As regular readers are no doubt aware, we’ve been pretty keen on documenting the bubble that is subprime auto loans.
In “As Subprime Auto Bubble Bursts, Lenders Use GPS To Hunt Deadbeat Borrowers,” we drew your attention to “DriveTime” and “Credit Acceptance,” highlighting the rather unnerving fact that both 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,” to quote a Bloomberg piece out last month.
Perhaps more worrisome than that is the following chart from Morgan Stanley which shows that DriveTime and Credit Acceptance are among the subprime originators who are starting to comprise a larger and larger percentage of ABS deals:
As Morgan wrote back in November, “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.”
We also noted following chart and accompanying color from Citi:
The securitization market continues to finance numerous subprime auto finance companies and total outstanding subprime auto ABS amounted to $41 bb, which accounted for 29% of total outstanding retail auto ABS as of 31 Dec 2016 (Figure 8), setting a new record market share.
Well, we don’t want to get too far down the subprime rabbit hole here (it is Sunday after all), but it’s worth noting that with subprime making up a record share of total outstanding auto ABS, and with a larger percentage of that subprime being comprised of deals from originators like the above-mentioned Credit Acceptance and DriveTime who i) overwhelmingly finance used car purchases, and ii) have lower than average underwriting standards, just about the last thing you want to hear is the following…
CPI for used vehicles declined for the twelfth consecutive month. Further declines, driven in part by an increase in off-lease vehicles, are expected to place pressure on realization and recovery rates for auto lease and loan ABS.