STCMA – 9th August 2017

Lest I castigate myself later for not documenting this, I am linking a few stories (mostly from Bloomberg) on this topic.

(1) The founder of Credit Acceptance Corporation resigns as Chairman, sells a big chunk of his stock (still retains a large portion) and critics evaluate if the company stock is the next BIG SHORT [Link]

(2) Santander Consumer USA Holdings Inc., which is counted among the biggest subprime auto-loan firms, verified income on just 8% of borrowers on loans it recently bundled into $1 billion of bonds, Moody’s Investors Service said. …Delinquencies on U.S. subprime auto asset-backed securities climbed to a 20-year high in February, exceeding the levels seen in 2009 following the financial crisis, Fitch Ratings warned in a March report. [Link]

(3) This story by Lisa Abramowicz has a chart that shows that securities backed by auto assets have crested the peak of 2006.

(4) The percentage of subprime auto-loan securitizations considered deep subprime has risen to 32.5 percent from 5.1 percent since 2010, Morgan Stanley said….Sixty-day delinquencies for bonds backed by these loans have risen 3 percentage points since 2012, compared with just 0.89 percentage points on all other subprime auto securities, Morgan Stanley’s Vishwanath Tirupattur, James Egan and Jeen Ng said in a report dated March 24. [Link]

Deep subprime borrowers are those with FICO scores of 550 or below.

(4) Depending whose money they’re using, Wells Fargo & Co. and JPMorgan Chase & Co. either love subprime car loans or fear them.

Both banks have grown more reluctant to make new subprime loans using money from their own balance sheets. Wells Fargo tightened its underwriting standards and slashed the volume of all loans it made to car buyers in the first quarter by 29 percent after greater numbers of borrowers fell behind on payments. JPMorgan’s consumer and community banking head Gordon Smith earlier this year said the bank had cut its new lending for subprime auto loans “dramatically.”

At the same time the firms are indirectly funding billions of dollars of the loans by helping companies like Santander Consumer USA Holdings Inc. borrow in the asset-backed securities market, essentially shunting money from bond investors to finance companies. Wall Street banks packaged more loans from finance companies into bonds in the first quarter than the same period last year, and Wells Fargo and JPMorgan remained two of the top underwriters of the securities. [Link]

(5) In May, Santander agreed to pay $26 million to settle allegations brought by Delaware and Massachusetts as part of ongoing investigations into the auto industry’s lending practices. Santander, whose partnership with Chrysler goes by the Chrysler Capital brand name, neither admitted nor denied wrongdoing….Whatever the case, the Santander-Chrysler relationship has opened a rare window into an industrywide race to the bottom that may have lasting consequences. [Link]

(6) Although this story has a deliberate, scary headline, the details are not. Discussing absolute dollar amounts is misleading as the underlying GDP and household networth have grown.

American consumers now collectively have the most outstanding revolving debt — often summarized as credit card debt — in U.S. history, according to a report Monday released by the Federal Reserve. Americans had $1.021 trillion in outstanding revolving credit in June 2017. This beats the previous record in April 2008, when consumers had a collective $1.02 trillion in outstanding credit revolving credit. [Link]

(7) More interesting is this chart. That American household savings rate has not improved but is lower than it was before.

US Household savings rate

Source: WSJ Daily Shot (August 2, 2017)

(8) If one were looking for a sign of market top, probably, this one is a very good candidate:

An $800 million subprime auto bond sale from Westlake Financial Services Inc. last week was priced at some of the highest valuations — as measured by the extra yield the notes offered compared with the benchmark rate — since 2014, the analysts wrote in a note Monday. The portion of the security rated BB, or two steps below investment grade, offered the least additional yield for a deal of its size and rating on record. Demand for the offering was strong enough to increase its size from a planned $700 million. [Link]

(9) NFC Equity to GVA

Equity in non-financial corporations (market value) to their Gross Value Added. We are fast approaching the levels of the 2000 peak. Perhaps, with 2Q data, we would be there already.

(10) Is the savings in corporate pension costs a silver lining at all to the story of stalling and even declining (very slowly, for now) life expectancy in advanced nations?

(11) A friend forwarded this article, ‘Our broken economy in one simple chart’. President Trump is predictably criticised at the end of the article for proposing a tax rate that allegedly worsens the inequality in the US. But, I could not stop wondering then about the worsening of the inequality to such extreme levels even without Trump tax cut and especially during the eight years of an egalitarian President.


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