Sub-Prime Auto Lending

I recently published a piece on SeekingAlpha briefly summarizing the state of the used auto-loan industry and Santander Consumer USA in particular, one of the largest sub-prime auto lenders in the country. You can see it here:

Sub-Prime Lending - Will It Be Different This Time?

Summary Notes:

  • Used-auto lending has become extremely competitive and as a result lending standards have become non-existent
  • Industry-wide lending standards can be summarized as follows: “No Credit. Bad Credit. All Credit. 100 percent approval.”
  • Fraud is common, with 1% of all loans involving some sort of material fraud, and moral hazard exists for all financial institutions involved
  • As defaults, non-payment, and troubled debt restructurings rise, lenders have to increase their portfolio of loans to keep earnings stable
  • These non-performing sub-prime loans are being securitized and sold to investors (sound familiar?). It was recently discovered that Santander verified the incomes of only 8% of borrowers whose loans it securitized in its recent ABS issuance- this ABS was somehow rated as Aaa by Moody's.
  • Santander holds the worst tranches of these loans on its books
  • Used car values are plummeting as loans are defaulted upon and cars are repossessed
  • I do not see how this can end well