If you're still on the fence about whether the auto market in this country is anything but a massive bubble being propped up by extremely loose credit underwriting standards, then we think Equifax has just provided some definitive evidence that just might push you over the edge.
In discussing delinquency trends in deep subprime auto ABS deals, Equifax Chief Economist Amy Crews Cutts recently pointed out that 2016 and 2017 vintage deals are mysteriously performing more like 2007 securitizations than those underwritten in 2010.
Here's more from Bloomberg:
“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.
“We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,” Chief Economist Amy Crews Cutts said in an email Tuesday. “In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”
And while we can't be sure, we're going to go out on a limb and suggest that the soaring delinquency rates of 2016/2017 vintage deals might just have something to do with promotions like the following one that literally offers a $1,500 discount to people with "Low Credit Scores." And, lest you think this is a joke, here is the fine print on the promotion:
"April 2017 Pricing on all new vehicles may include up to $1500 in finance rebates that have certain credit requirements to be able to claim this rebate. The finance office is Credit Score based and you must be below 620 to qualify. If you are over a 620 you must add up to $1500 to the price. Varies by make and model. Not all units are eligible for this rebate. Call Dealer for Details."
Let that sink in for a moment...this lender is actually trying to attract borrowers with lower credit scores rather than higher...on a $55,000 vehicle no less.
All of which helps to explain why this happened:
Meanwhile, Cutts seems to agree with our assessment noting that credit scores haven't really changed but lenders continue to get more and more aggressive on underwriting standards in order to keep the party going just a little longer...which sounds familiar to those of us old enough to have lived through the mortgage crisis 10 years ago.
The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.
"It isn’t a case of chasing a larger subprime share,” Cutts said in an email Tuesday. There’s been “almost no change in median credit scores. That means they are letting other underwriting characteristics slide,” she said, referring to the lenders that issue the bulk of subprime loans -- so-called monolines that specialize in one area of the credit market and dealer-finance companies that work specifically with car sellers.
“As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,” Cutts said. “The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.”
As we like to say, math always wins in the end...and somehow we suspect that offering $0 down, 0% financing for 80 months so deep subprime borrowers making $30k a year can purchase a $40,000 BMW doesn't actually pencil out over the long haul...