As Subprime Auto Bubble Bursts, Lenders Use GPS To Hunt Deadbeat Borrowers

Earlier this month, I noted that “Subprime Auto Loans Might Be Ok Because After All, People Need Their Cars.”

Obviously, the title was a bit tongue-in-cheek.

Back in 2015, I tracked subprime auto ABS issuance pretty closely. What I saw was reminiscent of the lead up to the collapse of the housing market. Companies like Santander Consumer (and on that score don’t forget that when Blythe Masters decides some sh*t is shady you know you’ve got a problem) and the (almost) worst-of-breed Skopos Financial (whose “leadership board” is riddled with ex-Santander Consumer employees) gained quite the reputation when it came to pushing paper backed by collateral pools full of shoddy car loans.

As it turns out, not much looks to have changed in the last 18 months. Consider the following via Morgan Stanley (from late last year):

• Delinquencies and default rates are climbing in the Auto ABS sector. While these metrics have not yet deteriorated as far as they did during the financial crisis, the YoY increases are meaningful, especially coming at a time when the rest of the consumer balance sheet — outside of student loans — appears to be performing well.
• The cracks in fundamentals can be partly attributed to the shift-in-mix of origination share away from lenders with stronger borrower profiles.
• Some issuers have lower underwriting criteria and the share of Auto ABS originated by these issuers is trending higher
• In the tables below, we identify issuers with lower underwriting standards (shaded in red). The share of outstanding deals originated by issuers with lower underwriting standards has increased from 23.1% and 3.4% in Jan 2010 to 33.9% and 11.2% in Oct 2016, for Prime and Subprime Auto ABS respectively.

Meanwhile, auto ABS makes up a decidedly large percentage of the overall ABS market. As Citi wrote in November, “auto ABS is one of the largest sectors of the ABS market, representing 42—56% of all consumer ABS primary market issuance since 2009.”

Here’s a look at supply and how much of this paper is outstanding:

(Citi)

As noted by Morgan, delinquencies and default rates are climbing and you’ll never guess what the bank found when they checked to see if perhaps there was a correlation between the share of issuance from originators with lower lending standards and cumulative losses. To wit:

As we dissect the performance of recent vintages, we find divergence in cumulative loss trajectories across various origination quarters. Not surprisingly, those are the quarters with higher origination share from lenders with lower underwriting criteria.

Given the high proportion of 2016 subprime deals issued by lenders with lower underwriting standards, we should expect delinquencies and losses to climb even higher over the course of 2017.

Got that? Good.

Now speaking of 2017 and delinquencies, Bloomberg is out with a new piece highlighting what Heisenberg Report readers knew last month – namely that the subprime auto bubble just may be starting to burst. Here’s more:

The country’s auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion. The combination of new car smell and new credit woes stretches from Subarus in Maine to Teslas in San Francisco.

It’s an alarming number, big enough to incite talk of a bubble. In fact, the pile of debt would cover the cost of 43.4 million Ford F-150 pickups, one for every eight or so people in the country.

Another way to look at: Every licensed driver in the U.S., on average, owes about $6,100 in car payments.

There you go. Now you know how many F-150s you could buy with the nation’s auto loan bubble.

Bloomberg goes on to discuss what I sarcastically referenced in the title of the first post linked above: the fact that borrowers are more willing to pay for their cars than they are their student loans. To wit:

Car payments tend to be cheaper than mortgages and people tend to use their vehicles a lot, so when it comes time to prioritize bills, the auto loan typically takes precedent over other things.

Nevertheless, there’s no denying that the trend in lending standards is worrisome. “In the past two years, U.S. drivers with credit scores of less than 620 borrowed $244 billion to buy cars, a tally not matched since 2006 and 2007 when the same strata of buyers rolled off with $254 billion in auto loans,” Bloomberg cautions. Recall the following chart from Goldman:

But there’s a bright side to all of this.

Go back up and look again at the table in the right pane of the first set of visuals presented in this post. See how “DriveTime” and “Credit Acceptance” are listed among those subprime originators who are starting to comprise a larger and larger percentage of ABS deals?

Well the good news for investors in those deals is that in the event the borrowers fail to make payments, the companies will simply track down deadbeats via pre-installed GPS devices.

No, really.

Via Bloomberg

A U.S. regulator is looking at whether auto finance companies that use sophisticated technology like ignition kill switches are illegally harassing subprime borrowers that have fallen behind on their payments.

The Federal Trade Commission, a consumer protection agency, has asked for information from at least two lenders, according to securities offering documents from both companies this month obtained by Bloomberg.

To make it easier to repossess cars when loans go bad, finance companies have been using technology like ignition kill switches, which allow debt collectors to remotely disable a vehicle’s starter, and GPS devices, which can allow them to track down an automobile or truck.

The Federal Trade Commission has asked for information about the devices from Credit Acceptance Corp. and DriveTime Automotive Group Inc., according to separate securities offering documents from both companies. DriveTime doesn’t install kill switches of any kind, but the cars it finances usually have pre-installed GPS systems, spokesman Chris Piper told Bloomberg in an e-mail.