Sub-Prime Car Loans See a 'Sudden Jump in Late Payments'

We have commented a few times on the slightly diffuse character of the echo bubble, which has infected a great many nooks and crannies of the economy. One of the areas which has experienced an enormous boom was the sub-prime auto loan sector. It seems however that the party in this sub-sector of the bubble economy is in the process of ending.

According to Bloomberg:


“A three-year lending boom to car buyers with spotty credit that helped push auto sales to a six-year high is starting to show signs of overheating.

The percentage of loans packaged into securities that are more than 30 days late rose 1.43 percentage points to 7.59 percent in the 12 months ended September 30, according to Standard & Poor’s. That’s the highest in at least three years, the data released last week by the New York-based ratings company show.

“We’re at this inflection point,” Amy Martin, an analyst at S&P, said by telephone. “Now that they are opening the lending spigot, it’s only natural that losses are starting to rise.”

Underwriting standards began to decline amid five years of Federal Reserve stimulus that set off a race for higher-yielding assets, spurring a surge in issuance of bonds tied to subprime auto loans. That breathed life into a car-finance business that had contracted in the wake of the credit crisis, attracting new lenders and private-equity firms such as Blackstone Group LP with cheap funding and high margins.

Delinquencies on subprime auto loans are likely to have increased more during the fourth quarter, the holiday period when consumers typically stretch their budgets, according to S&P. That’s poised to increase losses that bondholders will take from defaults on the debt, which stood at 6.92 percent at the end of September after falling to as low as 4.15 percent in 2011, S&P data show.

“Many lenders have told us that their performance in recent years exceeded their expectations,” Martin wrote in a report last month. “We are now hearing that they expect losses to trend upward to more normal levels this year and next.”


Subprime lenders have found cheap funding in the bond market, with $17.6 billion of asset-backed securities tied to subprime auto loans issued last year, more than double the $8 billion sold in 2010, according to Barclays Plc. About $3.6 billion of the securities have been offered this year, according to data compiled by Bloomberg.


(emphasis added)

We wonder of there is any pie Blackstone doesn't have a finger in these days… Anyway, it seems investors in these loans – after enjoying above average returns for a good while – must now brace for growing losses. That 'underwriting standards have declined' is really no surprise – that is what happens when the Federal Reserve prints wagon-loads of money and pressures short term interest rates to zero. In fact, this decline in lending standards was arguably one of the main goals of the policy.


It Always Starts Somewhere …

However, what interests us about this development is mainly this: it shows that the credit bubble is beginning to fray at the edges. Every downturn starts with a seemingly innocuous report about things 'suddenly' and 'unexpectedly' going wrong in a relatively obscure corner of the market. We find ourselves reminded of how sub-prime real estate credit troubles began to show up for the first time in February of 2007, leading to the often repeated mantra that this particular disturbance in the force was 'well contained'.

That is however never how it works – in the end, it is all one big interconnected market. When troubles begin to show up at one end of it, they soon tend to  begin to spread.


repo order

A car repo notice – at least the repo sector can expect a boom now.



Good-bye overpriced SUV piece of junk – it was nice to know ye while it lasted …



One should certainly keep both eyes open henceforth; more anecdotal evidence of this type is likely to emerge in coming months, especially if the Fed continues with its 'QE tapering' course. Once problems become visible in one obscure corner of the low grade credit markets, it is often a warning sign for the entire market and economy.



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One Response to “Low Grade Credit Bubble Fraying at the Edges”

  • Bruce:

    These quotes seem appropriate at this stage of the cycle.

    “I’ve abandoned free-market principles to save the free-market system” – President George W. Bush told CNN, Dec. 16, 2008

    “At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.” – Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

    When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. – Chuck Prince, Citigroup

    “The last duty of a central banker is to tell the public the truth.” – Alan Blinder, former Vice Chairman of the Federal Reserve

    “You cannot spend your way out of recession or borrow your way out of debt.” – Daniel Hannan, Member of the European Parliament

    “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.” – Napoleon Bonaparte

    “We’re essentially continuing a system where profits are privatized and…losses socialized,” – Nouriel Roubini

    “I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”
    – Andrew Jackson, 1834, on closing the Second Bank of the United States; (unabridged form, extended citation)

    And finally,

    “Those who cannot remember the past are condemned to repeat it,” – George Santayana

    “[N]either the wisest constitution nor the wisest laws will secure the liberty and happiness of a people whose manners are universally corrupt. He therefore is the truest friend of the liberty of his country who tries most to promote its virtue, and who, so far as his power and influence extend, will not suffer a man to be chosen onto any office of power and trust who is not a wise and virtuous man.” – Samuel Adams

    “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.” – Lord Acton

    Supposedly Keynesian economics is/was supposed to be the salvation of national economies, but there is no preventing the economic cycle. In fact, the loose money policies only exacerbate the swings in both directions. There is really no need for the Fed, or its policies. Only The State and the banks benefit from this incestuous relationship. Main St. not so much.

    “There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

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