Auto Loans

Servicers See It All – Are They the Bellwethers for Subprime Auto’s Future?

Jun 27, 2019 | By JOSEPH CIOFFI

As we continue to break down and analyze the responses to our subprime auto survey, covered in our inaugural market study, servicers, deserve a closer look given the unique vantage point they have in securitizations. It could be easy to overlook them in favor of originators and investors, the alpha and zeta in the chain. Servicers may not have originated the loans, and they may not be as vested in performance as investors, but no other group is on the frontline of collection and loss ...

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Get the Fraud Out of Here: Highlights from the Dealer Fraud Panel at the NAF Non-Prime Auto Financing Conference

Jun 13, 2019 | By JOSEPH CIOFFI

By popular demand, the National Automotive Finance (NAF) Association’s Non-Prime Auto Financing Conference in Plano, Texas, last week included a close look at one of the biggest challenges facing subprime lenders, dealer and dealer-enabled fraud. I was privileged to be on the panel with an experienced group of professionals: Joel Kennedy, Chief Operating Officer at TruDecision, and newly appointed NAF President who moderated the panel; Zahid Kassem, Principal at Kassem Consulting; Frank ...

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Anonymous Survey Finds Reports of Subprime Auto’s Health Are Greatly Exaggerated

May 29, 2019 | By JOSEPH CIOFFI

“There will be time, there will be time To prepare a face to meet the faces that you meet” - T.S. Eliot It’s not uncommon for the privacy of a setting to imbue a conversation with candor, and for the public situation to lead to prevarication. Remember all the folks who stated publicly they could never vote for a certain Presidential candidate, and yet . . . here we are. Diverging statistics in various reports (a recent example being the difference between the latest NY Fed Household Debt and ...

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Behind-the-Scenes Strategies for Success: We Speak to Revenue Connections on Improving Collections to Combat Latent Market Risks

Apr 11, 2019 | By JOSEPH CIOFFI

Sometimes, it’s what you can’t see that matters most. First, the bad news: after years of economic growth and generally good times, consumers’ credit scores may be inflated. Like 50 is the new 40, a prime score today may be the equivalent of a sub-prime score pre-financial crisis. If you believe a leopard doesn’t change its spots, a high credit score may be masking a borrower’s likelihood to default in bad times, and the risk on subprime loans is bigger than believed at origination. Now, the ...

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Following the Backup Plan – Part Two: We Talk to CAR Financial Services on the Keys to Successfully Engaging a Backup Servicer

Mar 29, 2019 | By JOSEPH CIOFFI

This is part two of our interview with the executive team at CAR Financial Services, a subprime auto finance company with over 25 years of experience providing customized backup and successor servicing. In part one of our interview, we discussed the benefits of having a backup servicer in place before trouble starts. But once you decide to take the prudent course and engage a backup servicer, how do you know you are getting the best value from the relationship? Here, we discuss with CAR the ...

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Part One: As Delinquencies Rise in Subprime Auto, We Explore a Protective Strategy with Backup Servicer, CAR Financial Services

Mar 22, 2019 | By JOSEPH CIOFFI

If subprime auto delinquencies continue to rise and the risks continue to grow, it will be cold comfort to those who saw it coming, if they haven’t taken protective measures. There’s no glory being on the wrong side of right. From this perspective, there is real value in any service that has the potential to help participants see ahead of the curve and mitigate risks. With this in mind, we spoke to Justin Bannister, Director of Centralized Operations, and Oscar Lopez, Specialty Products ...

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Subprime Auto: The Truth Is Out There

Feb 28, 2019 | By JOSEPH CIOFFI

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 ...

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How Subprime Auto Participants Can Avoid the Hell of a Future Unseen

Feb 14, 2019 | By JOSEPH CIOFFI

If you want to know the truth, no one can really predict the future of any market by themselves; everyone is limited by data and perceptions. Without shared knowledge and experience, the future remains a puzzle only time can solve. Where there is limited information, J.D. Salinger’s prediction is inevitable: “the fact is always obvious much too late.” But in subprime auto ABS, we don’t have to succumb to Salinger’s fatalism. By taking the pulse of all types of industry participants – lenders, ...

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Honor Finance’s Downfall Shows Anything Can Happen

Dec 05, 2018 | By JOSEPH CIOFFI

No one had suffered any losses, or at least it seemed no one could remember having done so. S&P had not downgraded any subprime auto loan ABS since just after the turn of the century or any other auto loan ABS since 2011. Credit enhancements were widely deemed sufficient to absorb any worst-case scenario. With a long track record of success and protections in place, few blinked when one non-bank lender, Honor Finance, went decidedly deep down the credit scale. It was 2016 and Honor Finance had ...

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Dis-Honor in a Downgrade – Strong Management and Credit Enhancements Mean More Today Than Yesterday (But Not as Much as Tomorrow)

Aug 02, 2018 | By JOSEPH CIOFFI

There’s a caution flag out for subprime auto loan securitizations. The Class C tranche of Honor Finance’s HATS 2016-1 – the deal that jump-started the debate as to how low deep subprime issuances could go before subprime auto ABS’s reputation for safety would be blemished – has been downgraded by S&P and KBRA. And now, what investors looked for yesterday is likely different than what investors will look for today. Two areas to watch: the strength of management and the level of credit ...

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Subprime Auto Loan Crisis Chronometer Update

Jul 02, 2018 | By JOSEPH CIOFFI

“They are who we thought they were!” Observing the rising tide of borrower delinquencies in subprime auto lending, I’m reminded of that famous outburst by the former NFL coach, Dennis Green. No one should be that surprised when subprime borrowers default. The question has always been and will continue to be whether credit enhancements – like overcollateralization and excess spread – will be sufficient to absorb the resulting losses.  Now that lower grade tranches have gained popularity among ...

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Usury: An Old Concept, Up to New Tricks in Subprime Auto

Apr 23, 2018 | By JOSEPH CIOFFI

Usury has made quite a comeback from the dust heap of old law treatises to become a crucial concept that has shaped modern credit markets. It recently returned to public awareness in marketplace lending, where online lenders have avoided making loans in states comprising the Second Circuit, such as New York, due to an unfavorable usury decision. Now, light has been shed on subprime auto financing and an exception to usury laws that’s creating risk for an already shaky market. Usury: It’s An Old ...

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Electric Vehicles Will Create Risks, Spur Changes in Auto ABS

Mar 06, 2018 | By JOSEPH CIOFFI

New Tech, New Risks There are always risks to forging a new path. When it comes to electric vehicles (EVs) like the Model S and Model X that back Tesla’s latest deal, there are peculiar risks beyond those that normally accompany auto asset-backed securities (ABS). Given a lack of historical data, there is the risk of uncertain residual or resale values, and moreover, the potential for those values to fall below expectations for any number of reasons. For example, new technology may emerge that ...

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LISTEN: Center for Auto Finance Excellence’s “The Roadmap” Podcast – “How ABS Credit Enhancements Are Masking Subprime Risk”

Mar 05, 2018 | By JOSEPH CIOFFI

Joseph Cioffi recently sat down with William Hoffman, Associate Editor of Auto Finance News, for an episode of “The Roadmap,” a podcast from the Center for Auto Finance Excellence, a site dedicated to providing best practices for auto finance industry executives and investors. Joseph and William discussed trends apparent in recent subprime auto loan securitizations, and the outlook for the market going forward, including a close look at the interrelationships between credit enhancements, credit ...

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What the Fargo?  Doubling-down on Loans and Deposits is a Dubious Move Following the Fed’s Order

Feb 15, 2018 | By JOSEPH CIOFFI

Wells Fargo is being put on a highly restrictive diet by the Federal Reserve and won’t get any relief until its compliance and governance shape up.  Under the terms of the Fed’s Consent Order, Wells cannot grow its consolidated assets beyond the total consolidated assets reported at the end of 2017.  Although Wells is dismissing the effect of the Order as a nothingburger, if there’s really no effect, it’s probably because Wells already lacks opportunity for growth in deposits and lending as a ...

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Subprime Auto in 2018: Riding a Market That’s All Show and No Go

Jan 31, 2018 | By JOSEPH CIOFFI

If the subprime auto loan asset-backed securities (ABS) market collapses, any post-mortem is likely to begin and end with the underlying auto market.  Of course, it won’t all be about sales practices and consumer trends – there would also likely be closely-related contributing factors in lending and ABS practices.  But despite growing concerns, following the 2018 Detroit Auto Show, it appears the auto market is poised for a year of activity centered mainly around “innovations” that are ...

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LISTEN: ValueWalk’s ValueTalks Podcast – “The Vulnerability of Subprime Auto Credit Enhancements”

Dec 18, 2017 | By JOSEPH CIOFFI

Joseph Cioffi recently sat down with Raul Panganiban of ValueWalk, a site covering the latest financial news impacting hedge funds and asset managers with an emphasis on value investing, for their podcast “ValueTalks.” Joseph and Raul discussed the importance of credit enhancements in subprime auto securitizations, and in particular, Joseph’s views regarding their vulnerability. The discussion builds on Joseph’s thoughts first shared on a post on Credit Chronometer. Following the warnings in ...

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Subprime Auto Risks: ABStention of Doubt is No Longer a Luxury

Nov 06, 2017 | By JOSEPH CIOFFI

As we said in our last post regarding vulnerability in credit enhancements and litigation risk, subprime auto ABS investors have historically slept easy in light of ample credit enhancements that have provided a protective cushion from losses. Based on the reactions, it seems some have been stirred from their slumber. The question now is what’s next?  Will market participants, after kicking the tires, find reason for alarm or will they hit the “snooze” button and go back to sleep? To paraphrase ...

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Subprime Surprise? Subprime Auto Overcollateralization May Not Be Overly Protective

Oct 06, 2017 | By JOSEPH CIOFFI

Historically, investors in subprime auto asset-backed securities (ABS) have been able to sleep well at night. They have rested easy in part because credit enhancements in securitizations have protected them from losses.  Today, due in large part to the safety expected from credit enhancements, rumblings about the parallels between subprime auto lending and pre-financial crisis subprime mortgage lending – and the cataclysmic end those parallels could portend – have barely disturbed the subprime ...

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On The Dark Side of Automation: Impact on Subprime Auto Borrowers

Jul 11, 2017 | By JOSEPH CIOFFI

Self-driving cars, car sharing and subscription-based vehicle services: these are destined to affect the auto industry in ways that will make the current sales slump and shift from cars to SUVs seem like a bump in the road. Predictions vary widely as to when the sea change in how we think about cars and how they fit into our lives will come, but its inevitable arrival is often portrayed as part of a brighter, safer, cleaner and more efficient tomorrow. The dark undercarriage of this issue is ...

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Autocorrect? Lenders Pull Back from Subprime Auto Lending, Others Follow Riskier Course

Jun 16, 2017 | By JOSEPH CIOFFI AND JAMES SERRITELLA

A Federal Reserve blog post in November 2016 attracted widespread attention to subprime auto lending and the similarities easily drawn, at least on the surface, to subprime mortgage lending leading up to the financial crisis of 2008.  The warnings of commentators who have sounded the alarm in the past six months have been rebutted at every turn, due mainly to the small footprint of the auto loan and related ABS market relative to subprime mortgages and RMBS at their peak.  However, crises come ...

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