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Deep Subprime Is a Matter of Concern for the US Automobile Industry

May 15, 2014

If the financial crisis in the real estate sector wasn’t bad enough, we are now on the verge of a crisis in the car loan market. In order to help you better comprehend this discussion, you should first know what a subprime and deep subprime loan are.

Subprime Loan

Whenever you take out a loan with low credibility, it is considered as a subprime loan. This can be due to anything. A person might have been laid off recently or had a financial crisis due to a certain medical emergency. In such cases, when a person struggles to pay back, a new loan is issued to him/her, called the subprime loan.

Deep Subprime

When we use the term ‘deep subprime’, we refer to lenders who fall below a score of 550 on the Fair Isaac Corp. table. The scores lie between 300 and 800 while a borrower under a 600 point mark is considered a high credit risk.

The Current Scenario

Now that you have an idea of what subprime loan is, consider this: about one-third of the total risky car loans that are floating in the market are deemed as ‘deep subprime’. And what has made matters worse is that for the past 5 to 7 years, these deep subprime car loans have been on the rise. In other words, customers who are awarded these loans are falling behind their allotted schedules.

It was recently reported that there has been a rise of three percentage points on the bonds that are backed by deep subprime loans. To put that into perspective, excluding the subprime mentioned, the overall increase in the rest of subprime auto securities combined has been a mere 0.89 percentage points.

As per the strategists,

“Auto loan fundamental performance, especially within ABS pools, continues to deteriorate.”

What is even more astonishing is the fact that the percentage of securitizations of the subprime auto loans that are considered deep subprime has now reached 33%. It was 5% about half a decade ago.

What Is Expected?

Keeping the current scenario in mind, things in the auto loan market can get even messier. S&P has even revealed that losses are piling up in all sectors including prime, subprime, as well as deep subprime. S&P even revised its expectations, stating that far greater losses are knocking on the door and that you cannot expect much good to come from any deals.

In other words, the profitable companies are becoming more and more unprofitable while the newbie is struggling to hit breakeven. The sad part is that as the economy grew back from the 2008 crisis, the credit scores did too. However, the payment behavior of subprime borrowers did not see much difference. From 2015 to this day, these customers have continued to move forward with late payments.

 

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Sources

http://www.autonews.com/article/20170329/FINANCE_AND_INSURANCE/170329826/deep-subprime-becomes-norm-in-car-loan-market-analysts-say

https://www.ft.com/content/3ee4f863-7b0b-3b6d-85f4-3dc73c994619

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