Tags: subprime | auto | loan | bonds

NYT: Subprime Auto-Loan Bonds: A Disaster in the Making?

By    |   Tuesday, 27 January 2015 02:11 PM

Institutional investors are going nuts over subprime auto-loan bonds, enticed by their hefty yields in a low interest-rate environment.

But some experts are worried that the investment spree is going overboard and could end in disaster, as strapped borrowers default on their loans.

The issuance of such bonds has soared 302 percent to $20.2 billion since 2010, according to Thomson Reuters IFR Markets.

The strong demand for these bonds comes at the same time as a rise in the number of subprime auto loans that contain falsified income or employment information, The New York Times reported.

"There is so much money looking for a positive return that people get lazy," Christopher Gillock, a managing director at Colonnade Advisors, a financial advisory firm that has worked with subprime auto lenders, told The Times.

"Investors see it is rated triple-A, turn off their brains and buy into the paper." He said that no subprime auto-loan bond deserves a triple-A rating. Only three companies have such a rating: Exxon, Microsoft and Johnson & Johnson.

This sounds eerily familiar to the subprime mortgage market before the 2008 financial crisis, doesn't it? Fortunately, the size of the overall auto-loan market pales in comparison to the mortgage market — $948 billion compared with $8 trillion.

But the problem is substantial. "Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession," The Wall Street Journal reported.

And economists are noticing. "It's clear that credit quality is eroding now, and pretty quickly," Mark Zandi, chief economist at Moody's Analytics, told the paper.

Regulators are noticing too — noticing that banks are loosening their lending standards. "We're putting banks on notice that we have concerns," Darrin Benhart, of the Office of Comptroller of Currency, told The Journal. "It's definitely an area that warrants some attention."

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Institutional investors are going nuts over subprime auto-loan bonds, enticed by their hefty yields in a low interest-rate environment.
subprime, auto, loan, bonds
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2015-11-27
Tuesday, 27 January 2015 02:11 PM
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