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 than 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. This is a worrying trend, and one that those wondering how to refinance my car should be aware of.

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: “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 me 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. a brand new Audi or BMW lease/loan payment – can quickly become unaffordable. Some households will either have to take out a short term loan, using sites like https://www.freshloan.co.uk or have their vehicles seized. A short term loan can resolve some financial affairs and keep the payments for the car up to date. Cars can be vital to low-income households, especially when they’re used to get back and forth to work. Therefore, it’s important these families understand the repayment schedule when they first get their car.

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 in 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.