Halister News

(Bloomberg) -- Recent performance of “deep” subprime auto-loans has been “awful,” according to Equifax.

• "We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two. In deep subprime, the rise is more substantial," Equifax chief economist Amy Crews Cutts said in a phone interview last week
• "For the group of lenders who specialize in high-risk loans, performance is getting worse. And since credit scores are not really moving, the performance doesn’t seem to be credit-score based. Perhaps a failure to verify sources of income? An issue with down payments? It’s hard to see where the risk is coming from"
• "Performance of recent deep subprime vintages is awful," noted an Equifax slide in a July 31 "virtual press conference" given by Cutts, referring specifically to loans with origination VantageScores of less than 530
• This comes despite credit scores staying roughly the same, with VantageScores of less than 530; performance of more typical subprime auto loans with VantageScores of less than 620, has been historically average
• NOTE: Equifax data reflects performance of broader subprime-auto loan universe, not just those loans that get securitized
  • Subprime auto ABS delinquencies have been increasing recently, but they only reflect performance of a very small microcosm of the broader subprime auto-loan universe, Cutts said

MORE CONSERVATIVE

• The good news: more than 90% of overall auto loans are made by banks, credit unions, and captive auto finance companies, and these entities have become increasingly conservative and discerning in their underwriting since the financial crisis
  • But these lenders have originated fewer and fewer subprime loans each year as a percentage of their overall origination volume (for example, roughly 13% of banks’ current auto-loan portfolios are considered subprime)
• Three other types of lenders -- dealer- finance companies, monolines, and independent finance companies -- have dominated the subprime-auto sector, and are more open to taking risk; they specialize in "deep" subprime
  • In 2Q 2017, for instance, more than 80% of the loans financed by so-called dealer-finance companies had VantageScores of less than 620, according to Equifax data. Still, they pulled back slightly from subprime compared to 2Q 2016
  • Comparatively, less than 20% of the loans financed by banks in 2Q 2017 were subprime; credit unions had even a smaller amount
  • While deep-subprime lenders are only a small minority of the auto-lender universe, they are originating a greater percentage of subprime loans

THE OFF-LEASE DILEMMA

• Used-car prices have fallen because too many leases were done 3 to 4 years ago for sedans when energy prices were still high (and therefore people did not want inefficient cars like SUVs). Ever since oil prices have crashed, SUVs look attractive again, and sedans are coming into preowned vehicle inventories. But nobody wants them anymore, Cutts said
  • "The wrong cars are coming back at the wrong time"
• Overall auto loan terms (all credit scores) are getting longer, with more terms of 7+ years
  • Auto subprime loan terms are also longer, mostly 6-year terms
  • Auto lease terms are getting shorter
• Loan performance, overall, is still relatively good compared to historical levels. The slight weakening is due to shifting market share among different lender types in the auto-lending market, Cutts said
• "I do worry about predatory lending," she added. In a normal situation, if a borrower has difficulty, lender can agree on a price for the loan. Both borrower and lender have a stake in the debt
  • "But in predatory lending, the scale is tipped away from the borrower." The lender doesn’t care if the borrower fails

To contact the reporter on this story: Adam Tempkin in New York at atempkin2@bloomberg.net

(Bloomberg) -- FV spread vs Libor is likely to tighten between mid-August and Labor Day in anticipation of surge in corporate supply after the U.S. holiday, Citi strategist Ruslan Bikbov says in note.

• Over past five years, spread has tightened by a median 8bp over the time frame
  • Recommendation: sell 2,598 FVU7, receive 300m USD matched-maturity Libor swaps at 9.4bp (DV01 $123k); target 1.4bp, stop-loss at 15.4bp
  • Main risk to trade is increasing demand for USTs from reserve managers

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Vivien Lou Chen