This is the last of 10 articles taking an updated look at our most widely read stories of the year. The first nine can be found here:
With regulators nipping at their heels, auto lenders had good reason this year to retrench.
But that’s not what they did.
Issuance of auto loan-backed deals in 2015 through October has reached $65.91 billion, with 23.93 billion backed by non- and subprime loans, already beating last year’s post-crisis record for this segment of $22 billion.
A big impetus for the continued brisk growth is the asset class’s glowing track record. Few could have foreseen how much better auto loans would perform than mortgages during the crisis. That’s convinced lenders and securitization investors alike that, provided there’s a cushion against losses, it’s a sector with excellent opportunities.
But the main attraction remains the high interest rates paid by borrowers, particularly those in the subprime sector.
Stalwarts such as Santander Consumer USA have continued to crank out deals, which are backed by deals that have riskier borrowers and metrics. In March, the originator pressed deeper into subprime terrain, reviving a platform for securitizing what are known as “deep subprime” loans, those taken out by consumer with particularly spotty track records. The first transaction under the DRIVE label was for $712 million.
Santander, along with peers such as AmeriCredit Financial Services — the subprime unit of GM financial — issued deals later in the year bundling loans with longer maturities. Terming increases risk as longer-term loans amortize more slowly, and so are underwater for longer. So if the obligor can’t pay further down the road, there’s a higher chance the recovery will short of the loan value.
Attracted by the high yields, less familiar names with growing portfolios issued auto loan securitizations as well. In October, for instance, Skopos, an indirect lender, was prepping its first term securitization of auto loans with a credit rating. The company issued its inaugural deal in April. Its target audience? Borrowers with scores ranging from 460 to 625.
All this activity has drawn the scrutiny of regulators, who are leery of a repeat of the subprime mortgage crisis.
The Department of Justice has subpoenaed GM Financial, First Investors, Consumer Portfolio Services, Santander and Ally Financial, asking for documents related to their approach to underwriting subprime auto loans.
The Consumer Financial Protection Bureau has also been heightening its scrutiny of the sector. ASR sister publication American Banker reported in October that the agency was internally debating whether to clamp down on the discretion that auto dealers have to mark up pricing as the practice allegedly leads to discrimination.
Proponents of subprime auto securitization said that regulators, as well as some media outlets, are conflating two sectors — subprime mortgages and subprime auto loans that are dissimilar in key ways. Apart from the better-track-record argument, they argue that securitization structures in auto loans are stronger than they were in mortgage deals, while risk retention now ensures that sponsors have a stake in the performance of their deals, in contrast to the mortgage securitizers of the past.
At any rate, growth seems unstoppable. In July — about a year after the Justice Department subpoenaed Santander — the bank said it planned to increase the size of the subprime book. This would come with higher provisions, but Santander’s performance this year has shown that the profits from this segment are rising faster than the cost of hedging against losses.
And it’s clear the Spanish bank isn’t alone. Regional banks like TCF Financial and Huntington Bancshares are also boosting their auto lending. In Q3, TCF alone increased its auto loan book by an annual 40%.
