Investors in securities backed by subprime lending assets should kneel before US taxpayers to thank them for bailing out the back door.
In Wolf Richter for WOLF STREET.
Subprime auto loans are risky but very profitable because they carry high interest rates, even in times of absurdly low interest rates. Much of the risk is transferred to investors by securitizing these loans into subprime asset-backed securities (ABS), which are cut into tranches, from the highest credit rating that takes the last loss, but gets the lowest yields, until the lowest ranked tranches that take the first losses but earn the highest yields. So there is something for everyone.
Vehicle repossession is generally easy and quick, there are not many hurdles to overcome, and there is a very liquid auction market for efficient vehicle disposal. Professional repurchase firms pick up the vehicle, clean it and bring it to the auction. For subprime lenders, this is all very shrewd.
Therefore, delinquencies on subprime auto loans of 60 days or more that had been securitized in ABS and rated by Fitch had been increasing for years as lenders took increasing risks amid a voracious appetite among institutional investors for subprime auto loans. In 2016, the default rate of more than 60 days surpassed the highs during 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 default rate hit the worst January and February ever. So this was going in the wrong direction. And then came the stimuli.
In May 2021, ABS’s 60-day default rate of subprime auto loans dropped to 2.58% of total auto loans (“prime” and “subprime” combined), according to Fitch Ratings . This was the lowest rate since 2012, when delinquencies fell because, by then, bad loans from 2009 to 2011 had been written off and released from the system, and lenders became wary of new loans.
Fitch’s ABS delinquency rate for prime auto loans, which remained below 1% even during the financial crisis, fell in May to an all-time low of 0.14%.
Clearly, the stimulus was used in part to catch up on auto loans. And that didn’t particularly help the economy, or jobs, or whatever, but it saved lenders and investors who might have seen big losses on their subprime and ABS loans.
Therefore, this pension fund in Texas, California or Norway, and its beneficiaries, should be on their knees in the face of the stimulus and the American taxpayers who paid for this bailout through the back door.
But at the same time, car buyers with subprime credit scores – below 620 – avoided buying a vehicle, perhaps discouraged by the Absurd price increases for new and used vehicles, or maybe because they still hadn’t got a job.
According to the New York Fed’s Domestic Debt and Credit Report, the share of subprime loans and leases originating in the first quarter of 2020 fell to 15.3% in loan values, the lowest level in data dating back to 2004 , another confirmation of the recovery K in the form of:
At the end of the first quarter, there was $1.38 trillion in auto loans and leases, up 2.7% from a year earlier, the lowest year-on-year growth since 2011, despite massive price increases for new and used vehicles, which should have increased the loan amounts. This may be further confirmation that more people have paid cash, perhaps investing their stock market earnings in the economy; and that more subprime-rated potential customers are on buyer strike, unwilling or unable to buy at these prices.
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