A quick glance at recent U.S. auto sales would imply that all is well in autoworld. Sure, sales have stagnated for about a year but they're still near all-time highs, right?
That said, a look just beneath the surface reveals a slightly different take on the U.S. auto industry. As the Financial Times recently pointed out, auto repossessions in the US are soaring and, with the exception of the "great recession" in 2008 and 2009, stand at the highest levels recorded in 20 years.
A wire fence topped with barbed wire surrounds a packed plot of land, housing a white Jeep, an orange Audi and a host of other repossessed cars. Sergio Tavano, owner of T-Birds Automotive in Red Hook, Brooklyn, sits in his car outside the lot with two of his employees. “The number of repossessions we are doing has definitely risen,” he says. “It’s the highest I have ever seen it.”
Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.
That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.
"More and more it is people down on their luck and getting their cars taken,” he says. “You feel bad for some people. You are finding them at financially the worst time in their lives … It’s unfortunate, but it’s business.”
Of course, rising repossessions have come after an unprecedented $400BN surge in new auto loans in the past 5 years as dealers have tripped over themselves to provide $0 down, 0% interest, 70 month financing...all of which feeds the wall street securitization machine and naive pension funds that will do almost anything for an extra 20bps of yield.
As Peter McNally of Moody's points out, subprime securitization volumes have also surged in recent years as credit quality has deteriorated to the "point now where it is becoming unstable." Meanwhile, net losses have increased 23% YoY across all subprime issuances according to Fitch.
“While we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable,” says Peter McNally, a senior analyst at Moody’s, another rating agency.
The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7 per cent. Net losses across subprime auto ABS hit 9.29 per cent in September, according to Fitch — 23 per cent higher than a year earlier.
The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.
“There are ingredients here — particularly the build-up of losses — that can be a triggering event … We feel that the risk is building,” says Mr McNally.
The rising delinquencies are also 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. Ironically, the levels of delinquencies currently being reported look much more like recessionary periods in 2001/2002 and 2008/2009...which is an "inconvenient" observation so we'll move on.
Meanwhile, the year-over-year change in 61+ day delinquencies for GM securitizations have been growing at double-digit rates for several months now.
Just like in 2006/2007, pension fund managers have now decided it is worth an extra 20bps per year to take on the risk of a $60,000 auto loan made to someone making $40k a year with a 550 credit score...all while taking comfort in their "AAA" credit rating...but just like in 2008/2009 we suspect this story will not end well.