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.
Sep 2018
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.

Joseph Cioffi recently sat down with Raul Panganiban of ValueWalk, a site covering the latest financial news impacting hedge funds and asset managers with an emphasis on value investing, for their podcast “ValueTalks.” Joseph and Raul discussed the importance of credit enhancements in subprime auto securitizations, and in particular, Joseph’s views regarding their vulnerability.

The discussion builds on Joseph’s thoughts first shared on a post on Credit Chronometer. Following the warnings in the post, new issuances have been marked by higher credit enhancements.

Listen to the full podcast here.