What’s New is Old Again. Three red flags for leasing

Non-Prime Times, the official publication of the National Auto Finance Association. TruDecision CEO Daniel Parry’s article on leasing featured as the cover story.

In 2010, the subprime auto loan market began to grow once more, returning from a near complete decimation to where it was pre-crisis. As far as the media is concerned, all growth was the product of a universal collusion to throw underwriting standards out the window. The following represents just a fraction of the stories that have been published since that time, sounding the alarm on risky auto loans and predicting another subprime crisis:

  • 2010 – The Subprime Lending Business (auto) Survives, Even Thrives – Time Magazine
  • 2011 – Ally Financial Bets on Risky Subprime Car Loans – Reuters
  • 2012 – Subprime Auto Loans Grow as Lenders Charge a Premium – Forbes
  • 2013 – How the Fed Fueled an Explosion of Subprime Auto Loans – Reuters
  • 2014 – The Next Subprime Bubble to Burst: Auto Loans – New York Post
  • 2015 – The Next Crisis, Subprime Auto Loans, Won’t End Well – Forbes
  • 2016 – Significant Concern in Subprime Auto Loans – Investor’s Business Daily
  • 2017–‘Deep’ Subprime Car Loans Hit Crisis-Era Milestone – Bloomberg

 

Nearly all of these stories reference sub- prime bond data, which is about $23 bil- lion out of $250 billion in annual subprime originations. Of the roughly 10 percent that is put into bonds, about 60 percent comes from three companies – none of which are blowing up.

What has yet to become headline news is that subprime auto finance has been in a mild contraction for the last year now, with major lenders pulling out of the deepest paper and others limiting originations due to capital costs (otherwise known as rational lending). The real risk in auto finance comes not from conventionally structured auto loans, but from auto leasing.

Reviving the past
The oil crisis of the 1970s, along with a slew of regulations from the Environmental Protection Agency, pushed Americans to drive smaller, more fuel-efficient cars. Gone were the 428 Cobra V-8 engines and Mopar 400 blocks. Powerful muscle cars were soon replaced by aerodynamic wedges with better mileage. It was kind of like going from Sean Connery to Pierce Brosnan, for you 007 fans.

The real risk in auto finance comes not from conventionally structured auto loans, but from auto leasing.