Sunday, March 8, 2015 7:49 AM EDT We’ve written extensively of late about the parallels between today’s subprime auto lending market and the conditions that prevailed in the subprime housing market on the eve of the collapse. Essentially the dynamic is the same. Lending to underqualified borrowers proliferates, leading to a large pool of securitizable loans. Issuance of ABS based on those loans rises as IBs see an opportunity to take advantage of investors’ hunt for yield. Rising demand for subprime ABS fuels demand for more subprime loans to securitize, prompting lenders to relax their standards in an effort to make eligible borrowers out of ineligible borrowers. New loans begin to carry longer terms (in order to lure buyers who need low monthly payments), lower FICO scores, and are often made for more than the total cost of the asset. Delinquencies rise. Cue collapse. As we’ve shown, delinquencies are indeed rising as is the total amount of outstanding auto debt, the latter having touched a massive $1 trillion, putting auto loans in position to join student debt in full-on bubble mode. Our fears were confirmed last week when, in the surest sign yet that the subprime auto bubble has reached its peak, CNBC unveiled what we have dubbed the “car-stock arbitrage,” wherein viewers are advised to take out an 84 month car loan and dump the money into the stock market at all time highs. Meanwhile, GMAC disclosed an SEC probe into subprime ABS origination and the higher ups at Wells Fargo (WFC) (perhaps after someone in the research department suggested that a 60% Y/Y increase in banks’ tendencyto originate loans for the purpose of selling them might be a red flag) suddenly got cold feet last month after financing $30 billion in car loans in 2014 and decided to put a cap on subprime auto lending. Given all of that, we were shocked — shocked — when February auto sales turned out to be a BNSF-style trainwreck (even AutoNation CEO Mike Jackson’s “trucks, trucks, trucks” couldn’t save the day as Ford F-Series (F) sales fell 1.2%). Of course to let the media tell it, February’s disastrous numbers were due to weather (snow in the winter) but we had our doubts and so were not surprised when a new note from Goldman confirmed, by way of an avalanche of data and charts, precisely what we’ve been saying all along which is that the risks inherent in subprime lending are materializing and that at the margin, growth has all been created by lowering credit standards and extending terms to a whole load of 'new' auto buyers. Copyright ©2009-2015 ZeroHedge.com/ABC Media, LTD; All Rights Reserved. Zero Hedge is intended for Mature Audiences. Familiarize yourself with our legal and use policies every time you engage ... Copyright ©2009-2015 ZeroHedge.com/ABC Media, LTD; All Rights Reserved. Zero Hedge is intended for Mature Audiences. Familiarize yourself with our legal and use policies every time you engage the site: they're updated constantly without notice. Visit www.zerohedge.com. How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.
In the auto loan market both delinquencies and the total amount of outstanding auto debt continue to rise. The delinquency rate for subprime loans is now at a record high of 14.7 percent, up from 11.8 percent in early 2008. Last week Goldman added its voice to the concerns saying that the risking inherent in the subprime market are materializing and that at the margin, growth has been created by lowering credit standard and extending terms to a whole load of “new” auto buyers. Zero Hedge 5-Mar-15Talk Markets 8-Mar-15