A First-Hand Account Of What's Really Happening In Subprime Auto

“Originate-to-sell practices are not and have never been prevalent.”

That’s a quote from Citi’s Mary Kane who, in a note out in late January, sought to dispel the notion that subprime auto was the next “Big Short.”

While it may be true that ABS as a percentage of total auto loan origination has been range-bound between 15% and 30% for more than a decade, there’s almost no question that the ability to securitize certain loans is helping to fuel subprime auto.

Just have a look at Skopos Financial and Santander Consumer for instance. No lender in their right mind would make some of the loans that show up in the collateral pools behind their ABS deals if they had to hold them on their own books. For example, 14% of the loans backing a $154 million Skopos deal last year were made to borrowers with no credit score at all. If you need a visual, take a look at this winner from Skopos:

Of course, the real test will come when, amid jitters about the economy, demand for auto ABS (as well as marketplace ABS and any other paper that isn’t backed by something rock solid) dries up. If subprime lending dries up at the same, well, correlation doesn’t necessarily equal causation but...

In any event, you don’t have to believe us, just ask someone who works in the industry. Below, find a first-hand account from a reader who says that when you’re in the subprime auto business and the securitization window slams shut, it’s all downhill from there.

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I wanted to give some insight into what is currently happening in subprime auto finance.

I work for a smaller but fast growing auto finance company. We grew from opening the doors in 2013 to having a $250 million portfolio as of today. Things for the last 3 years have been booming and it seemed like there would be no end to our growth. We were rated an A by S&P in January and were ready to start securitizing our portfolio.

Since January we have grown at our fastest pace on record and things couldn't be better.

We were hiring at a ridiculous rate and planned on doubling our staff in six months. One of my assistants was actually part of the hiring blitz and told me they needed to hire 13 people that week so he was moving his office down to the floor HR was on.

Later that day he came to my desk and told me that our director had told him to go back upstairs, because he wasn't needed down there anymore.

He soon became worried and said he thought that he might have done something wrong. Being a ZeroHedger I told him it was probably because we haven't securitized yet.

On March 1st I came into the office to find out that they had started layoffs. These people were fairly new and were in departments that the executive staff has now deemed unnecessary.

I had a meeting with my boss who told me my job is safe but due to us not being able to securitize we were freezing hiring going forward but we were hopefully done with layoffs.

We are a very solid company with a low default rate and higher standards than somewhere like Skopos. I worked in subprime auto during the Financial Crisis and it feels much worse right now than it did there in 2007 or 2008.

A lot of customer's who are subprime work in the energy industry and although they are living off of severance and savings right now you can see the wave that will be landing in a few months.

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Yes, yes we certainly can...