Across the country, there is a booming business in lending to the working poor—those Americans with impaired credit who need cars to get to work. But as The New York Times reports, this market is as much about Wall Street’s perpetual demand for high returns as it is about used cars.
An influx of investor money is making more loans possible, but all that money may also be enabling excessive risk-taking that could have repercussions throughout the financial system, analysts and regulators caution.
In a kind of alchemy that Wall Street has previously performed with mortgages, thousands of subprime auto loans are bundled together and sold as securities to investors, including mutual funds, insurance companies and hedge funds. By slicing and dicing the securities, any losses if borrowers default can be contained, in theory.
Led by companies like Santander Consumer; GM Financial, General Motors’ lending unit; and Exeter Finance, an arm of the Blackstone Group, such securitizations have grown 302%, to $20.2 billion since 2010, according to Thomson Reuters IFR Markets. And even as rising delinquencies and other signs of stress in the market emerged last year, subprime securitizations increased 28% from 2013.
The returns are substantial in a time of low-interest rates. In the case of a Santander Consumer bond offering in September—which totalled $1.35 billion, backed by loans on more than 84,000 vehicles—some of the highest-rated notes yield more than twice as much as certain Treasury securities, but are just as safe, according to ratings firms.
Now questions are being raised about whether this hot Wall Street market is contributing to a broad loosening of credit standards across the subprime auto industry. A review by The New York Times of dozens of court records, and interviews with two dozen borrowers, credit analysts, legal aid lawyers and investors, show that some of the companies, which package and sell the loans, are increasingly enabling people at the extreme financial margins to obtain loans to buy cars.
