Earlier this year, as the US auto sales miracle unfolded on the back of record loan terms and record high average monthly payments, we continually argued that underwriting standards were likely to deteriorate going forward as competition for the finite pool of creditworthy borrowers heats up.
Helping to drive (no pun intended) the shift towards looser lending standards is the proliferation of the originate-to-sell model – the same originate-to-sell model that helped steer the US housing market right off a cliff in 2007/2008. The concept is simple: if you’re making loans with the intention of carrying them on your books, you’re likely to care far more about the creditworthiness of the borrower than you are if you’re simply going to ship the loans off to Wall Street to be run through the securitization machine and then sold off to investors via MBS. That same dynamic is now at play in the market for car loans. Auto-backed ABS issuance should come in at around $125 billion this year – that’s up 25% from 2014 and accounts for more than half of total consumer loan-backed supply.