Fears rise over auto loan crisis as repo men see sales’ dark side
As lending standards eased, borrowers have taken on debt they may fail to repay
by: Joe Rennison in New York
A wire fence topped with barbed wire surrounds a packed plot of land, housing a white Jeep, an orange Audi and a host of other repossessed cars. Sergio Tavano, owner of T-Birds Automotive in Red Hook, Brooklyn, sits in his car outside the lot with two of his employees.
“The number of repossessions we are doing has definitely risen,” he says. “It’s the highest I have ever seen it.”
That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.
Ron Neglia, T-Birds’ manager, adds that the uptick from July of this year to now has been “significant”. And that the nature of the job has shifted as well, presenting a troubling insight into the state of the current economy and for areas of the booming market for auto asset backed securities.
A year ago most of the cars that Mr Neglia repossessed were from fraudulent schemes — people renting cars under a fake name and not returning them, for example. Today, he sees a larger number of individuals simply unable to repay on their loans.
“More and more it is people down on their luck and getting their cars taken,” he says. “You feel bad for some people. You are finding them at financially the worst time in their lives … It’s unfortunate, but it’s business.”
It comes amid rising concern about a crisis in the auto loan market. Analysts say that as competition has grown, lenders have relaxed lending standards, offering bigger loans to consumers and giving them more time to pay the loans back, resulting in borrowers taking on debt that they may not be able to repay. The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.
The issue is particularly acute for the subprime ABS market, where issuers take loans from less creditworthy borrowers and package them up into bonds that are then sold to investors.
“While we have seen a gradual loosening in underwriting in recent years it has gotten to a point now where it is becoming unstable,” says Peter McNally, a senior analyst at Moody’s, another rating agency.
The subprime auto ABS market has grown to $38.1bn, down slightly from its second quarter high of $41.2bn, according to data from the Securities Industry and Financial Markets Association. Fitch Ratings defines subprime ABS as a deal with expected net losses above 7 per cent. Net losses across subprime auto ABS hit 9.29 per cent in September, according to Fitch — 23 per cent higher than a year earlier.
The losses are still broadly within the rating agency’s expectations but for some investors, concern still surrounds the growth of newer, non-bank issuers that rely heavily on securitisation markets as a source of funding.
The fear is that if losses continue to climb, investors will stop buying bonds issued by less diversified companies. If their access to funding stops, it could impair the credit quality of the issuer itself, throwing doubt over the quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.
“There are ingredients here — particularly the build-up of losses — that can be a triggering event … We feel that the risk is building,” says Mr McNally.
A number of the newer, smaller issuers that increasingly comprise a larger slice of ABS issuance are also supported by private equity firms. Blackstone-backed Exeter and Perella Weinberg Partners’ Flagship both appear in the top 10 issuers for 2016, but were absent from the rankings 10 years ago.
Moody’s notes in a recent report that the involvement of private equity can lead to weaker loan terms in a bid to juice higher returns.
But so far, the risks have not turned to reality in the ABS market. Wells Fargo notes in a recent report that there have been 435 ratings upgrades across the subprime auto sector this year, and no downgrades. Borrowing costs for issuers across the subprime spectrum have also reduced through 2016 as investors continue to clamour for the relatively high returns offered by the products.
Some, such as Semper Capital, say that the high loss protections in the way the deals are structured — allowing for 50 per cent of the underlying loans to default before hitting senior bond holders in some cases — eases concerns about rising delinquencies.
“Even if you see a big pick-up in delinquencies going forward it’s hard for that to actually break through to investors,” says Ilan Bensoussan, a trader at Semper Capital.
But for consumers facing mounting debts, the broader economics pale into insignificance, especially with the looming potential for repossession.
“It’s a big problem, I’m worried,” says a repo man at another company who asked to remain anonymous.