The subprime auto industry is doing its part to try and help recreate another 2008 crisis. After all, it takes a village.
One of the largest U.S. subprime auto finance companies, Santander Consumer USA Holdings, verified income on less than 3% of borrowers this year. Better yet? It took those loans and bundled them into more than $1 billion in bonds that it sold this year, according to Bloomberg.
This 3% number is down from as high as 17% of loans that were verified when Santander issued them in 2017. For comparison, GM Financial's AmeriCredit, another major ABS issuer, verified income on about 68% of loans for a deal it priced in June and 66% of loans that it priced for a deal in March.
Meanwhile, Santander's ABS priced in June had 2.6% of loans verified for income and the one priced prior to that had 3.2% checked.
Another transaction being marketed by Santander will also be in the 3% range "or possibly lower", said Moody's analysts. Borrowers involved in the bond that Santander is currently marketing have an average FICO score of 581 and are paying an average annual interest rate of 18.9%.
The decline in Santander's income verification levels means the obvious: “...that there is a higher chance of borrowers having weaker credit profiles than they have stated,” Moody's said.
Santander didn't comment, but instead pointed to information on its earnings calls stating that the percentage of income verification has decline as the company is working to refine its processes of screening high risk dealers and borrowers from its securitizations. Meanwhile, we guess that just means give up on income verification altogether?
Santander also claims that the "performance of those transactions has been consistent or better than the historical deals that had a higher percentage of income-verified loans." We'll check back in on this statement a couple months after the next 25 bps rate hike, assuming that ever happens again.
Ratings firms have demanded higher levels of credit protection in deals over recent years to mitigate increasing delinquencies in underlying loans.
Moody’s analyst Nicky Dang said: “Income verification is only one part of the entire underwriting process for the loans. It’s only one factor that is baked into the historical deal performance we’ve seen, which has generally been consistent and stable.”
This has likely contributed to the expected losses on Santander auto bonds being higher than its peers. Moody's expects averages losses as high as 17% for loans underlying the bonds from Santander's subprime securities and it forecasts losses of 24% for the deals that Santander is currently marketing. For comparison, losses are about 10% for similar subprime auto ABS from GM financial.