Auto Defaults Soar On The Back Of "Hasty Loans And, At Times, Outright Fraud"

In the years after its 2009 bankruptcy, Chrysler looked for a dedicated lender to help customers "finance their cars quickly"...which was code for a lender who could help the struggling OEM expand their market share by making extremely risky loans to subprime borrowers all while laying off the credit risk to unsuspecting pension funds.  As such, Chrysler ultimately picked Santander due to its expertise in “automated decisioning”...which was code for the ability to advance credit without actually performing income verification tests on borrowers.

For a time, Chrysler and Santander enjoyed a perfect symbiotic relationship as it offered Santander an opportunity to aggressively expand in the U.S. subprime loan market, and Chrysler, the perennial third wheel among the “Big Three,” was able to target customers that were previously deemed untouchable by lenders.  Of course, as Bloomberg points out today, the problems surfaced almost from the start.

Many of them, detailed in the settlement between Santander and authorities in Delaware and Massachusetts, recall some of the excesses of the subprime housing era.

 

Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors.

 

State authorities also said an internal Santander review in 2013 found that 10 out of 11 loan applications from a Massachusetts dealer contained inflated or unverifiable incomes. (It’s not clear whether this particular case involved a Chrysler dealer.)

 

Santander kept originating the dealer’s loans anyway, even as they continued to default “at a high rate,” the authorities said.

 

Some dealerships even asked Santander to double-check customers’ incomes because they didn’t trust their own employees, the authorities said. They also said the lender didn’t always oblige because that would put it at a “competitive disadvantage.” At the time of the settlement, Santander said it was “totally committed to treating its customers fairly.”

All of which at least partially explains why auto defaults are soaring to post-crisis highs even as equity markets continue to shrug off bad data.

 

Of course, it wasn't just a few dealers in Delaware and Massachusetts that caused auto defaults to soar.  As we pointed out back in May, the problems at Santander were pervasive with the lender apparently only verifying income on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off pension and insurance companies. 

Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into bonds, according to Moody’s Investors Service.

 

The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.

 

Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.

Of course, Wall Street’s voracious appetite for high-yield investments has kept the loans - and the subprime ABS bonds - coming.  You can't possibly expect those overpaid, ivy league-educated financial analysts to be discerning when it comes to credit risk.

In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.

 

For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries. Of course, the market is still much smaller than the subprime-mortgage market which triggered the credit crisis, making a repeat unlikely. But the question now is whether that premium, which has dwindled as demand soared, is worth it.

 

“Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management.

 

But, just like with the subprime mortgage bubble, we suspect the extra 50 bps of yield garnered from moving down the credit quality curve will ultimately prove to be slightly less than sufficient compensation.  Luckily, much of the losses will reside with America's already bankrupt pension funds which means that taxpayer will get the opportunity to step in and fix everything.

Comments

bshirley1968 Mon, 07/17/2017 - 12:56 Permalink

“Investors seem to be ignoring the underlying risks,” said Peter Kaplan, a fund manager at Merganser Capital Management. What "risk" are you talking about?  Shit!  There is so much crap going on out there right now, and nothing happens, so why would anyone care about "risk"?  Has your ass looked at the market lately?  Risk?  Shit!  Onward and upward, Baby!

order66 Shocker Mon, 07/17/2017 - 13:22 Permalink

Rule #1: Never buy a depreciating asset. Which is what a car is.Leasing:A) keeps the car under warranty for the entire time your driving it. Do the math on depreciation and then a major mechanical repair out of maintenance. That happens to you - just once - and any smarts you thought you had buying the car go out the window.B) allows you take advantage of risk that is assumed by manufacturer/dealer - IF you get a high residual.C) allows you to sell to Carmax for a profit before your lease is over - done this 3 times. You need to lease the right car - see B.  

In reply to by Shocker

greenskeeper carl lasvegaspersona Mon, 07/17/2017 - 19:24 Permalink

Ya, what a dumb shit. Leasing makes sense ONLY if you are the type of person that feels like they always need to be driving a new car, thats it. Once you pay for this depreciating asset, you get to stop makng payments on it, which makes a hell of a lot more sense than making car payments forever. Even if I need a major repair on my paid off vehicle, its still only 6 months or so of payments on a new one. Im 32 and Im on my third vehicle in my entire life, and I got my first one when I was 16. My current vehicle is 14 years old, looks and drives great with 200k on it and i have no plans to get rid of it any time soon. My wifes is 7 years old, both paid off long ago. Hard to think of a bigger waste of money than renting a car forever.

In reply to by lasvegaspersona

Peacefulwarrior order66 Mon, 07/17/2017 - 13:51 Permalink

This is not a Leasing Cycle. Soon Automobile Manufactureres will be forced to reduce prices well below cost and go 0 percent across the board, add better warranty and longer service contracts due to the obvious over-supply, implosion of used car market and ramping up of loan defaults. By the time they hit the brakes on supply (no-Pun) Cars will be like roaches, everywhere! at this point it  Becomes much more opportunistic to buy or take them off the Dealer's hands rather than lease.

In reply to by order66

Cruel Aid Shocker Mon, 07/17/2017 - 14:27 Permalink

Its the elephant in the room, important things costs way more of % of income than before. So it has to come out somewhere, debt or default bc lots of people wouldnt be caught dead on a bus or pos car. Doesnt look good. You may think you are banking pretty good but its all in the percentages.Good luck out there

In reply to by Shocker

wmbz Mon, 07/17/2017 - 12:56 Permalink

Local dealers running the same old shit they did before the last crash.Two for the price of one. Buy one get one free. Two Jeeps for $222.00 a month zero down. Cash back, Etc... No problem here.

To Hell In A H… Mon, 07/17/2017 - 13:03 Permalink

What else do you expect in the land of fucking make-believe? The entire country is built on a mountain of lies, with a brainwashed self-belief in their own exceptionalism.If it wasn't for the petrodollar scam, world reserve currency status and an immense war machine, that country would have been exposed as a fraud a long fucking time ago.The USSA is home to a politically connected, financial criminal class mafia.

kudocast Mon, 07/17/2017 - 13:10 Permalink

"As we pointed out back in May, the problems at Santander were pervasive with the lender apparently only verifying income on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off pension and insurance companies.""Attorneys general in both states alleged Santander enabled a group of “fraud dealers” to put buyers into cars they couldn’t afford, with loans it knew they couldn’t repay. It offloaded most of the debt, which often had rates over 15 percent, reselling them to yield-hungry ABS investors."Who runs the investment arms of these pension funds and insurance companies?  They have got to be complete idiots to fall for the same scam as mortgages and student loans.  These people must be getting a kick back or some other incentive to actually invest in this shit for their pension fund and insurance "investment" portfolios.

CRM114 Mon, 07/17/2017 - 13:11 Permalink

Why are these things called securities when they aren't?Why do Governments allow pension funds to assume a wholly fantastic rate of growth, which then obliges fund managers to try and chase it?Why aren't Governments policing these frauds at any and every step of the process?  Why aren't the jails full of financiers doing 25 to Life?

ShorTed CRM114 Mon, 07/17/2017 - 13:29 Permalink

Why on earth do you think "government" policing anything (securities, markets, societies) is a good idea?How'd they do with the housing market, the internet ipo mkt (2000)?  Everything they touch they fuck up and blame on someone else.Maybe it's time to re-introduce the old latin phrase Caveat Emptor...do your own fucking homework.

In reply to by CRM114

CRM114 ShorTed Mon, 07/17/2017 - 14:13 Permalink

Why?1. Because the Government SAY they are policing it. I would have less objection if they said they weren't.2. Because we have basic protections in law against fraud - which this is.3. Because the sums involved can f#ck the whole economy, and therefore I, via the Government, care about what happens. I would have less objection if the Government promised to keep completely out, and were commited to sending the financiers involved in a crash to prison for the rest of their Natural. 2008 tells us they weren't and aren't.

In reply to by ShorTed

ShorTed CRM114 Mon, 07/17/2017 - 16:59 Permalink

you make some reasonable points, but the sums involved are nothing close to "fucking the whole economy".  Total car loans is just shy of 1.2 trln.  Total subprime auto loans (as of y/e 2016) just shy of 354bln.While that amount is nothing to sneeze at, it's not even in the same zip code as the subprime housing fiasco which were running at ~ 550+ bln/year from '04 - '07.  while you may believe the government cares because you care, they don't.  The OLNY thing goverenment cares about is perpetuating itself.  And if you get buried on shitty car loan, tough shit for you.  The gov't will print money (steal from you via inflation), write regulations (hamper capitalism by favoring deep-pocketed cronys) which increase the cost of whatever the product, and bail out any other deep-pocketed cronies who lost money in their self-inflicted "crisis" (which again will be taking money out of your pocket).Government is for government, NOT for you (unless of course you're in the government, in which case, fuck you  ;-)  )

In reply to by CRM114

CRM114 ShorTed Mon, 07/17/2017 - 18:19 Permalink

Thanks for continuing the comments.I'm aware of the different amounts, but I think the implications of car loan defaults go well beyond the loan money. Look out for the knock-on effects on retail, car support jobs, etc. Also, the bailouts that follow won't be for the benefit of the loanees, and economies are a lot more fragile this time around.I know the Govt hates me.I've never had a car loan, and never will.None of the Government's tricks you describe affect me significantly, and that's deliberate on my part.The only time I worked for a Government was when we were threatened by a worse Government - the Soviets. I left after The Wall came down.

In reply to by ShorTed

MrSteve Mon, 07/17/2017 - 13:11 Permalink

Dealers put wage slaves into deals they know the consumers can't maintain and so the vehicles are cheaply repo'd with extra keys made while the van is on the lot. Then the dealer takes a tax write-off for the loss of the loan and starts the cycle over with a new buyer / sucker. A nice red van can go through these cycles 4 or 5 times witht he dealer making more off the tax angle than the vehicle sales. Obviously this huge pile of losses attracts investors with money to launder and there you have it: the mob runs the used car market.

Too-Big-to-Bail (not verified) Mon, 07/17/2017 - 13:25 Permalink

The truth is when you drain one swamp somewhere, a new one forms just as fast with all the same scum taken out of the first swamp Investors are ignoring the underlying risks? What choice have they got? It's all shit -- the bar has been lowered so low.