Submitted by Tyler Durden on 03/17/2016 21:41 -0400
“Originate-to-sell practices are not and have never been prevalent.”
That’s a quote from Citi’s Mary Kane who, in a note out in late January, sought to dispel the notion that subprime auto was the next “Big Short.”
While it may be true that ABS as a percentage of total auto loan origination has been range-bound between 15% and 30% for more than a decade, there’s almost no question that the ability to securitize certain loans is helping to fuel subprime auto.
Just have a look at Skopos Financial and Santander Consumer for instance. No lender in their right mind would make some of the loans that show up in the collateral pools behind their ABS deals if they had to hold them on their own books. For example, 14% of the loans backing a $154 million Skopos deal last year were made to borrowers with no credit score at all. If you need a visual, take a look at this winner from Skopos:
Of course, the real test will come when, amid jitters about the economy, demand for auto ABS (as well as marketplace ABS and any other paper that isn’t backed by something rock solid) dries up. If subprime lending dries up at the same, well, correlation doesn’t necessarily equal causation but…
In any event, you don’t have to believe us, just ask someone who works in the industry. Below, find a first-hand account from a reader who says that when you’re in the subprime auto business and the securitization window slams shut, it’s all downhill from there.
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I wanted to give some insight into what is currently happening in subprime auto finance.
I work for a smaller but fast growing auto finance company. We grew from opening the doors in 2013 to having a $250 million portfolio as of today. Things for the last 3 years have been booming and it seemed like there would be no end to our growth. We were rated an A by S&P in January and were ready to start securitizing our portfolio.
Since January we have grown at our fastest pace on record and things couldn’t be better.
We were hiring at a ridiculous rate and planned on doubling our staff in six months. One of my assistants was actually part of the hiring blitz and told me they needed to hire 13 people that week so he was moving his office down to the floor HR was on.
Later that day he came to my desk and told me that our director had told him to go back upstairs, because he wasn’t needed down there anymore.
He soon became worried and said he thought that he might have done something wrong. Being a ZeroHedger I told him it was probably because we haven’t securitized yet.
On March 1st I came into the office to find out that they had started layoffs. These people were fairly new and were in departments that the executive staff has now deemed unnecessary.
I had a meeting with my boss who told me my job is safe but due to us not being able to securitize we were freezing hiring going forward but we were hopefully done with layoffs.
We are a very solid company with a low default rate and higher standards than somewhere like Skopos. I worked in subprime auto during the Financial Crisis and it feels much worse right now than it did there in 2007 or 2008.
A lot of customer’s who are subprime work in the energy industry and although they are living off of severance and savings right now you can see the wave that will be landing in a few months.
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Yes, yes we certainly can…
What is ABS?
Asset Backed Securities
Asset Backed Security
Anchor Baby Syndrome
Antilock Brake System
Authoritarian Bull Shit
American Business Sucks
all of these interlock…
Asset backed security, a bond sold to the public, pension funds etc. that has a pool of loans such as car loans or credit card balances etc. as its assets and the cash flows from the underlying loans pays the interest and principal on the bonds, until it doesn’t. Like the mortgage backed securities (MBS) you will remember from 2008.
Automobile Buyers Secrets
Apple’s Balance Sheet
Androgenous Boys Surrender
Absolutely Broken System
Actuarial Blight Scheme
Autocratic Bankers Suck
I have no background in finance or econ except for self-study. So I read and read about the housing market crash, and it positively blew my mind. So…now they’re securitizing sub-prime auto loans??? What could possibly go wrong?
Oh well. Now I know why it seems like every freakin’ body (except me) is driving a brand new car.
Why is there a 2015 Jeep Cherokee Laredo with 25000 miles, spotless, clean CarFax, 4×4, and loaded sitting at the local gas station for sale for 18,500? Blue Book on it is about 26K easy.
It makes no sense to me, so I’m not interested. If something looks too good to be true…
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folks with bad credit buying used cars get double hosed. not only is their interest rate higher, but a car sold for $6,000 cash will sell for $8,000 to the subprime borrower. no bargaining power – will pay any price assuming they wouldn’t lend more than value, and just can’t believe someone would give them a loan. higher price, higher interest, shitty car.
dealers in Detroit used to ask their black customers how much they could afford WEEKLY, and then price the car over sticker based on that. cuz math.
These operators used to be “buy here-pay here” before they bundled the loans on Wall St. I had such a dealer as a client and he told me it was common to sell the same vehicle 3 or 4 times, and back then that was the game….charge a 20% dp, get payments at 25% for a few weeks, then repo the vehicle, sell the bad paper to a collector, recon the vehicle, rinse & repeat.
When I was quite poor the first half of my life, I bought two 55 and one 57 Bel Air Chevys all with 6cyl Blue Streak engines and 3 speed transmissions for about $300 each and drove each about 5 years and then sold them for about $300 each. Then I bought me a used 1964 Chevy PU for $500 and a 1970 Toyota Corolla for my daughter in HS for about $300 and she drove it for about 5 years before selling it. Then I bought a 1999 Tacoma 5 speed that gets 29 miles per gallon which I still drive. You can’t do that anymore because most cars now are expensive complicated computerized crap hard to work on and usually become garbage in about 15 years. The whole system is now designed to screw American consumers. Somebody ought to start making 1960 Triumphs again.
Subprime Auto Delinquencies Soar Past Crisis Levels, Now Highest In 20 Years
Submitted by Tyler Durden on 03/18/2016 17:06 -0400
On Thursday night, we brought you a first-hand account of what’s really going on in subprime auto.
According to a reader who works in the industry, the securitization machine may be grinding to a halt for deals that are stuffed with loans to borrowers with low (or no) FICOs. Here’s an excerpt:
“I work for a smaller but fast growing auto finance company [and] we grew from opening the doors in 2013 to having a $250 million portfolio as of today. Things for the last 3 years have been booming and it seemed like there would be no end to our growth. We were rated by S&P in January and were ready to start securitizing our portfolio.
On March 1st I came into the office to find out that they had started layoffs. These people were fairly new and were in departments that the executive staff has now deemed unnecessary.
I had a meeting with my boss who told me my job is safe but due to us not being able to securitize we were freezing hiring going forward but we were hopefully done with layoffs.”
So why would a company not be able to securitize the loans on its book? Well presumably because someone, somewhere gets the feeling that demand for auto-backed ABS is going to dry up in the months ahead.
There’s evidence from both Experian and the NY Fed (see here) to suggest that the market is getting riskier. More auto loan originations are going to borrowers with shoddy credit and loan terms are looking more and more stretched by the quarter. Investors may fear that the credit cycle is about to turn and when it does, you don’t want to be anywhere near the double B tranches in subprime auto – even if you can get 9%.
With all of the above in mind, we bring you the following chart from Deutsche Bank which shows that 60+ day delinquencies for subprime auto ABS have now risen above crisis levels to 5.16% – levels we haven’t seen since 1996.
But don’t worry, even though Deutsche Bank does admit that it “raises eyebrows” when delinquencies for subprime are at their highest levels in two decades even as unemployment has plunged (so maybe those “jobs” people are getting aren’t that great after all), you shouldn’t worry, because it’s all about overcollateralization these days:
While it does raise eyebrows to see delinquencies exceed levels seen during the financial crisis at a time when unemployment is below 5%, we think subprime auto ABS structures remain well protected due to robust levels of hard credit enhancement, and structural features that increase credit enhancement as the transactions pay down.
For reference, 2015 saw about $25 billion in subprime auto ABS supply.
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Back before the peak in ’05, home decor businesses opened up in the place of big box stores left empty when they moved to new digs. Then they began to close up shop and sold off the pretty furniture and fancy decorative baubles that sold for $40 – $100. Longtime furniture stores disappeared and the Chinese furniture stores crept in. One had the bright idea to open a chintzy furniture store at the mall. after a few years, they have several stores in the same mall.
The same has happened with a particular used car dealer. He used to sell cars off an old AMC lot off the old Sierra highway that got replaced by the 14 freeway. $1500 – $4000 down and a 22% loan on the balance if he can find a lender from his long list of Shylocks, I don’t expect he has gotten nicer now that he has a lot in the auto mall, the old Chevy site before they downsized. This guy out-trumps Trump for hustle, I see a lot of his license plate frames on the road here.
Just watched _The Big Short_ last week and all this sounds so familiar.
So … I just need to find a banker who will write CDS on sub-prime auto ABS and I’ll get incredibly rich? Who do I need to see … ?