Subprime Auto Loans in YOUR Portfolio
In your Dec. 23 issue, you saw why subprime auto loans are the “Big Short” of 2017.
There are more bad car loans than ever. Now more of them are starting to fail.
The Wall Street Journal, Experian, TransUnion, and the New York Fed all agree.
Subprime auto loans are a problem.
A huge swath of all subprime auto loans in America could end up worthless. In their Dec. 1 report, Fitch noted annualized net losses on subprime loans were already at 9.61%.
And as you saw on Dec. 23, Experian said over 40% of all auto debt in America today is “non-prime” or worse.
That’s the big picture. Lots of bad loans out there. And many of them are at risk of default.
Now here’s how this story may have already infected your portfolio…
First, more failed auto loans means more car repos. More repos means more used cars sitting on lots all across the country. More used cars for sale means new car sales fall.
That’s obviously bearish for automakers. But that’s just the start. All those car repossessions cause other problems.
That’s because more failed auto loans means losses for the financing companies that write the loans. Sure, the car can go back on the lot be resold. But whoever wrote the loan takes a bath.
This is why small regional banks and credit unions typically have tight lending standards. They can’t afford to be wrong very often.
TransUnion even recently said credit unions, by and large, are immune from the subprime auto crisis.
The bad loans – the real toxic junk – come from companies like Santander Consumer (NYSE: SC) and Consumer Portfolio Services (NASDAQ: CPSS).
A quick review of quarterly filings from financing companies like these two would show which one has the most exposure to non-prime loans.
That company would be a great candidate for put options.
Now here’s the most urgent part when it comes to your portfolio…
The securitization of auto debt has led to a sickness similar to the mortgage crisis a decade ago.
Yield hungry investors have snatched up securitized auto debt and screamed for more.
That hunger filtered all the way back down to the loan originators. They keep financing less credit-worthy borrowers at higher and higher interest rates.
If subprime auto loan defaults go from 10% to 12% or higher, the sickness will start to infect much more than just auto financing companies.
It’ll infect carmakers and banks… and lead to losses in high-yield bond portfolios.
This means you should check the high-yield portion of your portfolio and find out exactly what you own. And find out where it comes from.
Your takeaway is simple. Even if markets continue racing higher as President-Elect Trump prepares to take office, there are economic storm clouds on the horizon.
The banks, automakers, and finance companies have managed to put auto loans in the same predicament mortgages were in back in 2005 – 2006.
And its possible 2017 is for the auto market what 2007 was for housing.
If you’re smart, you’ll get ready now so you can focus on fresh opportunities in 2017 knowing your portfolio is safe from subprime auto fallout.