How so? If the LTV is reasonable and the condition of the vehicle reasonable and the repossession costs low, as long as vehicle prices maintain a decent value the recovery value is reasonable. Right now most companies that write <100% LTV loans are experiencing ~60% recovery rate, ~120-130% LTV Is ~40% recovery rate. Even a decline in the Manheim of 20% would only put recovery rates at 30-50%. Considering that the average age of vehicles on the road is now ~2yrs older than pre-crisis and that people are holding cars longer, it's difficult to see how you reasonably get there. Especially considering that the senior tranches delever quickly. These aren't 30 year IO mortgages, they are usually 5-6yr car loans that amortize naturally over a relatively quick period. The A2 AAA tranche of most of these bonds begin paying within 10 months, meaning that by that time 10-20% of the bonds have paid off, then the A2 has an additional 20% of enhancement, making the scenario in which you lose money one where 100% of the loans would have to default with a 70% loss severity to hit the bonds.
Do you see a reasonable scenario where car values will fall 30% *AND* 100% of every single surviving loan will default? There's absolutely not catalyst out there that would make cars fall 30% when the supply is still tight. Maybe in 2-3 years you could see them falling due to more cars coming off lease, or rental fleets defleeting during turnovers. Car manufacturers aren't stamping out cars en-masse with incentives, so that's staying relatively sane.
The market has actually pulled back from mid/late 2013 and early 2014. LTVs are down a little, FICOs are up, and rates are actually up.
I think the one thing that could change the equation is the lengthening of terms. In order to afford the more expensive vehicles they are just pushing the terms out. If you're a subordinate tranche, maybe a 3-4yr weighted average life, you could be in trouble, but I usually don't buy there. But those aren't AAA tranches and aren't usually the front-pay "A" rated tranches. They are 3-4th in line "A" rated tranches.
I'm about as bearish as they come on subprime auto but these articles are ridiculous.
There's also a key difference between houses and cars. Nobody is taking out cars as an investment and most are just buying a Chevy to get to work. The utility is only lost if the car breaks down which, in the case of deep subprime auto, may be more frequently but that's again usually the back-end bonds. Furthermore, you still need to get to work. You can't just get rid of your car and go get another car very easily, unless you file for bankruptcy, turn your car in, then are underwritten by a specialty shop like Tidewater, to be a good credit on the backside of the bankruptcy. Those are pretty rare. The choice to ride the bus or take the train is limited for the vast majority of Americans. Thus, a car is what you get.
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