by Mish

As standards have weakened, so have delinquencies.

The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

In a “Subprime Flashback” the Wall Street Journal reports Early Defaults Are a Warning Sign for Auto Sales.

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2.

The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed.

About 12% of the loans backing bonds sold in November by Exeter Finance Corp., another Dallas-based subprime lender, were more than 30 days delinquent through February, according to the company.

Loan payments have been slipping as well for the broader group of subprime borrowers who make up a big slice of the auto market. The 60-plus day delinquency rate among subprime car loans that have been packaged into bonds over the past five years climbed to 5.16% in February, according to Fitch Ratings, the highest level in nearly two decades.

“What’s driving record auto sales is not the economy, but record auto lending,” said Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York and who has bearish bets on some auto lenders.

RECOMMENDED ARTICLES

The total volume of U.S. auto loans is now at an all-time high of close to $1 trillion, with a fifth made to subprime borrowers, according to Equifax. Many of those loans are repackaged into bonds to free up capital so that new loans can be made.

Issuance of bonds backed by U.S. subprime auto loans topped $27 billion last year, the highest in a decade and up 25% from 2014, according to Asset-Backed Alert, an industry newsletter that has flagged concerns around Skopos and other “deep subprime” lenders.

Some 87% of the loans were to borrowers with credit scores below 600, on a scale of 300 to 850. A third of those had scores below 500 or no credit scores at all.

Sliced and Diced Into Investment Grade

The Kroll Bond Rating Agency Inc., gave most of the bonds in the November deal investment-grade ratings.

According to Kroll, half the loans in the pool could default and all the bonds still would be repaid.

If those estimates are accurate, Kroll should use its earnings and buy the entire pool.

Rate Shopping Whores

In this perverse business, the agencies willing to hold their nose and assign the highest ratings gets the most business.

In recent Chicago bond offerings, Kroll gave the best rate assignments.

For details, please see …

Mike “Mish” Shedlock

Deep Subprime Auto Loan Delinquencies Reach 2007 Levels: The Next Big Short?

Subprime auto delinquencies have staked up so much that we are back at 2007 milestone levels.

Debt Deflation Setup: Credit Card Defaults and Subprime Auto Delinquencies Rise

Serious mortgage delinquencies are leveling off and remain one recession away from a serious upswing. Credit card and auto loan delinquencies are already on the rise.

Surge in Auto Loan Delinquencies: Auto Loans in High Gear

Auto loan delinquencies are well below the great recession. But they are well above the years prior to the recession.

Reader Asks About Shorting Subprime Auto Sector

A question and some interesting observations came in today from reader “FW” who works at Ford. He asks about shorting the auto sector including auto-backed collateralized loans.

Soaring Auto Loan Defaults: Fitch Says 2015 May Be Worst Ever, Mish Says 2017 Will Be Even Worse

Bloomberg reports Subprime Auto Bonds From 2015 May End Up Worst Ever, Fitch Says. I suggest 2017 will be worse, but let’s tune into Fitch first.

Parent Plus Student Loans: How to Screw Parents and Kids in a Single Shot

It’s easy to get student loans thanks to the aptly named “Parent Plus” program, a subprime loan trap that ensnares parents plus their college-age children.

Mortgage Rates Highest in Nearly Four Years

Mortgage rates are at the highest level since March of 2014, and another 15 basis points from the December 2013 level.

Regional Lender Loan Crash: Nearly Every Major Regional Bank Missed Lending Estimate

In addition to a miserable performance in the auto sector and a very poor GDP report, the Trump Era Brings Rare Drop in Loans at America’s Regional Banks.

Auto Loans, Student Debt Lead Household Re-Leveraging

Mortgage debt remained essentially flat in 2015 but the brief period of household debt deleveraging ended in 2013.