Well, it’s official: the cat is out of the bag on what’s
"driving" (no pun intended) record US auto sales.
Anyone who frequents these pages is by now well-versed in the
idea of "originate to sell." It’s the dynamic that helped create
the housing bubble and it’s now in full effect in the auto loan
space.
The concept is simple. When demand is strong for paper backed by
a particular type of asset, Wall Street obliges by cranking up the
securitization machine. Thanks in part to the Fed-induced hunt for
yield demand for auto loan-backed ABS has been strong.
Supply should come in at around $125 billion this year -
that’s up 25% from 2014 and accounts for more than half of total
consumer loan-backed issuance.Here are the latest
projections from BofAML:
In this environment, competition among lenders keen on getting
in on lucrative securitizations heats up - the more fierce the
competition, the less scrupulous the underwriting and before you
know it, you’ve got tens if not hundreds of billions in paper
floating around backed by loans to underqualified buyers.
It doesn’t take a securitized products strategist to figure out
what happens next (although as Ben Bernanke showed us in 2006, it
is apparently far too complex for a PhD economist).
Borrowers who never should have been given loans in the
first place start to default and the ABS collateral pools quickly
transform from collections of pristine credits to steaming
cesspools.
We’ve talked until we’re blue in the face about the lunatic
terms being extended to buyers in the auto market, but the
following bullet points (derived from
Experian’s Q1 data) are always worth
recapping:
Average loan term
for new cars is now 67 months — a record.
Average loan term
for used cars is now 62 months — a record.
Loans with terms
from 74 to 84 months made up 30% of all new vehicle financing
— a record.
Loans with terms
from 74 to 84 months made up 16% of all used vehicle financing — a
record.
The average
amount financed for a new vehicle was $28,711 — a record.
The average
payment for new vehicles was $488 — a record.
The percentage of
all new vehicles financed accounted for by leases was 31.46% — a
record.
That's the story and it's one we've told before, but just so
it's clear that everyone else is now catching up, here's
Bloomberg with a summaryof a new Nomura
note:
Losses on car loans taken out by bad-credit borrowers are
continuing to climb, thanks in part to the flood of rookie auto
finance companies that have entered the market in recent
years.You can see the rise in subprime borrowers
struggling to make car payments in monthly data on bond deals sold
on Wall Street. So-called subprime auto asset-backed securities
(ABS) bundle together car loans and then sell them to big
investors.
July reports show that annualized net losses on such bonds—a
measure of the cost of bad debt—rose 1.45 percentage points over
the past year to reach 6.6 percent last month, according to Nomura
analysts.
What's driving the rise? Nomura has an idea.
"The significantly weaker performance in the subprime auto
sector is being driven by an increase in issuance from the lesser
established issuers," researchers led by Lea Overby said in a
report.
Smaller, newer bond issuers fueled 37 percent of the sales of
subprime bonds last year, up from 27 percent in the previous year,
according to Nomura's figures.
As the small upstarts fight for market share, the concern is
that they'll lower their standards too much and drag established
lenders with them, inviting even greater trouble down the line.
Many of the new players are backed by the biggest private-equity
firms, which are under pressure to produce relatively quick
returns.
For those curious to learn more about these "small upstarts" who
may be "lowering their standards too much," look no further than "
Meet Skopos Financial, The New King Of Deep
Subprime," excerpts from which are included below.
* * *
Texas-based Skopos Financial has both raised and lowered the bar
at the same time by setting a new standard for what counts as
questionable collateral while simultaneously proving that in a NIRP
world, investors are willing to plumb the FICO depths for
yield.
Via
Bloomberg:
Skopos Financial, a four-year-old auto finance company based in
Irving, Tex., sold a $149 million bond deal consisting of car loans
made to borrowers considered so subprime you might call them—we
dunno—sub-subprime?
Details from the prospectus show a whopping 20 percent of
the loans bundled into the bond deal were made to borrowers with a
credit score ranging from 351 to 500—the bottom 6 percent of U.S.
borrowers, according to FICO. As a reminder, the cut-off for
"prime" borrowers is generally considered to be a credit score of
around 620. More than 14 percent of the loans in the Skopos deal
were made to borrowers with no score at all. That
means the Skopos deal has a slightly higher percentage of no-score
borrowers than the recent subprime auto securitization recently
sold by Santander Consumer, which garnered plenty of attentionfor
its dive into "deep subprime" territory.
Who is Skopos Financial you ask? We’ll let them tell the story
in their own words:
In 2011, Skopos Financial opened its doors with one goal in
mind making tough, deep subprime auto loans easier to finance for
dealers.
Leveraging our sophisticated, patented iLender technology and
visionary management team, Skopos provides a
streamlined process for franchise dealers to finance customers with
low credit scores.
As an indirect auto lender, Skopos offers solutions for car
buyers with no credit, low FICO scores, or a previous bankruptcy,
repossession or foreclosure.
And the best part is the speed.Skopos' dealers
enjoy fast underwriting, fast approvals and fast funding.
Yes, the "best part is speed." We suppose the process is quite
efficient considering there appear to be no underwriting standards
whatsoever.
As for the "visionary" management team, have a look at the
following profiles which seem to indicate that at least for some
industry veterans, Santander Consumer isn’t quite subprime-y enough
(note that there’s a Countrywide link in there as well for good
measure):