By on April 30, 2013

The largest asset-backed securities deal since prior to the mortgage crisis, worth $1.6 billion, was announced last week. Meanwhile, one ratings agency is touting their low delinquencies as positive signs in the ABS market.

The subprime mega deal was reportedly helmed by Santander, a major Spanish bank that is also Chrysler’s lending partner. Recent developments have had many observers questioning whether Chrysler’s phenomenal sales boom in 2012 was in fact spurred on by subprime loans. Credit rating agency Experian said that nearly 30 percent of new car loans issued by Chrysler went to subprime buyers. Meanwhile, a Top 10 car list for subprime buyers compiled by one online lender showed that Chrysler products made up 40 percent of the list.

Meanwhile, ratings agency Fitch was rosy in its outlook of ABS products, noting that

Both losses and delinquencies declined across prime and subprime auto ABS even as used vehicle values softened and are expected to moderate further this year. Subprime 60+ day delinquencies fell to 3.02% in March from 3.65% in the prior month, dropping 17% both on a MOM (month over month) and YOY (year over year) basis. Subprime ANL (annualized net losses)  were 3% down in March to 5.36% from 5.53% in February. On a YOY basis, subprime ANL  were still 14% higher in last month versus March 2012.

Our usual grain of salt comes in the form of cautious practices on the part of Fitch. The agency has been more conservative than most in rating subprime ABS deals, to the point where Fitch has been excluded from rating deals that some observers have considered rather risky.

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19 Comments on “America’s Next Top Bubble: Delinquencies Down, Deals Up In ABS Land...”


  • avatar
    KixStart

    What’s the yield on these things after you factor out the delinquencies? If the economy is growing and the yield is high enough, these things might actually work out for investors. As somebody noted in the earlier article, interest rates are at rock-bottom. If you want more income, you must take on some risk.

  • avatar
    celebrity208

    I’m claiming NON-expert/NON-B&B status for this query so here goes…
    Why is Chrysler blamed/derided for “30 percent of [their] new car loans” being sub-prime? In different posts on TTAC we’ve been reminded that manufacturers don’t actually sell cars to individuals. They sell to DEALERS. So it’s Chrysler’s dealer network that is issuing so many sub-prime loans. I assume a lot of coordination between Chrysler, their dealers, and the underwriters but if the metal is moving then what’s the problem for Chrysler? Residual values?

    • 0 avatar
      sunridge place

      In general you are correct, however the risk could be:

      A. When the lender is the captive finance group of the OEM OR when the OEM has some form of responsibility for the gap in the event of a default and repo.

      B. As Derek states (but doesn’t necessarily predict) IF the subprime lenders over-do it and fail themselves, there won’t be anyone to pick up that part of the market and auto sales will tank leaving the OEM’s with similar overcapacity as 2008-09–although GM/Ford/Chrysler took care of most of their overcapacity risk in the 2000′s and have break even points with SAAR in the 12 million range now.

      Its important to note that very few auto subprime lenders failed in 08/09 and bad auto loans had very little/nothing to do with the crash. What did happen is that funding evaporated almost overnight leaving very little money out there to lend for the subprime auto market.

      • 0 avatar
        BrianL

        I don’t believe Chrysler has a subprime captive loan company currently. It used to use GMAC/Ally and might still currently.

        The real risk to the manufacture is of dealerships not buying cars. It would just be a trickle effect. But, I also disagree that this would be the start of anything. If these failed, it is because other parts of the economy failed.

  • avatar
    danio3834

    As long as everyone pays their bills everything with be a-OK!

    • 0 avatar
      bikegoesbaa

      Actually, the whole idea of subprime loans is that a significant percentage of the debtors will not pay their bills. That’s why their interest rates are higher – to offset the increased risk of default.

      “Everything will be OK” from the lender/system perspective as long as they accurately predict the risk of default and set the interest rate accordingly.

      It’s not necessary that everybody pay their bills, just that the lender make enough from the people who do to cover the losses from the folks who don’t.

    • 0 avatar
      icemilkcoffee

      Yes. Until used car values crash, and the subprime buyers realize that they could just buy a nicer used car for less money than they owe on their current used car. cf. 2008

      • 0 avatar
        28-Cars-Later

        I’m curious, in what circumstances do you see used car values coming back to Earth?

        • 0 avatar
          akitadog

          I would say, in 3 to 5 years, when this huge (and growing) pool of virtually-free-loan-borrowing public get bored of their current rides and start to dump them en masse.

        • 0 avatar
          jimbob457

          Thanks for asking, but I am not all that tuned in to your concern. On the internet there should be some people who keep track of the ratio between new vs used vehicle prices. This info may cost you a little.

          What I can tell you is that oil prices are poised to go down to $70 and then $50/bbl. Maybe a bit lower later even w/o a US recession. Little pissant cars bad. Gas guzzlers good.

  • avatar
    BrianL

    The reporting on this topic has been really weak. Honestly, we aren’t going to have a bad economy from subprime lending. I would look more at gov’t bonds being the next big bubble. Interest rates will have to increase at some point. The cheap and easy money that fueled the housing bubble is going to hurt gov’t badly because they have over extended themselves. Japan is actually worse off than the US in this regard.

    There might be problems with getting a subprime loan at some point for cars, but it isn’t going to be a cause of any issue, but it can be a result of other much bigger issues.

    • 0 avatar
      icemilkcoffee

      How long have you deficit hawks been predicting interest rate increase? I remember the talk of ‘bond holder strike’ way back in 2008. Well it’s been 5 years and you guys have been wrong, wrong and wrong.
      Interest rate will indeed increase at some point. It will increase when the economy as a whole is doing better. When the economy as a whole is doing better, the government revenues will go up in tandem.

  • avatar
    jimbob457

    Wall Street has been dealing in subprime auto loans for over 20 years. They have become a fairly well understood commodity.

    ABS for these loans works just fine from a financial point of view as long as the ultimate buyers of the various pieces of the ABS’s have a realistic expectation about the borrowers’ default rate during the next recession. So, I am in full agreement with the previous poster that in the next recession there is unlikely to be a financial fallout from this sector.

    The problem for you car guys in the next recession will be what to do with all the repos. Subprime auto loan ABS’s have made the motor vehicle market peaks and valleys more extreme. The good news is that some financial guys should have a good handle on potential peak default rates, certainly by borrower credit score and geographic area and probably by make and model of the vehicle. You want to find financial folks who deal in the high-risk tranches of these ABS’s since it’s their asses that are most on the line when borrower defaults go up.

    Once you do some of this, you may be able to figure out your best car dealing strategy for the next recession.

    • 0 avatar
      icemilkcoffee

      Yes. Just trust Wall St. They know what they are doing.

      • 0 avatar
        jimbob457

        I guess I could bore you with hours of stories about how Wall Street and their European counterparts screwed up in a serious way, about half from my personal experience and about half from the history books. The academic narrative goes back to the Dutch tulip bubble in the 1600′s. The real story has to be much older.

        The point is that their one common denominator was that all of them involved some kind of new financial innovation. Many people using these misunderstood them. Greed came to the fore. Disaster ensued.

        Subprime auto loans in the mid-90′s were but a minor example. Until say 1995, used car sellers did their financing out of pocket. They ‘toted the note’. ‘Su trabajo es su credito’.

        Then somebody decided that these receivables looked like credit card receivables. Hey, let’s package them and resell ‘em. So, initially, the Wall Street geniuses treated them exactly like credit card receivables. If they didn’t default in the first month or two, they became ‘safer’ or ‘better’ or ‘seasoned’.

        This was a total misapprehension of what was really happening on the ground. This wiped out the early entrants. Having lived through this, I do think Wall Street and the financial sector understand situation by now. What about you?

  • avatar
    blowfish

    last time there was a big nail driven into the box, Oel price went berserk.
    Many jobs disappear, and many can’t afford benzene in the tank.
    Have business tanking and fuel tanks empty!

  • avatar
    CapVandal

    Given the shortage/high prices of used cars — it makes perfect sense to me to put someone in a Chrysler 200 or Avenger.

    The incentive money can be used to reduce the net price or subsidize the interest rate or a little of both.

    The least popular new vehicles (at MSRP) get discounted until they become a substitute for used vehicles — supply and demand at work.

  • avatar
    CapVandal

    If anyone cares, there was a subprime lending problem in the late 1990′s …. http://www.bis.org/publ/bcbs_wp13.pdf (see page 63) which had a negligible effect on the US economy.

    In addition, there was a meltdown in the mobile home industry in the mid to late 1990′s.

    There is always some segment of the American economy that is tanking. In 2001, domestic oil was a disaster.

    When people buying new cars think they are going to flip them for a profit — then I would be worried.


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