Subprime Auto: The Truth Is Out There

Red and blue is the new black and white, but the country could use a lot more purple. Seems few can take a position publicly these days unless it’s extreme – whether it’s a political debate or the meaning of the New York Fed’s recent Quarterly Report on Household Debt and Credit showing an uptick in subprime auto delinquency. Intelligence includes the ability to see the other side’s point of view. The truth is out there – and it can be found in the gray area between the absolutists.

There Are Reasons to Stay the Course

For some, the latest Fed report is about as jarring as a worn out speed bump. This view reminds me of the old saying that a second marriage is the triumph of hope over experience. In a new spin on that adage, not seeing the dangers could be seen as the triumph of experience above all other considerations.

The lack of concern may be understandable based on subprime auto’s ABS track record and the individual experiences it suggests – if you haven’t suffered losses in the past, you’re not going to easily fall for a warning to change course. As the subprime optimists point out, there are good reasons for success, including the relatively short duration of auto loans and sequential payments in securitizations that increase credit enhancements on junior tranches over time. In addition, it is true that subprime auto, however bad it may get, is not expected to cause a 2007 redux given the relative size of the market versus subprime mortgages.

There Are Also Flashing Red Lights

On the other hand, even if the macro impact of a subprime auto downturn won’t reach the scale of the mortgage crisis, individual participants could still be flirting with disaster. There have already been casualties among non-bank lenders and the claims of deceptive lending practices against Major World, said to be metro New York’s largest car dealer, may provide a roadmap of troubling conduct in the industry that, if found to be more widespread, could ensnare others as well. As we mentioned in our last post, uncertainty is creating risk – no one really knows what lies beneath the ramp up in delinquencies during a strong economy and whether it reflects economic disparity, lending practices or the beginning of a cultural change.

Time to Have Sights Set Straight Ahead

Comparing everything to the subprime mortgage crisis is becoming as tiresome to some as “everything zen” was a few years ago. That’s unfortunate given the lessons in the reflection. Regardless, the best thing any market participant can do is pump the brakes and make their best decision based on what they see ahead. And wouldn’t they have a clearer picture if they expanded their view? Folks on either side of the subprime debate would do well to see the other’s view – maybe then the future will be more predictable for all.

If you haven’t already, you can be part of creating that future by taking our subprime auto survey here.


Seiji Newman, a Counsel, and Nicole Serratore, an Attorney, in the Insolvency, Creditors’ Rights & Financial Products Practice Group of Davis & Gilbert each contributed to this post.