Timing Matters.

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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 2018
Lending Practices and Factors i
Subprime and deep subprime lending and securitization have risen sharply; delinquencies are on the rise, but not yet above peak levels. Risky practices exposing specific lenders and their investors to losses; other lenders will be similarly exposed if they chase market share.
ABS Practices and Factors i
Credit enhancements such as excess spread, overcollateralization and subordination continue to create a buffer from riskiest lending practices. Investors have not yet felt the sting of riskiest practices.
Auto Market Risks i
New vehicle prices are at all-time highs, but sales incentives and high supply of off-lease vehicles are depressing used vehicle prices, accelerating depreciation and driving up negative equity on trade-ins. Advances in technology will likely accelerate depreciation further.

Timing Matters.

Stay Ahead with Credit Chronometer.

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ABS Issuances, by the Numbers

Nine ABS deals totaling $3 billion closed in Q2 2017, a 76% increase from Q2 2016. Q2 ABS issuances included approximately $2 billion in consumer (up 28% versus Q1 2017) and approximately $1 billion in student (down 5% versus Q1 2017). All deals were rated. Total ABS issuance is expected to be over $11 billion in 2017.

Performance and Practices

Performance continued to weaken as delinquencies and charge-offs increased in Q2 for personal, student, and subprime auto loans. Prime credit card portfolios are showing multi-decade delinquency rate lows….

Originations and Issuances, by the Numbers

Student loan debt rose to $1.34 trillion in Q2 2017, up from $1.31 trillion at the end of 2016, and now accounts for 10.4% of the $12.8 trillion in total household debt.

In Q2 2017, $3.3 billion in student loan asset-backed securities (SLABS) were issued, down 34% versus year ago. Of the total first half 2017 SLABS issuance of $7.9 billion, student loan refinance (refi) ABS issuances were $2.3 billion, a 30% increase versus year ago. Traditional private SLABS issuances accounted for $0.8 billion, a 54% decrease versus year ago….

Originations and Issuances, by the Numbers

$3.7 billion has been advanced to homeowners under residential Property Assessed Clean Energy (R-PACE). Additionally, nearly $500 million has been advanced for commercial PACE (C-PACE) projects. Although R-PACE currently accounts for just .03% of the $12.8 trillion in household debt, it is one of the fastest growing sources of consumer credit and expected to double within the next year.

Through May 2017, the cumulative issuance of R-PACE loan securitizations between Renovate America, Ygrene, and Renew Financial reached $3.4 billion, up from $2.7 billion through December 2016 and $1.03 billion through December 2015….

It’s been getting tougher for anyone to mount strong opposition to the Consumer Financial Protection Bureau’s (CFPB) rule banning mandatory arbitration clauses after news broke of more misdeeds at Wells Fargo, which has admitted to forcing borrowers to pay for auto insurance they didn’t need. Although Senate approval of the rule remains uncertain, banks and other lenders should prepare for it to take effect. If that’s a benefit to consumers, it’s one they are going to pay for. Indeed, consumers should prepare for higher costs as a consequence of that preparation and the uncertainty deregulation might fuel….

Years ago, “show me the note” contagion took hold in the subprime mortgage market. Borrowers launched widespread attacks on foreclosure actions once tales of successful early challenges were reported in the media.  With the recent reports in The New York Times about National Collegiate Student Loan Trusts’ problems enforcing student loans due to incomplete documentation, the same contagion could again take hold in the nation’s courts.

In the aftermath of the 2008 financial crisis, courts were filled with cases in which borrowers made the technical argument that the securitization trustee trying to foreclose never actually received the relevant note and mortgage—and in some cases,…