Are SubPrime Loans Fueling The ABS Market?

With auto sales numbers at their strongest point since 2006, there was an accompanying increase in auto loans. With more auto loan origination, there was a marked uptick in high-risk automotive lending. From subprime to extra long term, both saw increasing numbers as the year wore on. However, when it comes to subprime loans the question remains, is there a bubble? If so, is that bubble going to burst and cause financial chaos reminiscent of the housing crisis of the mid 2000s?

Some think that a bubble exists and will burst, others do not. Another popular theme that comes up with subprime auto lending is the auto backed security market. Billions of dollars in subprime loans are packaged and sold as securities, often with high demand. This past September Santander USA put out a $1.35 billion dollar bond offering that had to turn back $1 billion in demand. During a panel discussion in Las Vegas, Chris Pink the Managing Director at Wells Fargo & Co.’s securities arm voiced his opinion that subprime loans aren’t fueling the ABS market. Pink said, “I don’t think you’d come away from looking at those figures saying it feels like the ABS market is driving a resurgence of subprime.” Sam Smith, Director of Long-Term Funding and Securitization at Ford explained in a Bloomberg report that he feels that subprime auto lending isn’t done just to flip to the ABS market. On this topic Smith said, “The tail is not wagging the dog in auto securitization. We’re not originating contracts just so we can securitize them.”

How could this fueled speculation impact dealerships? For one thing, the government has investigated Santander USA and other U.S. auto lenders like Ally Bank. Government groups like the CFPB have stated their desire to have more control over auto lending. On September 18th, Richard Cordray, the Director of the CFPB said, “The extension of our oversight to the nonbank auto lending companies would also allow us to protect consumers better against the silent pickpocket of discrimination.” Cordray was referring to auto lenders and dealers. As more attention is drawn to auto lending, more attention and possibly regulation could be directed at dealers.