Delinquencies on subprime auto loans that have skyrocketed due to incentives. These people are on a buyer strike now



Investors in subprime auto loans backed by asset-backed securities should kneel before US taxpayers to thank them for their back door.

From Wolf Richter for WOLF STREET

Subprime auto loans are risky business but very profitable because they carry high interest rates, even in times of insanely low interest rates. Much of the risk is passed on to investors by securitizing these loans into asset-backed subprime auto lending (ABS) securities, which are divided into tranches ranging from the highest credit rating, which takes the last loss but receives the lowest return, to the tranches with the lowest. rating, which incur the first losses, but receive the maximum profitability. So everyone will find something to their liking.

Car ownership returns are generally quick and easy, there are not many hurdles to jump over and there is a very liquid auction market for efficient vehicle recycling. Professional repo firms receive the car, remove it and put it up for auction. For subprime lenders, this is all pretty handy.

Thus, delinquencies on subprime auto loans of 60 days or more, which were securitized by ABS and rated by Fitch, have been growing over the years as lenders took on more risks amid an insatiable appetite for ABS subprime auto loans by institutional investors. By 2016, the 60-plus-day delay in payments exceeded the maximum reached during the financial crisis. In August 2019, it coincided with the peak in October 1996, the strongest according to the data. And in January and February 2020, delinquency rates skyrocketed to the worst ever in January and February. So everything was going in the wrong direction. And then there were stimulants.

According to Fitch Ratings, in May 2021, the overdue 60-plus-day delinquency rate for ABS subprime auto loans fell to 2.58% of total auto loans (“premium” and “subprime” combined). This was the lowest level since 2012, when delinquencies fell because by then the overdue loans from 2009 to 2011 had been written off and repaid from the system, and lenders had become more cautious with new loans.

The ABS delinquency index for premium auto loans, which remained below 1% even during the financial crisis, fell to an all-time low of 0.14% in May.

Obviously, the incentives were partially used to pay off overdue car loans. And it didn’t really help the economy, jobs, or anything else, but it helped out lenders and investors who might otherwise have suffered big losses on their sub-prime loans and ABS.

Thus, a retirement fund in Texas, California or Norway and their beneficiaries must kneel to the stimulants and to the US taxpayers who paid for this backdoor aid.

But at the same time, buyers of cars with a subprime credit rating – below 620 – are refraining from buying a car, possibly due to crazy rise in prices for new and used carsor perhaps because they still haven’t got the job.

According to the New York Fed report on household debt and credit, the share of subprime-rated loans and leases issued in the first quarter of 2020 fell to 15.3% on loan amounts, the lowest data level for 2004. , which is another confirmation of the K-shaped recovery:

As of the end of the 1st quarter, outstanding auto loans and leases were $ 1.38 trillion, up 2.7% from a year earlier, the lowest increase since 2011 over the same period last year. a sharp rise in prices for new and used cars, which should have led to an increase in the loan amount. This could be further confirmation that more and more people were paying in cash, possibly by investing their earnings in the stock market in the economy; and that more and more subprime-rated potential customers are on strike, unwilling or unable to buy at those prices.

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