Uh-oh, the credit rating agencies are up to their old tricks again

[glenn1]

This needs to be stopped in it's tracks. Seriously if they (congress and the feds) don't reign in what these banks are doing on wrapping bad loans into good loans and selling them like they are AAA rated to investors we are going to end up with another economic crash.

The ratings agencies aren't "up to old tricks," they're measuring the credit risk of instruments exactly like they're supposed to. What you seem to want them to do is account for systemic risk in their ratings, which is a different animal altogether. It defeats the entire point of the exercise if you're rating everything against extraordinary vs. regular market conditions.

 

[werepossum]

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.

I was assuming OldGamer's point about them being "up to their old tricks" is correct. My son works for an auto auction company and they regularly sell vehicles for a fourth or even a tenth of Bluebook value. If these particular cars were financed at Bluebook value, recouping even 50% of the loan value would likely be impossible. Your costs in trying to restore the cars to nominal value would cost more than that value.

 

[LegendKiller]

I was assuming OldGamer's point about them being "up to their old tricks" is correct. My son works for an auto auction company and they regularly sell vehicles for a fourth or even a tenth of Bluebook value. If these particular cars were financed at Bluebook value, recouping even 50% of the loan value would likely be impossible. Your costs in trying to restore the cars to nominal value would cost more than that value.

LTVs in the securitizations are based off of the wholesale values.

Most new captive finance companies have loss severities of 40% or so. Used vehicles are usually 50-60%. Not a huge difference.

They aren't up to many tricks. A lot of the stuff you hear about is on the margin.

 

[LegendKiller]

Bank inspectors should have just come out and said you cant bundle loans together and sell them. If you look at how they rated these bundled products, then, it makes sense to question if these rating agencies can rate other stocks and bonds. They obviously should have all gone to jail already or been convicted of fraud or misleading investors. Where is the SEC?

The government is just as likely to fail with big business. Larger companies and larger banks can afford bigger bribes.

I don't understand how a bank can charge 18% interest (or more like 40%) on a credit card but only give depositors 1% or less interest on your cash. This is what I would fix first.

Yeah, throw the baby out with the bathwater. What a moronic idea.

 

[werepossum]

LTVs in the securitizations are based off of the wholesale values.

Most new captive finance companies have loss severities of 40% or so. Used vehicles are usually 50-60%. Not a huge difference.

They aren't up to many tricks. A lot of the stuff you hear about is on the margin.

I'll take your word for it as I'm not knowledgeable about the subject, just suspicious about bundled loan securities in general.

 

[LegendKiller]

I'll take your word for it as I'm not knowledgeable about the subject, just suspicious about bundled loan securities in general.

I look at them all day, every day. There are some I don't trust, most I do. You see some real zingers once in a while. You just have to keep in mind, know what you know, fuck the rest and never just take a banker's word for it.