know who was named to Santander Consumer's board earlier this year:
Well, don't look now, but Skopos is at it again, and this time, 14% of the loans "backing" a $154 million ABS deal were made to borrowers with no credit score. Here's Bloomberg:
Skopos Financial, a deep-subprime auto finance company based in Irving, Texas, is packaging $154 million of loans made to borrowers with weak credit -- and some without a credit score -- into bonds rated investment grade.
More than three-quarters of the loans backing the deal are to borrowers with credit scores under 600 and another 14 percent have no credit score at all, according to a pre-sale report by Kroll Bond Rating Agency. That would place the bulk of the obligations well below what’s typically considered good credit.
The offering is the latest prepared by privately backed auto lenders that offload their risk into securities bought by institutional investors. Skopos, which is backed by Lee Equity Partners LLC, the New York-based private equity firm started by Thomas H. Lee, has only been in business since 2012.
About two-thirds of the loans being packaged into Skopos’ securitization have been taken out by borrowers who are financing used cars. With the loan maturities stretched to almost six years on average, borrowers may be at greater risk of owing more than their cars will be worth if they try to sell them later.
As a result of these risks, investors in the deal are being offered a big cushion against defaults. The securities, marketed by Citigroup Inc., are expected to be rated as high as AA, according to Kroll. Investors who buy them would be protected against the first 48 percent of losses. The “base case” cumulative net loss expectation is 21 percent to 23 percent, the rating company said.
Better still, half of the loans in the collateral pool were extended to borrowers in Texas where, you're reminded, households are feeling the pinch from layoffs tied to slumping crude prices (the completely inexplicable September state employment print notwithstanding):
Nearly half of the borrowers whose debt is being financed in this deal are from Texas. Earlier this year, Skopos issued an unrated securitization with the biggest concentration of borrowers also in Texas, but that comprised only 15 percent of the loan pool.
Despite the high number of loans to Texas borrowers, only a handful were in energy-production regions, making the exposure to the oil industry’s downturn “insignificant,” Kroll wrote in its report.
Yes, "insignificant." So despite the fact that half of this $154 million deal is accounted for by borrowers from Texas, we should draw no parallel between desperate, uncreditworthy households and the imperiled state of US oil producers. Got it.
What the above shows is that we've now reached a point where borrowers can get a 6-year loan for a used car with no credit score, meaning there's virtually i) no chance they're going to be able to make all of the payments, and ii) even if they do, they'll be underwater within a couple of years, if not a couple of months.
How much risk is being embedded within the financial system as a result of this you ask? Well, that's difficult to nail down, but auto loan-backed ABS supply is set to come in at around $125 billion this year, up 25%:
And here's Nomura's take on the dynamic dominating the market:
"The significantly weaker performance in the subprime auto sector is being driven by an increase in issuance from the lesser established issuers."
Smaller, newer bond issuers fueled 37 percent of the sales of subprime bonds last year, up from 27 percent in the previous year.
We'll close with a quote from Comptroller of the Currency Thomas Curry:
"This reminds me of what happened in mortgage-backed securities in the run-up to the crisis."