Subprime Auto Implosion In Full Effect As Lenders Start Dropping Like Flies

We are in the midst of watching the subprime auto lending bubble burst in its entirety. Smaller subprime auto lenders are starting to implode, and we all know what comes next: the larger companies go bust, inciting real capitulation. 

In addition to our coverage out just days ago  talking about how the subprime bubble has burst and, since then since has been crunched even further, additional reports today are showing that smaller subprime lenders are starting to simply implode after being faced with losses and defaults. In addition to losses and defaults, Bloomberg reported this morning that there have been allegations of fraud and under reporting losses, tactics that are clearly reminiscent of <throw a dart at any financial crisis/bubble burst over the last 30 years>:

Growing numbers of small subprime auto lenders are closing or shutting down after loan losses and slim margins spur banks and private equity owners to cut off funding.

Summit Financial Corp., a Plantation, Florida-based subprime car finance company, filed for bankruptcy late last month after lenders including Bank of America Corp. said it had misreported losses from soured loans. And a creditor to Spring Tree Lending, an Atlanta-based subprime auto lender, filed to force the company into bankruptcy last week, after a separate group of investors accused the company of fraud. Private equity-backed Pelican Auto Finance, which specialized in “deep subprime” borrowers, finished winding down last month after seeing its profit margins shrink.

The article continues:

The pain among smaller lenders has parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming. In both cases, rising interest rates helped trigger more loan losses.

“There’s been a lot of generosity and not a lot of discretion on the part of lenders and investors,” said Chris Gillock, a banker at Colonnade Advisors, which advises companies on subprime auto investments. “There’s going to be more capitulation.”

Representatives for Spring Tree didn’t respond to requests for comment. A lawyer for Summit said "restructuring in a Chapter 11 bankruptcy proceeding is the best strategy to ensure its long term success" and the company is working with its vendors and lenders to meet its obligations.

Astonishingly and ridiculously, the article goes on to talk about this implosion as if it was expected to happen and as if it's what would have happened during the normal course of business if ridiculous debt and engineered interest rates weren’t a mainstay of current economic policy:

This time around, the financial system’s losses are expected to be much more manageable, because auto lending is a smaller business relative to mortgages, and Wall Street hasn’t packaged as many of the loans into complicated securities and derivatives. As of the end of September, there were about $280 billion of subprime auto loans outstanding, according to the Federal Reserve Bank of New York, compared with around $1.3 trillion in subprime mortgage debt at the start of 2007. There isn’t a standardized definition of subprime borrowers, though it generally encompasses borrowers with FICO credit scores below 600 to 640 on an 850 point scale.

Take, for example, this gem of cognitive dissonance:

"When you think about the effects of housing versus autos, they’re a lot different," said Kevin Barker, a stock analyst covering specialty finance companies at Piper Jaffray & Co. Losses tend to be less severe for car loans because they are smaller than mortgages and borrowers pay them down faster, he said, and the collateral is easier to repossess. With home loans, in many states foreclosures require a lengthy court process.

As we all saw from the housing crisis, the smaller shops are usually the first ones to go. The law of large numbers plays to the advantage of bigger corporations and usually buys them more time. The bigger the company, the more the government and institutions care if it goes bust. Smaller companies come and go like it's nothing, because they have no tangible effect on major financial institutions or the US economy. However, this generally only exacerbates the size of the ticking time bomb to come.

In early March of this year, we posted our "Signs of the Peak: 10 Charts Reveal an Auto Bubble on the Brink". Our timing couldn't have been better. In that article we pointed out that the key data which seems to suggest that the auto bubble may have run its course comes from the following charts which reveal that traditional banks and finance companies are starting to aggressively slash their share of new auto originations while OEM captives are being forced to pick up the slack in an effort to keep their ponzi schemes going just a little longer.

And while some can claim that this is just a natural result of healthy competition between lenders, what is likely causing sleepless nights at banks who have tens of billions in outstanding loans, is the coming tsunami of lease returns which will lead to a shock repricing for both car prices and existing LTVs once the millions in new cars come back to dealer lots...

We have seen this bubble coming from a mile away. 

Also, just as we expected, between record prices (courtesy of what until recently was easy, cheap debt), record loan terms, and rising rates, shoppers with shaky credit and tight budgets have suddenly been squeezed out of the market. In fact in the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9 percent, according to J.D. Power.

Confirming our observations, Bloomberg notes that while lenders took chances on consumers with lower FICO scores after the recession, partially on the notion that borrowers prioritize car payments ahead of other expenses, several financial companies started to tighten their standards more than a year ago. The result is a surge in the amount of captive financing shown in the chart above, which as we warned is the clearest indication yet of the popping car bubble.

We also predicted back in December of last year that certain PE firms would start to feel the pain of their subprime auto bets.

However, no one wants to make the point that subprime auto also followed in the footsteps of the financial crisis because it was a bubble that was engineered due to the Fed making it easy to take on cheap debt in order to fuel our nonsense "recovery".

The continued focus on borrowing and spending, instead of saving and underconsumption, will ensure not only that these bubbles continue to happen going forward, but they will get larger in size as time progresses.


greenskeeper carl cheka Sun, 04/08/2018 - 19:16 Permalink

I've been shopping for a new SUV lately, as I've been waiting for this to happen. I have heard from several honest sales people that most people pay little to no attention to what the actual price is, and only care about how low they can get the monthly payment by stretching it out as long as possible. And apparently it didn't occur to them that, like ARM housing loans of years past, this isn't remotely healthy or sustainable.


Had a guy lean in really low and say, just between us when I was haggling him down, that a large part of their business is 'demographics that don't really care what the actual price is or if its a good deal, they just want something that says Mercedes or BMW on it and don't want to pay that much a month'. We were still about 1500$ apart on the final price, because I DO care how much the price is. I don't think he actually expected me to walk, but walk I did. I may not get that exact vehicle for the price I want, but I'll get one just like it eventually. I have no problem waiting a couple more months either. Judging by the percentage of the customers in that place that were of the 'demographic' that like to buy overpriced BMW/Benzs because its super important their car say BMW or Mercedes on them, I'd say they are in for some pain in the next couple months.

In reply to by cheka

Mr. Universe beepbop Sun, 04/08/2018 - 21:10 Permalink


Last time we were in a dealership, we found a vehicle my wife wanted and made our offer.  I told them in no uncertain terms I was not playing the "manager"game and to come back with either a yes or a no, or your best price. FAIL. We walked. They chased us to our car...wait wait...we'll take it....too late.

In reply to by beepbop

greenskeeper carl Mr. Universe Sun, 04/08/2018 - 23:33 Permalink

I did a similar thing. I told him in no uncertain terms the maximum I was paying. I let him do the 'manager thing' all he wanted. He even went and got him to come talk to me once. Then they went to some office while I walked outside and pretended to study the truck some more. They came down a little further, but not far enough, so walked. It was pretty much exactly what we wanted, but there are others, and the vehicle we were trading in still works fine, so Im not in a hurry. I told the guy I'd looked at the auction site and what the vehicle I was looking for sold at auction within a few hundred dollars, which is where this one came from, and I knew how much the vehicle I was trading in sold for retail and at auction, and that my price was more than reasonable. I don't mind them making money off me, but Im not getting ripped off. Another one will come up, and Im not in a hurry. It'll probably be cheaper in a couple more months anyway.

In reply to by Mr. Universe

glenlloyd greenskeeper carl Sun, 04/08/2018 - 23:52 Permalink

I think it's remarkably funny that the whole lending arena has become this huge game. A system for deciding who has to pay what rate, the stupid FICO, that everyone seems to buy in to, just so they can borrow for some nonsense.

If you want the damn thing just save your money until you can pay for it. Personally I don't want the damn thing bad enough, especially these new vehicles that spy on you, track you and most certainly listen too you without your permission.

Hell even vehicles without onstar accounts can be stopped by onstar if necessary. That's not something I relish in at all.

Fuckin fools if you ask me...

In reply to by greenskeeper carl

FireBrander cheka Sun, 04/08/2018 - 19:19 Permalink

Massive local ford dealership...inventory lot stuffed for years...lot is still full...but, it`s recently become very obvious there is a lot more room between each vehicle and that this dealership is prepping for slow sales.

There are also tons of 2017 cars of all brands sitting in abandoned retail store parking lots across town.

There is an abandoned grocery store lot with at least a hundred 2017 Hyundai`s. Both entrances to the lot are blocked with multi-ton concrete barriers to prevent theft...I never see those barriers move and lot is as full as last fall...will be interesting to see how those cars are cleared out.

In reply to by cheka

Endgame Napoleon ldd Mon, 04/09/2018 - 00:37 Permalink

Unless they are hauling around a bunch of kids, real estate clients or furniture if an interior designer, no one needs those gas-guzzling cars. Some elderly people like the SUVs due to the ease in getting in and out. Parking in cities is bad enough without having a behemoth SUV. Of course, the many Americans living in their cars may have a different opinion of the roomy descendants of the Seventies Era station wagons. 

In reply to by ldd

ScratInTheHat BunkerZee Sun, 04/08/2018 - 18:57 Permalink

The last new car I bought was in 1999 (I paid cash). It will be the last one I ever buy! I buy cars at peak value not peak price. I drive 95 miles a day. When I figured out that you get there in a cheap car just the same as a pricey car it becomes a cash flow issue. My cash does not flow through an FN bank to get my transportation. I pay cash for it and less cash is better! There is a real upside to not having a loan for anything and you don’t get there by taking out loans!

In reply to by BunkerZee

Pure Evil j0nx Sun, 04/08/2018 - 19:15 Permalink

I've seen home values crash but never car values.

To maintain their price values the auto manufactures will shut down plants and layoff workers to keep the inventory flat.

You might see some of the lower end crappy inventory drop in price just to off load it on to some sucker and then load up on inventory higher up the curve. Only cause they know those same people will be back in a year or so cause their piece of shit broke down and costs more to fix than it's worth.

In reply to by j0nx

FireBrander j0nx Sun, 04/08/2018 - 19:46 Permalink

A friend rebuilds/sells salvage vehicles. He gets very frustrated with being overbid at the car auctions with so many dealers willing to pay top dollar+ on wrecks. Not this spring though, says he`s often winning without hitting his limit. The small shops are giving up...the very idiots that were overpaying for the cars...finally bankrupted themselves with thier stupid bids.

In reply to by j0nx

greenskeeper carl takeaction Sun, 04/08/2018 - 19:20 Permalink

Same here, I love those things. I'm kinda done with government motors, even though my current vehicle is a Tahoe. I want a QX80, or a 56 if those are still more than I'm willing to pay. Those fuckers are fast as hell for their size, too. Beautiful trucks. I really don't NEED all the fancy shit, but I just may snatch one up when they get nice and cheap. There are already a good number of 15's piling up on lots, presumably from lease turn ins. They are still priced more than I'm willing to pay for one, but as you say, when there is blood on the streets.... I have a feeling they have another 15-20% to drop in price when this really gets going.

In reply to by takeaction

greenskeeper carl Hussflier Sun, 04/08/2018 - 20:40 Permalink

Haha, I have been driving an 03 Z-71 Tahoe on 33 inch tires for the last 11 years, so to me, its fast as hell. But, this thing is getting old and getting up there in miles. As far as the QX, 0-60 in 6.2 seconds IS pretty fast for a 6400 pound SUV. Comparing it to a pickup with less wait, or especially to a caddy sedan, isn't really an even comparison. Its also lot faster than my current truck, which is fast enough. I also don't want to buy another Govt Motors if I can avoid it.

In reply to by Hussflier