Slumping Used Car Prices Spell Disaster For Subprime Auto Securitizations

It will come as no surprise to our readers that sales of automobiles in the U.S. have bubbled over in recent years and stood at a SAAR of 17.7mm units at the end of September.To put that number in context, an assumed 15-year useful life for vehicles would imply that’s more than 1 car for every driving age person in the United States. Obviously that’s likely not sustainable which is probably why Ford executives admitted on a recent conference call that U.S. auto sales have reached a “plateau.”

As we’ve argued in the past, the main reason auto sales have bubbled over is due to the continuous degradation of lending standards over the past 6 years fueled by the Wall Street securitization machine. Of course, the problem with “rigging” new car sales in this way is that eventually all of those vehicles come back to flood the used car market with excessive supply resulting in lower used car prices and higher securitization losses…and that’s when the whole ponzi starts to unravel. Which, as the Wall Street Journal points out, is exactly what is starting to happen right now.

Several large companies have warned that prices of used vehicles are likely to weaken, potentially leading to higher losses on loans on which cars are the collateral. That, combined with looser terms for loans and the growth of loans going to subprime borrowers, is sounding a warning for the long credit boom that has spurred auto sales.

Auto-loan balances topped $1 trillion for the first time ever this year. Actual default rates remain low, but losses are starting to tick up, leading some big lenders to scale back. That has the credit underpinnings of the auto boom looking shakier.

“Losses are going to go higher—there’s no question about that,” said Hylton Heard, senior director at Fitch Ratings.

Earlier this year, J.P. Morgan chief James Dimon warned about a weakening auto market and the potential for used-car prices to drop. Indeed, prices of used cars that are up to eight years old are down 3.6% in 2016 through September versus the same period a year earlier, according to the NADA Used Car Guide, a division of J.D. Power.

“It is the first time since 2008 that prices have fallen by any material amount,” said Larry Dixon, director of market intelligence at the NADA Used Car Guide. The firm is projecting prices will finish the year down by an average of 4% compared with 2015.