No Car, No FICO Score, No Problem: The NINJAs Have Taken Over The Subprime Lunatic Asylum

One of the most trumpeted stories justifying the US economic “recovery” is the resurgence in car sales, which have now returned to an annual sales clip almost on par with that from before the great depression. What is conveniently left out of all such stories is what is the funding for these purchases (funnelling through to the top and bottom line of such administration darling companies as GM) comes from. The answer: the same NINJA loans, with non-existent zero credit rating requirements that allowed anything with a pulse to buy a McMansion during the peak day of the last credit bubble.

Bloomberg reports on an issue we have been reporting for over a year, namely the ‘stringent’ credit-check requirements for new car purchasers by recounting the story of Alan Helfman, a car dealer in Houston, who served a woman in his showroom last month with a credit score lower than 500 and a desire for a new Dodge Dart for her daily commute. She drove away with a new car.

So there you have it: No Car, no FICO score, no problem. The NINJAs have once again taken over the subprime asylum.

This time, it seems, is different: because anyone can get a loan. A year ago, with a credit ranking in the bottom eighth percentile, “I would’ve told her don’t even bother coming in,” said Helfman, who owns River Oaks Chrysler Dodge Jeep Ram, where sales rose about 20 percent this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs and bring me some down payment.”

Nevermind that a FICO < 500 means that not only will her job be gone in a few weeks, and that she will likely repay a single-digit percentage fraction of the total loan. What matters is she showed, well, signs of life – which makes her immediately eligible for all the loans that the government is fit to hand out. And frankly why not: with the US essentially insolvent, and now holding on to every day that the USD is still a reserve currency like dear life, who can blame her or the countless others like her, who have given the impression the economy is recovering when it is merely going through all the final strokes before it all, once again, comes crashing down?

Is it possible that barely five years later, everyone has forgotten what happened the last time anyone who wanted credit got it? And what will happen when those who don’t even have a phone bill or a light bill, nevermind a job, come asking for a Dodge Dart? Why yes: the Pied Piper of Marriner Eccles is playing the music ever louder, and so all must dance.

Luckily, even the mainstream media is finally catching on to the fact that all the “gains” in the best economic sector have been on the back of subprime.

While surging light-vehicle sales have been one of the bright spots in the U.S. economy, it’s increasingly being fueled by borrowers with imperfect credit. Such car buyers account for more than 27 percent of loans for new vehicles, the highest proportion since Experian Automotive started tracking the data in 2007. That compares with 25 percent last year and 18 percent in 2009, as lenders pulled back during the recession.

Issuance of bonds linked to subprime auto loans soared to $17.2 billion this year, more than double the amount sold during the same period in 2010, according to Harris Trifon, a debt analyst at Deutsche Bank AG. The market for such debt, which peaked at about $20 billion in 2005, was dwarfed by the record $1.2 trillion in mortgage bonds sold that year.

Of course, the enablers of this destructive behavior see nothing wrong, and live under the delusion that sub-500 FICO borrowers will actually pay them back.

“It’s a good investment” for lenders, Helfman said. “A person that has to get from point A to point B, they’re not going to jeopardize their job. They have to pay the car payment before they pay anything else.”

His Dodge Dart customer with the bad credit had to pay a higher than average interest rate.

“It wasn’t pretty, but it wasn’t crazy,” he said. She was “so happy she couldn’t see straight.”

Of course she did: Greece too was happy when it found Germany – an idiot lender who fund the Greek drunken spending for a decade (mostly on made in Germany military equipment). And like the lender, Germany too was happy: it found a willing idiot to buy everything it had to sell funded by “vendor financing.” Well all know how that relationship ended.

And end again it will, because subprime borrowers are the ones who can least afford the highest interest rates, which by definition flow through to the riskiest borrowers.

Fifty-eight percent of loans taken out to purchase Chrysler Group LLC’s Dodge brand vehicles in October were with loans above the industry average of 4.2 percent annual percentage rate, according to Edmunds, a researcher that tracks vehicle sales.

The average loan for a Dodge charged an APR of 7.4 percent, and 23 percent of the loans had APRs of more than 10 percent, making it the brand with the highest percentage of loans for more than 10 percent, followed closely by Chrysler and Mitsubishi. Rates on subprime auto loans can climb to 19 percent, according to S&P.

Dodge U.S. sales rose 17 percent this year through October compared with a year earlier, propelling Chrysler Group to 43 straight months of rising sales.

“Right now, you have to have fairly bad credit to be paying above 3 percent,” Jessica Caldwell, an analyst with Edmunds, said in a telephone interview.

But since nobody has blown up to date as a result of this latest micro credit bubble, it must mean everyone is welcome to dance. Sure enough:

An influx of new competitors into subprime auto-lending since 2010 is sparking concern of eroding underwriting standards, according to S&P. About 13 issuers have accessed the asset-backed market to fund subprime auto loan originations this year, according to Citigroup Inc.

Among the issuers accessing the asset-backed market this year are GM Financial, the lender founded in 1992 and known as AmeriCredit before it was acquired by General Motors Co. in 2010, and new entrants such as Blackstone Group LP’s Exeter Financial Corp.

“We are still skeptical that all of today’s subprime auto players will thrive,” Citigroup analysts led by Mary Kane said in an Oct. 10 report. The successful companies will be those that can underwrite and collect on loans while holding costs and defaults to a minimum, the Citigroup report said.

We are skeptical that Citi will thrive when the bubble pops, but that’s irrelevant. For now, let the good LTV times roll. LTVs of a whopping 114.5%.

Consider Exeter Finance Corp., which was acquired by Blackstone Group LP in 2011. Moody’s Investors Service won’t grant high-investment-grade rankings to asset-backed deals sold by the Irving, Texas-based company, citing its limited experience and performance history.

It has
had higher loss rates compared with other lenders, S&P said in a Sept. 17 report. Julie Weems, a spokeswoman for Exeter, declined to comment on the company’s losses.

Exeter has issued $900 million of the bonds this year, including $589 million of securities rated AAA by Toronto-based DBRS LTD and AA by S&P, data compiled by Bloomberg show.

In Exeter’s most recent deal in September, a $500 million issue backed by 26,591 loans, the average loan was 112.4 percent of the value of the car, up from 111.9 percent in a previous offering sold in May, according to a presale report from S&P. The average loan-to-value ratio, or LTV, on vehicle sales to consumers with spotty credit is 114.5 percent this year, compared with a peak of 121 percent in 2008.

It is so bad that even Morgan Stanley now gets it:

“Perhaps more than any other factor, easing credit has been the key to the U.S. auto recovery,” Adam Jonas, a New York-based analyst with Morgan Stanley, wrote in a note to investors last month. The rise of subprime lending back to record levels, the lengthening of loan terms and increasing credit losses are some of factors that lead Jonas to say there are “serious warning signs” for automaker’s ability to maintain pricing discipline.

And who gets to eat the losses? Well, as we showed yesterday, the bulk of consumer credit issuance in the past year, a massive 99%, has been sourced by the government to go straight into auto and student loans.