Subprime Auto Securitizations Show Signs Of Cracking As Delinquencies Rise

It will come as no surprise to our readers that sales of automobiles in the U.S. have bubbled over in recent years and stood at a SAAR of 17.7mm units at the end of September.  To put that number in context, a 15-year useful life would imply that's more than 1 car for every driving age person in the United States.  Obviously that's likely not sustainable which is probably why Ford executives admitted on a recent conference call that U.S. auto sales have likely reached a "plateau."

Subprime Auto

 

Of course, the only reason auto sales have bubbled over is due to the continuous degradation of lending standards over the past 6 years with borrower credit quality deteriorating while loan terms continue to get stretched.  Which, as Bloomberg points out, has resulted in more subprime borrowers falling behind on their car loan payments at the end of September 2016 than at any other point in the preceding six years.  According to S&P, subprime borrowers were behind by more than 60 days on about 4.85% of auto loans in August, the highest level since January 2010.

Rising delinquencies are readily apparent in GM's subprime securitizations where 31-60 day delinquencies have been on the rise since 2012 and now stand at over 8% of outstanding loans.

Subprime Auto

 

Meanwhile, the year-over-year change in 61+ day delinquencies for GM securitizations have been growing at double-digit rates for several months now.

Subprime Auto

 

Meanwhile, just like in 2008, wall street is starting to bet against the impending collapse as S&P warns that downgrades of certain subprime securitizations are imminent in the face of mounting delinquencies and write-offs.

"The auto industry has also become intensely competitive, which has led to price competition, loosening of credit standards, and higher charge-offs," S&P said. U.S. car sales have been growing for six years, but the growth rate is showing signs of slowing after a record 2015.

 

The ratings firm said it may have to downgrade some subprime auto loan securities that have high-yield grades because of the increased delinquencies and loan losses, a statement it first made last month.

 

Some investors believe that subprime auto loans will continue to deteriorate, and have looked for ways to bet against them. After the financial crisis, mortgage lenders have been required by law to verify that applicants can repay their debt, but car lenders do not have that obligation. In the 12 months ended in June, only 5.2 percent of car loan applications were rejected, down from 11.1 percent in the 12 months ended in October 2015, according to research from the Federal Reserve Bank of New York. Lenders are making longer-term loans than before, and used car prices have fallen, which also could hurt loan recoveries, S&P said on Tuesday.

With delinquencies and charge-offs mounting at these levels, it's just a matter of time before the subprime auto bubble bursts.  Just another sign of the Obama "economic recovery."

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