Another Red Flag Emerges in the Auto Market

Not just subprime, but “deep subprime.
Sounds like a great idea…

From Michael Krieger:

Irresponsible and dangerous lending practices in the U.S. automobile market have been flagged by many people for a long time, but nobody knows exactly when it will all come to a head and create real problems. Today, I want to flag the latest warning sign.

Bloomberg reports:

Subprime auto bonds issued in 2015 are by one key measure on track to become the worst performing in the history of car-loan securitizations, according to Fitch Ratings.

This group of securities is experiencing cumulative net losses at a rate projected to reach 15 percent, which is higher even than for bonds in the 2007, Fitch analysts Hylton Heard and John Bella Jr. wrote in a report Thursday.

“The 2015 vintage has been prone to high loss severity from a weaker wholesale market and little-to-no equity in loan contracts at default due to extended-term lending, a trend which was not as apparent in the recessionary vintages,” said the analysts, referring to lenders’ stretching out repayment terms on subprime loans, sometimes to over six years, to lower borrowers’ monthly payment. That becomes riskier in the tail end of the loan, after the car has mostly depreciated and borrowers may be left owing large balances.

Credit-rating companies that assess the auto debt packaged into bonds have raised concerns in recent months about rising delinquencies and defaults. They note that additional pressures in the used-car market have weighed on lenders’ ability to recoup funds from borrowers who have their cars repossessed.

Furthermore, the market for subprime auto-loan securitizations has shifted considerably since 2008. Fitch warns of the rapid growth of new and less-established lenders with weaker underwriting standards, echoing other industry reports that show “deep subprime”lenders making up a bigger part of the market.

Not just subprime, but “deep subprime.” Sounds like a great idea.

For prior articles on this topic, see:

2017: Welcome to the U.S. Auto Market aka the ‘Trade-in-Treadmill’

2016: Subprime Auto Loan Delinquencies Jump to Highest Level Since 2010

2015: Subprime Auto Loan “Titan” Foolishly Proclaims There’s Nothing to Worry About

2015: Gotta Keep Dancing – Honda Executive Laments “Stupid” Auto Loans Driving U.S. Sales Higher

2013: Introducing the 97-Month Auto Loan

In Liberty,
Michael Krieger