Defaults Jump in the Subprime Auto Market

Originally published by Bloomberg on July 17, 2017 Read the original article.

In a discussion about the U.S. subprime auto loan market, EWI’s February 2017 Elliott Wave Financial Forecast said:

The auto industry’s reliance on easier and easier money is clear from a TransUnion tally of subprime car loans. As of September 2016, total subprime loans were $172 billion, or 16% of the $1.1 trillion car loan market. … In another unmistakable sign of a stretched out credit bubble, J.D. Power estimates that 31.3% of car buyers through auto finance companies were upside down on their existing loans.

So, a July 17 Bloomberg article titled “New U.S. Subprime Boom, Same Old Sins: Auto Defaults Are Soaring” is no surprise. Here’s an excerpt:

It’s classic subprime: hasty loans, rapid defaults, and, at times, outright fraud.

Only this isn’t the U.S. housing market circa 2007. It’s the U.S. auto industry circa 2017.

A decade after the mortgage debacle, the financial industry has embraced another type of subprime debt: auto loans. And, like last time, the risks are spreading as they’re bundled into securities for investors worldwide.

Subprime car loans have been around for ages, and no one is suggesting they’ll unleash the next crisis. But since the Great Recession, business has exploded. In 2009, $2.5 billion of new subprime auto bonds were sold. In 2016, $26 billion were, topping average pre-crisis levels, according to Wells Fargo & Co.

… In recent years, lending practices in the subprime auto industry have come under increased scrutiny. Regulators and consumer advocates say it takes advantage of people with nowhere else to turn.

For investors, the allure of subprime car loans is clear: securities composed of such debt can offer yields as high as 5 percent. It might not seem like much, but in a world of ultra-low rates, that’s still more than triple the comparable yield for Treasuries.

You can read the entire article by following the link below:

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