On Thursday night, we brought you a first-hand account of what’s really going on in subprime auto.
According to a reader who works in the industry, the securitization machine may be grinding to a halt for deals that are stuffed with loans to borrowers with low (or no) FICOs. Here’s an excerpt:
“I work for a smaller but fast growing auto finance company [and] 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 by S&P in January and were ready to start securitizing our portfolio.
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.”
So why would a company not be able to securitize the loans on its book? Well presumably because someone, somewhere gets the feeling that demand for auto-backed ABS is going to dry up in the months ahead.
There’s evidence from both Experian and the NY Fed (see here) to suggest that the market is getting riskier. More auto loan originations are going to borrowers with shoddy credit and loan terms are looking more and more stretched by the quarter. Investors may fear that the credit cycle is about to turn and when it does, you don’t want to be anywhere near the double B tranches in subprime auto - even if you can get 9%.
With all of the above in mind, we bring you the following chart from Deutsche Bank which shows that 60+ day delinquencies for subprime auto ABS have now risen above crisis levels to 5.16% - levels we haven't seen since 1996.
But don’t worry, even though Deutsche Bank does admit that it "raises eyebrows" when delinquencies for subprime are at their highest levels in two decades even as unemployment has plunged (so maybe those "jobs" people are getting aren't that great after all), you shouldn't worry, because it’s all about overcollateralization these days:
While it does raise eyebrows to see delinquencies exceed levels seen during the financial crisis at a time when unemployment is below 5%, we think subprime auto ABS structures remain well protected due to robust levels of hard credit enhancement, and structural features that increase credit enhancement as the transactions pay down.
For reference, 2015 saw about $25 billion in subprime auto ABS supply.