By on April 25, 2013

Ratings agencies and other players in the finance world are beginning to sound the alarm on auto backed securities.  Among the most troubling factors for some investors is the growth of smaller issuers who rely on pools of deep subprime loans. And ratings agencies who are being more conservative with their ratings are missing out on the action.

A report by Reuters highlights a recent ABS offering from Security National Automotive Acceptance Co (SNAAC), a smaller firm that focusing on loans to military personnel. This offering received a solid rating despite seemingly poor fundamentals.

According to the S&P, around 24% have ultra-low FICOs of between 500 and 550. And roughly 24% of the loans have loan-to-value ratios of 115% to 120% – meaning that the borrowers owe more than their vehicles are worth. Even so, S&P rated the deal AA, while rival DBRS gave it a full AAA rating.

Some players in the fixed income industry say that this kind of practice is far from an isolated incident. Ostensibly, a boom in subprime ABS has led to new players who are hungry for loans, regardless of quality

“The gap between the biggest players and the smaller issuers is just massive,” said John Kerschner, the head of securitized-product investing at Janus Capital Group. The smaller second-tier players go to deep, deep subprime – in the range of a 500 FICO score. That may not be the person you want to lend money to.”

Even more troubling is an assertion that ratings agencies Moody’s and Fitch, two well known companies in the bond ratings world have been deemed too cautious by a number of issuers, and thus have not been hired to rate their deals. Needless to say, this effectively stifles any outlooks that are less than rosy. John Bella, a top ABS official at Fitch, told Reuters

“We are generally more reluctant to reach AAA on subprime auto ABS for numerous reasons, among them the sector’s innately more volatile performance history, operational concerns and often heavy reliance on securitization as sole source of funding. Stiffer competition and deteriorating underwriting in recent months are amplifying our concerns.”

While the Reuters piece questions how investors may fare in the event of a burst ABS bubble, TTAC has long maintained that the real risk lies with new cars, the auto makers, and another possible systemic crisis. Auto manufacturers could interpret rising sales in an overly optimistic fashion, and start adding capacity as a result. But if the growth in sales is being driven by subprime lending, then it is inherently vulnerable to a slowing economy or an increase in unemployment. Either of those factors could be the trigger that causes subprime buyers to start defaulting. Used cars are less affected by this problem. They can simply be pumped through the system again and again, and the nature of subprime lending itself means that (if executed correctly) the high interest paid by everyone else can offset the losses brought on be delinquent debtors. If new car sales were to experience a significant contraction due to external forces like these, then auto makers could be left with a 2008-style scenario of idle plants, excess capacity and a glut of inventory, all of which are enormously costly to the OEMs.

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47 Comments on “Fitch, Moody’s, Stand Alone As Subprime ABS Skeptics...”


  • avatar
    PrincipalDan

    OK TTACer’s, How is an Adult Bookstore different than an Auto Backed Security?

    AND GO!

  • avatar
    Geekcarlover

    Possibly the only good thing to come out of this is for people like me, who only buy used cars. I can see a sudden glut of 2-4 year old cars hitting the auction block when it all blows up.

  • avatar
    sunridge place

    It would be interesting to know the ratio of new vs used car loans in these packages.

  • avatar
    Omnifan

    Will Kia sponsor their own ABS to keep selling their sub-prime cars?

  • avatar
    replica

    At least cars have an LTV to even consider. Credit cards and other unsecured debt is a complete loss.

  • avatar
    Conslaw

    Wouldn’t these be the same ratings agencies that helped cause the mortgage mess by giving AAA ratings to aggregations of C class mortgages?

    • 0 avatar
      ClutchCarGo

      Yes, and subsequently downgraded Fed debt in order to show that they had learned their lessons and wouldn’t be anyone’s patsy anymore.

      • 0 avatar
        highdesertcat

        The subprime housing loans back then were actually encouraged by Clinton and Congress who envisioned more home ownership, even if people couldn’t afford to make the payments.

        I’m just not comfortable with anything that is “subprime”; homes, cars, whatever. It may sell product at first, and it may look good for a little while, but the slightest downturn can upset the applecart.

        It’s like being a little bit pregnant. At some point the bubble is going to burst.

        There are some staunch defenders of subprime, and they may even believe what they peddle and try to sell the rest of us on, but I view it as something to artificially inflate or promote a commodity.

        The whole lending business reeks! Standards are lowered so more people can qualify but then when the tent collapses, the rest of us have to help pick up the pieces and put it all back together again.

        Isn’t that what happened with the subprime housing market? What makes anyone think the same implosion cannot happen with the car-loan market?

        Bundle all these subprime car loans together and sell them as what? Nah, I’m with Fitch and Moody’s on this. In my case skeptic is an understatement.

        • 0 avatar
          sunridge place

          ‘Isn’t that what happened with the subprime housing market? What makes anyone think the same implosion cannot happen with the car-loan market’

          Read everything Corntrollio has posted regarding proper underwriting.

          Try and think and process his facts.

          Then understand that a car loan is not the same as a mortgage or, even worse, a home equtiy loan when the equity is a fantasy.

          I write the following against my best instincts….

          Try and understand it wasn’t Bill Clinton wanting home ownership…it was Wall Street getting rich on the re-packaging of these loans..then pouring cash downstream to get every last person to borrow their borrowed money to feed the beast above them and make their cut that was the major driver to the home loan crisis. There were others to blame…but if the money wasn’t available, it wouldn’t have happened.

          • 0 avatar
            28-Cars-Later

            I won’t disagree with most of those statements, especially “the money wasn’t available, it wouldn’t have happened”. However the Clinton administration was very much in favor of increased mortgage lending to reduce “redlining” under the Community Reinvestment Act of 1977 and in fact turned it into a significant political issue at the time. Whether this was in concert with Wall Street’s wishes or greed is argumentative without more facts.

            In July 1993, President Bill Clinton asked regulators to reform the CRA in order to make examinations more consistent, clarify performance standards, and reduce cost and compliance burden.[51] Robert Rubin, the Assistant to the President for Economic Policy, under President Clinton, explained that this was in line with President Clinton’s strategy to “deal with the problems of the inner city and distressed rural communities”. Discussing the reasons for the Clinton administration’s proposal to strengthen the CRA and further reduce red-lining, Lloyd Bentsen, Secretary of the Treasury at that time, affirmed his belief that availability of credit should not depend on where a person lives, “The only thing that ought to matter on a loan application is whether or not you can pay it back, not where you live.” Bentsen said that the proposed changes would “make it easier for lenders to show how they’re complying with the Community Reinvestment Act”, and “cut back a lot of the paperwork and the cost on small business loans”.[36]

            In a 1998 paper, Alex Schwartz of the Fannie Mae Foundation found that CRA agreements were “consistently successful in meeting their goals for mortgages, investments in low-income housing tax credits, grant giving to community-based organizations, and in opening (and keeping open) inner-city bank branches.”[45] In a 2000 report for the US Treasury, several economists concluded that the CRA had the intended impact of improving access to credit for minority and low-to-moderate-income consumers.[87]

            http://en.wikipedia DOT org/wiki/Community_Reinvestment_Act

          • 0 avatar
            highdesertcat

            28-Cars-Later, yeah, I didn’t want to rehash all that history again, and I was too tired to type it all out. Thanks for doing that.

            I am always surprised at how two different people can look at the same situation and come away with different interpretations.

            However, that is the nature of the beast and I do not comment to try to change someone’s beliefs, nor do I care if they see things my way or not.

            That’s what makes America great. We can each believe what we want and live our lives accordingly.

            G’night yawl! I’ve got a busy day tomorrow, even worse than this afternoon.

          • 0 avatar
            sunridge place

            28

            I did write that against my best instincts telling me not to. Here’s what I honestly don’t know. Was the biggest driver to the meltdown:

            A. Giving loans to lower income people in cheaper homes with lower down payments and credit standards

            or

            B. The exotic crap that allowed a person to take a 300,000 mortage in Vegas/California/Arizona/Florida with an income of $100,000 then turn around 8 months later and take a home equity loan for $80,000 because that $300,000 house is now worth $400,000 on paper because the ‘market’ says it is and Wall Street loves paper like that to repackage and make a profit.

            or

            C. The exotic crap ARM loans that blew up 5 years into the loan but were sold as though it wouldn’t matter because the value of your home would be so high after 5 years that you’ll just cash in and sell your house and make a big profit.

            It was probably a combination of all 3…but you have to acknowledge B and C…especially based on what BigTruck says. I have no clue whether Clinton caused B and C….I doubt that was the intent.

            But, please acknowledge B and C as a part of the problem and Wall Street feeding the beast as the source of those funds.

            Did Clinton really create policy that allowed households making $50k a year to buy all those $300,000 houses in California/Vegas/Arizona/Florida or were there other factors at play. Home equity loans were a big cause…people (and lenders) using their house as an ATM…that was caused by trying to get poorer people into home ownership? Ok I guess. I would imagine it was the poorer people who got those loans and lost their jobs because of the crap on the upper end of the market and defaulted that weren’t the cause of the problem…but who the hell knows.

            I really don’t like to get political on crap like this. Both parties have good/bad ideas and good/bad policy.

          • 0 avatar
            sunridge place

            One more point. I bought a condo in Austin, Tx in 2003. I remember the process quite well. I had 20% down payment in my savings and very easily qualified for my loan.

            My loan officer spent 10 minutes trying to convince me to put 5% or 10% down to do an 80/10/10 loan or 80/15/5 loan. I said thanks, but no thanks. It was a tool to make him more money and get me into a 2nd lien before I was into my first lien.

            If you don’t know what those are: An 80/10/10 loan avoids Mortgage insurance required if you can’t put 20% down but immediately borrows the 10% you just put down as a home equity loan.

            $200,,000 condo
            $40,000 down
            $160,000 loan

            becomes

            $200,000 condo
            $20,000 down
            $180,000 mortgage
            $20,000 home equity loan (before I even moved in) against the ‘equity’ I just paid.

            He told me how I could use the extra $20k instead of putting it down in the deal.

            Buy a car!
            Take a vacation!
            Upgrade the Condo with granite!

            Clinton caused that?

            I’m sure other people were solicited into loans that way. Clinton’s act caused that? Okay. It wasn’t Wall Street providing the short term cash and pushing downsteam to get that type of paper to resell.

            The mortgage brokers didn’t care…they got their cut on the deal…they had no skin in the game…they were getting (somewhat) rich too. Their companies were passing on that paper fast to Wall Street and looking for the next exotic deal to sell. That was Clinton’s fault? Okay.

          • 0 avatar
            thornmark

            The current gov of NY figures big in that debacle as does Barney Frank and the mayor of Chicago.

            “Andrew Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded “kickbacks” to brokers that have fueled the sale of overpriced and unsupportable loans. Three to four million families are now facing foreclosure, and Cuomo is one of the reasons why.”
            http://www.villagevoice.com/2008-08-05/news/how-andrew-cuomo-gave-birth-to-the-crisis-at-fannie-mae-and-freddie-mac/

          • 0 avatar
            corntrollio

            thornmark, Fannie and Freddie’s role in the housing bubble is greatly exaggerated. In fact, in the prime bubble years, FNMA and FHLMC loans were decreasing while private loans were increasing.

            In fact, Fannie and Freddie only started buying some of the alternative loan product-based securities when they started losing huge amounts of market share to the private loan industry, and even then, they bought only a small percentage.

            Generally speaking, Fannie and Freddie’s portfolios have far lower delinquency rates than the general market — even among Fannie and Freddie’s alternative loan products and subprime products.

            There is a lot of data on this, but Barry Ritholtz has done a lot of analysis — here is but a sample:
            www dot ritholtz dot com/blog/2011/11/fannie-freddie-and-the-foreclosure-crisis/

        • 0 avatar
          corntrollio

          So that CRA, you’re talking about 28-Cars-Later, they must have had that in Ireland and Spain and in many other countries too, right? Those companies had a simultaneous housing bubble.

          Furthermore, the CRA must have applied to commercial lending, since so much commercial lending was underwater, right?

          Also, independent mortgage lenders who issued huge numbers of alternative loan products and then sold them as part of securities portfolios must have also been subject to the CRA, right?

          Except that none of that is the case. We had a credit bubble that affected more than just the US, the CRA has never applied to commercial lending, independent mortgage lenders were not subject to the CRA, and banks that were subject to the CRA were much more likely to maintain underwriting standards because they were more likely to hold on to the loan.

          The CRA fluff you’re talking about is a nonsensical ideological argument more than an economic one.

  • avatar
    DC Bruce

    Well, the takeaway from this is go out and buy a car right now . . . while you can get the cheap credit. . . if you don’t want to pay cash (or even if you do, if you think you can arbitrage the loan rate).

    As was pointed out before, the difference between car loans and home loans is that no one believes that cars will appreciate in value.

  • avatar
    corntrollio

    “Stiffer competition and deteriorating underwriting in recent months are amplifying our concerns.”

    Is there detail on the underwriting standards available? Just because they are going deeper into lower credit scores doesn’t mean underwriting standards are low — it just means they should expect a higher default rate, but they will get a higher rate of interest to compensate.

    The fact that there are second and third tier lenders going heavier into subprime could be worrying if they have lower underwriting standards than first tier lenders, but it needn’t be worrying in itself.

    There are other articles that say the opposite by the way:

    http://www.ft.com/intl/cms/s/0/9abca26c-9df4-11e2-bea1-00144feabdc0.html

    “However, fund managers say the securities’ popularity has yet to reach levels that point to the looser underwriting standards common in the build-up to the financial crisis.”

    A lot of people are looking at subprime debt as an investment because yields are so low on everything else. That’s why Mr. Lang’s business is getting more and more difficult and more and more competitive. This could lead to a bubble, but it could not — hard to say without having more information than these talking heads and anonymous quotes.

    • 0 avatar
      ClutchCarGo

      Just as with the mortgage backed CDOs, the problem won’t be with the ABS CDOs themselves crapping out, the problem will be with the exponentially bigger market of synthetic CDOs created by Wall St, and the credit default swaps purchased against all of those CDOs. If and when the ABS CDOs underlying all of the secret, unreported claptrap built on top of them start to fail, panic will set in because no one will know who is holding the bad end of the bet. This could be avoided if all of these deals/bets had to be in the open, but Wall St successfully kept that requirement out of Dodd-Frank.

  • avatar

    Our jobs as Americans is to take on as much of America’s debt as possible-without capsizing. All of you with those government jobs that the corporate scum couldn’t figure out how to outsource to China, India or South Korea – must buy as many Chinese-made Samsung Galaxy 4′s, iPhones, brooms, dust pans, 4K TVs and Buicks as possible.

    Be sure to take out the biggest loans you can. Buy an E-class… Hell, buy an S-CLASS!!! You can afford it!
    Let your c- average kids go to $30,000 a year schools! Just take out MOAR loans!

    You owe it to the PRC to do so!

  • avatar

    The American housing market is in a slump because banks don’t want to give home loans to people it can’t be certain will actually have a job for 30 years to pay it back.

    However, just to keep the American economy moving, they don’t mind lending you $25,000 for 6 years, and ripping you off with an interest rate for that new Sonata for your Family- which is gonna end up costing you $45,000.
    .
    I mean, $25,000 is safer than lending yo broke, credit-unworthy ass $250,000 right?

    • 0 avatar
      mpresley

      A car loan is always safer, because people will pay for a car before a house. At least when it comes to the sub-prime crowd. I was talking to a guy who did just that, and he explained the trade off: “I can sleep in my car, but I can’t drive my house.”

      • 0 avatar
        redav

        Also, the car can be towed at any time, but it takes months or longer to foreclose on the house.

      • 0 avatar

        The sub prime credit market is filled with people who make POOR DECISIONS regarding credit and investments.

        For the vast majority of Americans, a car and a house are the two major investments they’ll make over their lifetime.

        Unfortunately, in an America where kids come to Elementary school with $100 sneakers and iPhones and people crying poormouth while spending $200 a month for premium cable parking 2 luxury cars in front of their apartment – there’s plenty of poor decisions to count.

        The HORROR STORIES of clients who’ve come to me to help them – I could make a comedy movie from and retire a rich old x-film maker.

        How about Client #1 who was a babysitter and had a husband who was a parks department worker who took out a $600,000 mortgage on a crappy single family home cut to make it 3 family. The first mortgage was $550,000 and the second was $50,000. Imagine her surprise when no one wanted to live there. Imagine her other surprise when he left her for another guy (I couldn’t make this stuff up).

        How about Client #2 who saw my car and wanted to buy one used for $60,000 because he just got a $45,000 a year job – figuring $599 a month was affordable.

        How about Client #3 who decided to turn the house his deceased mother left him into a whorehouse – TO HELP PAY THE MORTGAGE.

        I LOVE MY JOB!!!

  • avatar
    Commando

    I used the term “bubble bursting” yesterday and it took all of 30 seconds to get called out on it. Now DK uses it too. Anybody going to call him out.
    A bubble getting burst is going to happen again and we’re going to pay again.
    Hell, yeah. 72 mo. @ 19.9% to a $10.00/hr. medical office assistant is really going to help the carmakers, buyers, and bankers over the long term.
    I’m looking at the new cars now to figure which one I want to buy as a two yr. old repo two years from now. I hope the new Impala will be a smash hit with the sub-primers.

    • 0 avatar

      Just wait till the artificially low interest rates (>1%) snaps back.

      America won’t even be able to afford to pay interest on the debt.

      Only question in my mind is which countries are we going to war with?

      • 0 avatar
        28-Cars-Later

        All of them, it will be fun!

      • 0 avatar
        hreardon

        +1 on the interest rates, bigtruck.

        I’ve argued for a while that once interest rates start creeping up the mortgage and auto businesses will crater. The difference between a 3.5% and 5-7% mortgage is massive and will severely impact the affordability of housing in this country.

    • 0 avatar
      sunridge place

      ‘A bubble getting burst is going to happen again and we’re going to pay again’

      When did the automotive subprime market burst in the past? If you say its going to happen again, tell us when it happened the first time.

      Show me any significant automotive subprime lender that crashed during 08/09. Hell, most of them continued to be profitable. AmeriCredit posted an annual profit in FY 2009.

      Derek used the word ‘bubble burst’ while providing analysis…you probably used it in a ‘the sky is falling’ type post.

      Your $10/hr medical assistant isn’t buying a new car and her car payment will be about $280 per month for a $12,000 used car. It will also be the second thing she pays each month after rent. Having a hard time seeing how that sort of setup is going to bring down the economy.

      • 0 avatar

        “When did the automotive subprime market burst in the past? If you say its going to happen again, tell us when it happened the first time.”

        Auto loans were a large portion of the loans which led to the subprime housing crash because many people were financing expensive cars with HELOC loans and cash they were pulling out of refinances.

        • 0 avatar
          sunridge place

          Sounds like the cars were paid for in cash and it was the dumbasses in the home lending business that caused that problem.

          • 0 avatar

            I agree with you.

            But come on, the real problem is that mortgages were allowed BY CONGRESS to be originated by unlicensed “mortgage brokers” and Wall Street wanted to make as much money as they could off individual transactions.

            I want you to google: NO MONEY DOWN FALLS FLAT by Steven Pearlstein.

          • 0 avatar
            sunridge place

            Cool…automotive is different and that’s always been my point. I’m not here to debate the home lending trainwreck and how/why it happend.

            The only potential issue I see is the downward pressure causing some bad decisions at the bottom of the market which is primarily used and won’t impact the OEMs.

            In other words, there is good money to be made in the true subprime market and companies that normally focus on prime see that and are going there with a bigger % of their portfolio.

            That makes the lower level lenders lose some business and have to go lower into the deep subprime. Of course, if its all done properly (as Corntrollio has been stating over and over to anyone who will listen and think) it won’t be a big concern.

          • 0 avatar
            brettc

            Just read the no money down falls flat thing. My wife and I bought a modest house in 2005 at the peak of the mortgage craziness. We dealt with a local bank (where I was working at the time) and all they offered were conventional fixed rate loans that they held on to and they slowly got into secondary market loans by the time I left in late 2006. As it is, that bank is still around after 186 years in business. We kept reading about the ARM loans and we briefly considered it until we thought “what if something happens and our $200000 house is no longer worth $200000?”. So we went with a 30 year fixed. Too bad other people (including people in the banking industry) didn’t possess the intelligence to realize that everything could go TU.

  • avatar
    makuribu

    Up here in Canada (eh), car companies like Honda are advertising their payments in biweekly terms. If you can’t afford $300 a month, how does $150 every two weeks sound? Sign me up!

    • 0 avatar
      CJinSD

      A local Mercedes-Benz dealer is doing that here on the C-class.

    • 0 avatar
      mik101

      I’ve noticed that too. People need to remember elementary school math and realize that’d be 13mo worth of payments. It’s a sad tactic. I wonder how many fall for it? I assume you don’t get a better interest rate by doing so?

      • 0 avatar
        Chicago Dude

        The lender is actually going to want a slightly higher interest rate to compensate for the biweekly loan

        A loan based on a two-week payment cycle will end up amortizing out with less interest paid over the life of the loan.

        FOR EXAMPLE – $25,000 loan @ 6% interest (APR) for 5 years

        Pay monthly – $483.32 per month. You pay $3999.20 in interest over the life of the loan
        Pay every two weeks – $222.81 per payment. You pay $3965.30 in interest over the life of the loan.

        It’s a small difference over the course of 5 years in terms of interest paid. The biweekly payer ends up paying ~$6 less per year.

        Quite frankly, if you get paid every two weeks you are better off having a loan that you pay every two weeks – ASSUMING that the interest rate (APR) is the same.

        EDIT – since I’m still within my edit window of opportunity, I’ll expound. You shouldn’t just blindly knock different loan styles than you are used to. They aren’t necessarily bad.

        There are a lot of people out there for whom paying every two weeks is more convenient than paying once a month. Now that we have sufficient technology and can make payments electronically, it costs approximate nothing to “process” more frequent payments. So that’s why you are seeing them now and not in the past.

        There is also a risk reduction in a two-week payment cycle. If the loan is going to default, the lender will find out about it two weeks earlier OR will get one extra “halfish” payment before the default. Because of that lower risk, they can extend credit to someone they may not have before OR they can offer a discount to a solid credit-worthy buyer.

  • avatar

    MARGIN CALL

    TOO BIG TO FAIL.

    Watch em when you can on-Demand.

  • avatar
    BrianL

    Going from AAA to AA isn’t exactly going to be terrible. But you have to understand something. Auto subprime lending is only going to be dangerous if other parts of the economy falter and people can’t pay for their cars. The latest crisis showed how people would let their houses go while making car payments. There was plenty of subprime lending for cars then too.

    IMHO, the only reason this matters is the economy tanks even further and people aren’t able to afford cars. This would be a secondary effect and not a cause.

  • avatar
    bluegoose03

    Sub Prime auto loans are completely different from Sub Prime housing loans. Why? It is a million times easier to repo a car than a house. Housing foreclosures take forever. Automotive recovery is a very quick process. The risk is simply not the same.


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