I’ve spoken about a coming auto loan crisis. I believe it’s on our doorstep (Actually it has come through my door more than once in recent times). Multiple potential clients have come to me, questioning an “income-producing” investment they either bought already or are being “pitched” on.
Just like mortgages, many of those loans have been packaged into bonds, “securitized” in Wall Street parlance, and sold across the world to investors searching for yields.
Morgan Stanley recently reported that the share of auto securities tied to “deep subprime” loans – those given to borrowers with a FICO credit score below 550 — has risen from 5.1 percent in 2010 to 32.5 percent today. It said defaults on those bonds have risen significantly in the past five years.
Almost a quarter of the more than $1.1 trillion in U.S. auto loan debt is owed by subprime borrowers, and delinquency rates have hit their highest point in seven years.
As if to underscore the concern, the Massachusetts attorney general on Wednesday announced a $26 million, two-state settlement with the subprime auto-loan unit of Santander bank for giving high-interest loans to car buyers whom it knew could not afford them.
Attorney General Maura Healy said the bank would then package the unsound loans into securities and sell them to investors. The Boston Globe quoted Healy as saying that for Santander, “The global economic collapse wasn’t a cautionary tale. It was a blueprint.”
An auto loan crisis will just be a small appetizer. The 800 pound gorilla in the room will be “student loans”.