Tag Archives: subprime auto loans

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.

Housing Sales Start To Tank As Suprime Auto Loan Delinquencies Soar

Note:  For the record, I am expecting the possibility that the new homes sales report for February released today will show an unexpected spike up.  For the past several months, there’s been what I believe to be a pre-meditated pattern in which the existing home sales data series and the new home data series move in the opposite direction.  Let’s see if the trend continues.

The existing home sales data series has become as erratic and unpredictable as the Census Bureau’s new home sales report.  One can only wonder about the reliability of the National Association of Realtors reporting methodology when its Chief “Economist” repetitively states month after month that “job growth continues to hum along at a robust pace.”  Any economist who uses the Census Bureau’s monthly employment report as their evidence that the U.S. economy is producing meaningful, income-producing jobs is either just another propaganda mouthpiece or is of questionable intelligence.  Either way a statement like that is highly unprofessional.

You must be wondering why I’m connecting home sales to the recent data which shows that subprime auto loan delinquency rates are soaring (here and here).  Let me explain.

All cash sales of existing homes in February were reported to be 25% of all sales in February, down from 26% in January.  This means that 75% of existing home sales (93% of new home sales) are dependent on mortgage financing.  The FHA has been underwriting 3.5% down payment mortgages since 2008.  3.5% down payment mortgages are nothing more than sub-prime mortgages “dressed in drag.”  The FHA’s share of the mortgage market soared from about 2% at the beginning of the 2008 to around 20% currently (plus or minus a percent or two).  Fannie Mae and Freddie Mac have been issuing 5% down mortgages for quite some time and lowered the down payment to 3% in early 2015.

If you require a 5% or less down payment to buy a home, you are a subprime credit risk, I don’t care what your FICO score it.

First time buyers represent about 30% of all existing home sales.  A good bet is that the first time buyer segment almost exclusively uses the lowest down payment possible to buy a home.  RealtyTrac issued a report in June 2015 which showed that low down payment purchases hit  a 2-year high in Q1 2015 and accounted for 83% of all FHA purchase mortgages.  Understandably RealtyTrac has not updated this report.  My bet would be that somewhere between 30-50% of all purchase mortgages were of the low down payment variety, or clearly de facto subprime quality.

The Wall Street Journal published an article last year which discussed the rising trend in low to no down payment mortgages:  Down Payments Get Smaller.

This is where soaring subprime auto loan delinquencies come into play.  To the extent that a potential home buyer is behind on his auto loan, it will impede his ability to take out a mortgage of any down payment variety.  In fact, I believe that the U.S. financial system has hit the wall in terms of the amount of debt that can be “absorbed” by potential borrowers. Auto loans and student loans outstanding hit new record highs daily, with both well over a combined $2 trillion outstanding.   In my opinion, this is why existing home sales dropped 7.1% from January, more than double the 3.1% decline forecast by Wall Street.

The National Association of Realtor’s Chief Clown attributes the big drop in home sales in February to “affordability.”  But this is statement seeded either in ignorance or fraud.  Forget the Case-Shiller housing price comic book.  Nearly every major MSA has now entered into the continuous “new price” vortex.  This has been going on Denver since last June.  I’m getting reports from readers all over the country describing the same dynamic in their markets.  This problem is especially acute the high end.  Besides, every mortgage sales portal in existence markets a calculator that take your monthly income and calculates how much house you can “afford.”  Price has nothing to do with ability to get approved for a mortgage.

Speaking of “affordability,”  the cost of financing home dropped to 3.66% in February, it’s lowest rate since April 2015.  In other words, the cost of buying a home actually became more affordable in February.

“There is no means of avoiding the final collapse of a boom brought about by credit expansion”  – Ludwig Von Mises.  The Fed and the Government prevented the collapse of the system that was set in motion by the housing/mortgage market in 2008.  As Von Mises stated, “The alternative is only whether the crisis should come sooner as a result of voluntary abandonment of further credit expansion , or later as a final and total collapse of the currency system involved.”

I believe that it is quite likely that the Fed’s ability to push further credit expansion has reached, or is close to, its limits.  The soaring delinquency rates of auto loans and a housing market which is likely beginning to tip over now reflect this reality.

I was early in 2004 when I predicted a collapse in the housing market.  I underestimated Greenspan and Bernanke’s ability to expand mortgage credit.  I was once again early in predicting the demise of the current housing bubble.  Again, I underestimated the Fed’s ability and the Government’s willingness to stuff the average American up to his/her eyeballs in debt.  Regardless of flaws in predictive abilities with regard to timing, my overall analysis materialized in 2008 and it’s a good bet that it’s coming to fruition once again – only this time it is likely that the Fed will be helpless in preventing the inevitable.

The Economy And Stocks: Someone Is Smoking Crack

Privately compiled and reported economic indicators started rolling over in 2012, which is why the Fed continued to “re-up” its money printing. With most S&P 500 companies having now reported Q4 2015 earnings, there’s been four consecutive years of declining net income – both GAAP and “non-GAAP.” If I had told you two years ago that the S&P 500 revenues and earnings would decline but that stock prices would continue higher, you would have asked me if I was smoking crack.  –  Short Seller’s Journal

A big driver of the economy for the last four years has been the auto and housing markets. While it may not be evident in some areas yet, both sectors of the economy are starting to seize up.

Auto sales in February missed analysts’ forecasts and were down from January.  Not mentioned in the still-bullish reports was the fact that GM’s and VW’s sales declined, while Ford’s jump in sales was driven by a big bulge in rental fleet sales.  Note to crackheads: rental fleet sales are not the best measure of the demand for autos.  At the same time, new car inventories at dealers soared to a 14-year high.    With subprime auto loan delinquencies beginning to spike up, along with repo rates, on whom will the dealer/lending syndicate unload all this inventory?

Similarly, the housing market in previously red-hot areas is starting to fizzle, led by a rapid escalation in listings in the higher end of the market.  Housing market expert Mark Hanson describes the popping bubble in Silicon Valley:  Tech-Head Housing Cities Seizing Up.  This article describes the collapsing Houston housing market:  Oil crash is crushing Houston’s housing market.   The virus popping Houston’s real estate bubble is now spreading throughout Texas.   Miami’s market was white hot for a few years.  Of course, as is par for the course, Miami is now perilously overbuilt:  Miami’s Epic Condo Boom Turns Into Glut. That same market condition is hitting the southwest coast of Florida, as a flood of existing home listings are helping the continuous  “price reduced” notices chase the market lower.

The same scene is now starting to play out in many major MSA’s – NYC, Washington DC/northern Virginia, etc.  While the lower end of the market is still somewhat firm in many areas because the Government is proliferating the availability of low credit rating subprime nuclear mortgages to first-time buyers who can barely afford a pot to piss in, the upper-middle and high end of the housing market is being perilously flooded with listings. In one high-end enclave south of Denver that is averaging at least one listing over $800k per block, a friend of mine who lives near there asks:  “who is going to buy these homes?”

Not only is the stock market not even remotely discounting the underlying economic reality, but the S&P 500 spent the last four weeks clawing back 78% of the 249 point (12%) drop that occurred just after New Year’s despite the continued plethora of increasingly negative economic reports.

At some point the Fed is going to lose its ability to jump-start the stock market with its monetary defibrillator.  There is a lot of money to be made taking the other side of NewSSJ Graphicwhomever is chasing stocks higher right now.   The Short Seller’s Journal will help you take advantage of the highly overvalued stock market with weekly ideas for shorting stocks.  Each issue includes exclusive market commentary, a minimum of two short-sell ideas plus strategies for using puts and calls.  Subscribers will also have free access to all future IRD short-sell research reports plus a discount to the Mining Stock Journal.   You can subscribe by clicking HERE or on the image to the right.