Subprime Auto Loan Crisis Chronometer

Crisis /krīsis/: A turning point that results in a battle over loss allocation.

Will there be a crisis? Are we near one?

Practices and factors similar to those contributing to the subprime mortgage meltdown are now impacting subprime auto lending and related ABS. The gauges reflect our take on how they are impacting risks for lenders and investors.

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The Subprime Auto Loan Crisis Chronometer shows the risk of battles over loss allocation.
Apr 2019
Lending Practices and Factors i
Subprime originations have trended down but securitization volume continues to increase. Subprime delinquencies in the secondary market are on the rise and have surpassed peak levels. Risky practices are exposing specific lenders and their investors to losses, as evidenced by the closure of a number of smaller subprime auto lenders earlier this year.
ABS Practices and Factors i
Credit enhancements such as excess spread, overcollateralization and subordination have increased in new deals and continue to create a buffer from riskiest lending practices. Investors have not yet felt the sting of riskiest practices.
Auto Market Risks i
New and used vehicle prices are at all-time highs, but sales incentives and high supply of off-lease vehicles are accelerating depreciation and driving up negative equity on trade-ins. Advances in technology will likely accelerate depreciation further.

Sometimes, it’s what you can’t see that matters most. First, the bad news: after years of economic growth and generally good times, consumers’ credit scores may be inflated. Like 50 is the new 40, a prime score today may be the equivalent of a sub-prime score pre-financial crisis. If you believe a leopard doesn’t change its spots, a high credit score may be masking a borrower’s likelihood to default in bad times, and the risk on subprime loans is bigger than believed at origination. Now, the good news: if existing loans are riskier than believed at origination,…

This is part two of our interview with the executive team at CAR Financial Services, a subprime auto finance company with over 25 years of experience providing customized backup and successor servicing. In part one of our interview, we discussed the benefits of having a backup servicer in place before trouble starts.

But once you decide to take the prudent course and engage a backup servicer, how do you know you are getting the best value from the relationship?

Here, we discuss with CAR the keys to a successful relationship….

If subprime auto delinquencies continue to rise and the risks continue to grow, it will be cold comfort to those who saw it coming, if they haven’t taken protective measures. There’s no glory being on the wrong side of right.

From this perspective, there is real value in any service that has the potential to help participants see ahead of the curve and mitigate risks. With this in mind, we spoke to Justin Bannister, Director of Centralized Operations, and Oscar Lopez, Specialty Products Manager, of CAR Financial Services, a subprime auto finance company with over 25 years of experience providing customized backup and successor servicing….

Red and blue is the new black and white, but the country could use a lot more purple. Seems few can take a position publicly these days unless it’s extreme – whether it’s a political debate or the meaning of the New York Fed’s recent Quarterly Report on Household Debt and Credit showing an uptick in subprime auto delinquency. Intelligence includes the ability to see the other side’s point of view. The truth is out there – and it can be found in the gray area between the absolutists.

There Are Reasons to Stay the Course

For some,…

If you want to know the truth, no one can really predict the future of any market by themselves; everyone is limited by data and perceptions. Without shared knowledge and experience, the future remains a puzzle only time can solve. Where there is limited information, J.D. Salinger’s prediction is inevitable: “the fact is always obvious much too late.”

But in subprime auto ABS, we don’t have to succumb to Salinger’s fatalism. By taking the pulse of all types of industry participants – lenders, servicers, investors, trustees and others – Credit Chronometer’s survey will contribute to a more informed,…

No one had suffered any losses, or at least it seemed no one could remember having done so. S&P had not downgraded any subprime auto loan ABS since just after the turn of the century or any other auto loan ABS since 2011. Credit enhancements were widely deemed sufficient to absorb any worst-case scenario. With a long track record of success and protections in place, few blinked when one non-bank lender, Honor Finance, went decidedly deep down the credit scale.

It was 2016 and Honor Finance had just brought its HATS 2016-1 securitization to market….