Is Sub-Prime Auto Loan Armageddon Coming?

I experienced a real eye-opener this past week. The lease on my fiance’s Audi A3 terminates soon. I was scanning the “pre-owned” inventory at the two largest Audi dealers in Denver expecting to see some good deals on 2013/2014 Audi A4’s that had come off lease. Instead, I was shocked to see at both dealers a large selection of 2016/2017 A4s with less then 20k miles. Some under 10k miles. I even saw a 2018 with something like 6k miles on it.

Why was I shocked? Because most of these vehicles had to have been repossessed. If there were only a couple almost brand new Audi A4s with very low mileage on them, it’s plausible that the buyers/lessee’s traded them in because they didn’t like them. The bigger dealer of the two had six 2017’s, all of them with 11k or less miles. Most if not all of these cars had to have been repo’d because of lease/loan default. We plan on waiting a couple more months because her lease expires in March and I suspect that the inventory of near-new Audis will be even larger and the prices will be even lower.

My theory was confirmed when I came across a blog post from a blogger (Cold War Relic) who is a car salesman (What’s Going On?): “People are buying cars they can’t afford or shouldn’t even have been able to buy.” He goes on to explain that: “I went to my buddy Paris’ repo lot. He called me to check out a 2016 BMW 435i he jacked for BMW Financial Services…as we walked through [the lot] I noticed all of the cars seemed to be nearly new. Paris confirmed my fears when he told my about nine-out-of-ten vehicles he’s repossessed in the last few months were model year 2016 or newer” (emphasis is mine).

Here’s the coup de grace: “To make matters worse Paris only does work for prime and a few captive lenders, meaning a majority of these cars went out to consumers with good credit.” In a past Short Seller’s Journal issue in which I discussed the rising delinquency and default rates on auto loans, I suggested that, in addition to the already soaring default rates on subprime auto loans, I believed the default rate on “prime” auto loans would soon accelerate. This is in part because a lot of prime-rated borrowers would have been considered subprime a decade ago. But it’s also in part due to the fact that the average household’s disposable income is getting squeezed and what might seem affordable in the present – e.g. an brand new Audi or BMW lease/loan payment – can quickly become unaffordable.

A recent article from Bloomberg discussed “soaring” subprime auto loan defaults in connection with the fact that several Private Equity firms bought out subprime auto lending companies starting about six years ago. The investment rationale was based on expanding the loan portfolios and cashing out the “value” created in the IPO market. One company, Flagship, was bought out by Perella Weinberg in 2010. It took the loan portfolio from $89 million 2011 to nearly $3 billion. Bad loan write-offs have soared. PW tried to IPO the company in 2015. It’s still trying. Based on the two anecdotes of new car repossessions described above, it’s a good bet that the investments in most subprime auto lenders will eventually have to be written-off entirely.

The total amount of subprime auto loans outstanding is nearly $300 billion. This number is from the NY Fed. I would argue that, in reality, it’s well over $300 billion. If you add to that the amount of subprime credit card debt outstanding, the total amount of “consumer” subprime debt is in excess of the amount of subprime mortgage debt ($650 billion) at the peak of the mid-2000’s credit bubble. This is not going to end well. In fact, I suspect the eventual credit implosion will be much worse than what occurred in 2008.

13 thoughts on “Is Sub-Prime Auto Loan Armageddon Coming?

  1. That is fantastic inside knowledge and fact you uncovered. Excellent work correlating that “in the trenches” real time info with on site observations and PE missteps. This is going to be one helluva implosion, if they can’t create a false flag and/or Iran provocation war first..

    My private “vulture” fund sits by idly, no interest or return, but hopefully safely in the correct currencies, physical metals, liquid tangibles and especially jurisdictions. Might soon finally be time for a new “used” car, the way purchasing/pricing was all explained in “The Millionaire Next Door”.

    1. Good on the ground reporting, Dave. Way to go. Been ready for fireworks for a long time, looks like 2018 will be spectacular. Great time to be alive. Nice move on gold these last couple of days. Here’s to the new year!

  2. The auto sales and finance world is even worse off than I realized. Reading Cold War Relic’s comments, I feel like I stepped back 10 years to 2006, when the first cracks in the subprime housing loan market opened. How could lenders be so dopey as to make loans to people who couldn’t afford half the payment, if that.

    Simple.

    The lenders pretend to underwrite; the borrowers pretend to pay.

    That works perfectly in Alice in Wonderland, but of those 6 wonderful things thought up before breakfast, the auto industry’s credit policies will feed them their lunch.

    Lease and loan payment rates on subprime clients start a high single digits and go up from there while the borrowers have absolutely no means to cover beyond the first few months of subsided payments.

    Lease and loan payments for quality borrowers who have no savings and whose debt service coverage ratios cannot come close to affording $600 a month is just another loan going some place to default. And technically speaking we’re not even into the next recession.

    When the home loan defaults came home to roost in 2008-2010 the failure to pay was accompanied by jingle mail as borrowers sent their home keys to the lenders by USPS. Many squatted in their homes for months afterwards but the damage to the home market was long etched into valued that dropped 50%.

    The problem with ultra-bling cars is that they don’t make good homes.

    I kind of pity the car markers as they starting eating their tails like the big worm. The more rolling stock they flog with drop price incentives and FUBAR loans to nowhere, the worse become the new car market as the 1-2 year old models that still have that new car smell just stink up the market. It’s estimated that the new car sales will drop by 2,000,000. That’s pretty optimistic. At the depth of the 2008 crash I recall the annual US new car sales hit around 13,000,000.

    If I was a car buyer today with a wallet full of cash, I’d be car crazy, looking for that repo $80,000 Ford F150 with all the goodies, willing to pay maybe $30,000. My second offer would be $20,000. “Take the money Tooms”
    Not that I want another vehicle. The average age of ours are around 12 years.

    Carmagheddon is a wave cresting, coming just before the impending home loan crash that’s sure to hit in maybe a year or so.
    What do you call lenders willing to lend to anyone, no matter their credit?
    Bankrupt. The only race worth betting on is who gets to the court house first. The banker or the borrower
    We are living in a lender extend and pretend fools paradise.
    Pride goeth before a fall. Debt goeth before a repo.
    Every fool and his money will soon be parted

      1. Good for you Dave! Wishing you happiness. We all need a positive or happy or uplifting or hope/faith-inspiring focus. Cause the S is going to hit the wind turbine.

  3. Great post Dave, Had a bit of a real world experience on this yesterday. Heading out to make the last biz deposit yesterday and met the mailman end of driveway and got another check. No deposit slip so asked the drive in teller to just use my account num on the checks to deposit this. He left the intercom on. In rolls one of those massive bubbamobiles big enough to blot out the sun… looked like a pretty/very new one but could be wrong. I hate these loud diesel stinking machines. Anyway Bubba was trying to make a withdrawal out of his home equity credit line for $300. The teller came on and told him he was maxed. He fumed how can it be maxed…..well she said there have been 3 withdrawals in the last 2 weeks for $2200. He whips out his phone and calls his wife (?) Raises his voice , guns the engine and off he goes…..with no cash. How often is this being repeated around the country every day

    1. Wow- great anecdote – I know what you mean about those diesel engines – just brutal to be around. That dude
      is a repo candidate

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