Investors in subprime auto-lending asset-backed securities should kneel before U.S. taxpayers to thank them for the backdoor rescue.
By Wolf Richter for WOLF STREET.
Subprime car loans are risky but very profitable because they carry high interest rates even in these times of incredibly low interest rates. Much of the risk is transferred to investors by securitizing these loans into subprime auto-lending asset-backed securities (ABS), which are sliced up from the highest credit rating that takes the last loss but gets the lowest yields, to the lowest rated tranches that take the first losses, but get the highest yields. So there is something for everyone.
Repossessions of vehicles are generally quick and easy, and there aren’t many hurdles to jump through, and there is a very liquid auction market for effectively disposing of vehicles. Professional pension companies collect the vehicle, clean it and take it to the auction. For subprime lenders, this is all pretty slippery.
Thus, defaults on subprime auto loans 60 days and over that had been securitized in ABS and rated by Fitch had been increasing for years as lenders took more and more risk, amid a ravenous investor appetite. institutional for subprime auto loan ABS. In 2016, the default rate of more than 60 days surpassed the heights of the financial crisis. In August 2019, it corresponded to the peak of October 1996, the worst of the data. And in January and February 2020, the delinquency rate exploded with the worst January and February ever. So it was going in the wrong direction. And then came the stimuli.
In May 2021, the over 60-day default rate for subprime auto loan ABS fell to 2.58% of total auto loans (“prime” and “subprime” combined), according to Fitch Ratings. This was the lowest rate since 2012, when defaults declined because, by that time, delinquent loans from 2009 to 2011 had been written off and cleared from the system, and lenders had become wary of it. new loans.
Fitch’s ABS default index for prime auto loans, which had remained below 1% even during the financial crisis, fell in May to an all-time low of 0.14%.
Obviously, the stimulus had been used in part to make up for overdue auto loans. And it didn’t particularly help the economy, or jobs, or anything, but it bailed out lenders and investors who might otherwise have suffered big losses on their subprime and ABS loans.
Thus, this pension fund in Texas, California or Norway, and their beneficiaries, should kneel before the stimuli and before the American taxpayers who paid for this bailout through the back door.
But at the same time, auto buyers with risky credit scores – below 620 – have stayed away from buying a vehicle, perhaps deterred by the wild increases in prices for new vehicles and cars. opportunity, or perhaps because they still had not found a job.
According to the New York Fed’s Household Debt and Credit Report, the share of subprime risk loans and leases issued in the first quarter of 2020 fell to 15.3% in terms of loan size, the highest level Bottom of data going back to 2004, another confirmation of the K-shaped recovery:
At the end of the first quarter, outstanding auto loans and leases stood at $ 1.38 trillion, up 2.7% from a year earlier, the weakest growth in a year. year over year since 2011, despite massive increases in the prices of new and used vehicles, which should have pushed up loan amounts. This can be further confirmation that more people have paid in cash, perhaps by injecting their stock market earnings into the economy; and that more risk-rated potential customers are striking buyers, unwilling or unable to buy at these prices.
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