As standards have weakened, so have delinquencies.
The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.
To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2.
The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed.
About 12% of the loans backing bonds sold in November by Exeter Finance Corp., another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company.
Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.
“What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders.
The total volume of U.S. auto loans is now at an all-time high of close to $1 trillion, with a fifth made to subprime borrowers, according to Equifax. Many of those loans are repackaged into bonds to free up capital so that new loans can be made.
Issuance of bonds backed by U.S. subprime auto loans topped $27 billion last year, the highest in a decade and up 25% from 2014, according to Asset-Backed Alert, an industry newsletter that has flagged concerns around Skopos and other “deep subprime” lenders.
Some 87% of the loans were to borrowers with credit scores below 600, on a scale of 300 to 850. A third of those had scores below 500 or no credit scores at all.
Sliced and Diced Into Investment Grade
The Kroll Bond Rating Agency Inc., gave most of the bonds in the November deal investment-grade ratings.
According to Kroll, half the loans in the pool could default and all the bonds still would be repaid.
If those estimates are accurate, Kroll should use its earnings and buy the entire pool.
Rate Shopping Whores
In this perverse business, the agencies willing to hold their nose and assign the highest ratings gets the most business.
In recent Chicago bond offerings, Kroll gave the best rate assignments.
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Mike “Mish” Shedlock