Thursday, July 2, 2015

LTV 137% - In Unprecedented Development, Lenders Now Take Record Losses On Every Used Car Loan

This wasn't supposed to happen.
With the US consumer hunkering down in 2015 and barely spending more than in the comparble period last year, the only silver lining had been auto sales driven almost entirely by access to cheap credit; in fact, as the chart below shows while revolving credit has barely budged from its post-crisis lows with consumers still failing to fall for the "recovery" narrative, Uncle Sam's zero cost loans which are now reaching well over 6 years in average duration have provided a generous support for the US auto industry. In addition to the bubble in student loans, car loans have been the only confirmation that the US consumer - that driver of 70% of the US economy - is still alive.

So in a world in which one can buy cars now and worry about the costs later, much much later, auto sales should have been soaring as they have been in recent years, right?

Well, not for GM, which moments ago reported a surprising drop in June auto sales, which declined 3% M/M to 259,353 from the prior month, driven by an 18.1% plunge in Buick sales, with Chevy and Cadillac also posting declines, despite expectations of a 3% headline increase. This even as GM announced pickup deliveries were up 33% with the Silverado up 18%. Curiously, GM's main domestic competitor, Ford, reported a 9% drop in F-Series sales in June.

What is more surprising is that even as GM posted its first monthly sales miss in a long time, it now appears to be engaging in yet another stealth government bailout, this time not on the balance sheet but the income statement.
As GM reported, even in a month of broader decline in sales, "State and local government sales were up 6 percent in June, with full-size pickup and Tahoe PPV deliveries more than doubling."
The US government is buying GM pickup trucks now?
It gets better: "State and local government sales are up 19 percent calendar year to date."
So just what is the dollar amount of these soaring government purchases from a company that was bailed out by the same government several years ago? That information is not disclosed, as otherwise it may crush the fiction that it is the US consumer that is behind GM's powerful "rebound" and not the entity that has an unlimited balance sheet.
But what is most concerning in light of weak sales not only from GM but virtually all other carmakers, both domestic and foreign, is what was reported in the OCC's semiannual report on "Semiannual risk perspectives" in which we learned something truly stunning: according to the OCC, "60 percent of auto loans originated in the fourth quarter of 2014 had a term of 72 months or more. Extended terms are becoming the norm rather than the exception and need to be carefully managed."
But the real stunner is the following: also according to the OCC, quoting Experian, "average advance rates well above the value of the autos financed. In the fourth quarter of 2014, the average LTV for used vehicle auto loans was 137 percent." In other words banks are assured to take major losses on their loans and they are still lending at a record pace. Or rather, not so much banks because as we have shown before, the primary source of auto loans in recent years has been just one, as shown below.

Believe it or not, it gets worse:
"advance rates for borrowers across the credit spectrum are trending up, with used vehicle LTVs for subprime borrowers (credit score < 620) averaging nearly 150 percent at the end of 2014 (see figure 24)."

For those who are confused, an LTV of over 100% at origination guarantees that the lender will suffer losses on the loan (absent some dramatic price bubble which sends car prices soaring in the coming years).
This explains why the Fed stopped reported LTV data for auto loans altogether and one has to rely on period snippets of updates to get a sense of just how terrifying the real Loan to Value situation currently is.
So what is going on here? Well, for lenders, car loans have become a definitive loss leader. How do they recover the losses on the loans? "Sales of add-on products such as maintenance agreements, extended warranties, and gap insurance are often financed at origination. These add-on products in combination with debt rolled over from existing auto loans contribute to the aggressive advance rates."
In other words, in the US, the car industry has been quietly transformed to a razor-razorblade model, one in which it is not the manufacturers who benefit on the razorblade sales but the lenders!
That this too will result in an epic disaster is not a question of if but when, which is a recurring question considering there is now a bubble virtually anywhere one turns.
Source: OCC

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