Author Topic: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans  (Read 6243 times)

Vindicated

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Then bundles the debt into Bonds...

Sounds dangerous, and eerily similar to what mortgage lenders were doing in the mid 00's.

I work in the automotive industry, and while production volumes remain strong, there is a lot that is making me worry.  Dealership inventory levels, and incentive spending by OEMs, are near all-time highs (Mar 2017 was the high for each).  Truck and SUV purchases, along with their higher sticker prices and lower fuel economy, account for ~60% of sales

Silver-Lining:  Maybe this will result in a wider selection of cheaper used cars when I look to purchase again in ~10 years.

Quote
Around 42 percent of Santander Consumer’s subprime auto loans made between 2009 and 2014 by dealers identified as “high risk” in Massachusetts and Delaware have defaulted or will default

https://www.bloomberg.com/news/articles/2017-05-22/subprime-auto-giant-checked-income-on-just-8-of-loans-in-abs

acanthurus

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #1 on: May 30, 2017, 02:32:18 PM »
I'm surprised this didn't get any responses! This is quite an interesting topic. I'd like to make two comments:

1) I've never liked asset backed securities in bond funds. I've specifically avoided total market bond funds for this reason. I don't think there's any systemic risk like there was in 2009, but there's no reason to own things backed by assets that may be mispriced, or backed by assets whose price may plummet when there is a surplus of defaults. I would rather loan my money to the government, or to big industrial companies, than a collection of Average Joes who promise to give me the car/house/boat/whatever back when they can't pay the note anymore. I've previously used VBILX as my core bond holding but am thinking of slicing and dicing my fixed income allocation to be more selective about what I hold.

2) While income verification of 8% on subprime sounds terrible, it's probably not as bad as it sounds. They likely don't have steady jobs, so income verification would be somewhat pointless for a 72 month loan term. They are such high default risks that they probably get charged usurious amounts of interest - around 11% last I read for subprime auto loans. Combine that with financial illiteracy and they probably get upsold on GAP insurance by the finance office.

All they need is for these people to make enough payments before the default and repo for the risk to be mitigated.

That's my devil's advocate post for the day. It will probably be bad, but the financial press likes to get clicks. So long as you limit your exposure to these companies and these loan products you're probably fine.

DavidAnnArbor

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #2 on: May 30, 2017, 05:13:49 PM »
Banco Santander lost $3.5 billion dollars in the Bernie Madoff Ponzi scheme.
Regarding auto lending, it's unclear how rigorous the lending standards are and how well the loans are actually audited. Borrowers might try to artificially inflate their credit scores by buying authorized user spots on high credit limit seasoned credit cards.

If a borrower defaults the lender can immediately seize the car. In fact some lenders have a kill switch in the car that prevents the car from operating if the loan is not paid.

Indexer

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #3 on: May 30, 2017, 08:32:58 PM »
4506T

I use to work in a bank and those 5 digits keep most people honest about their income. When you request a loan at a bank they have you sign an IRS form 4506T. This form allows the bank to go to the IRS and request your recent tax forms. The bank normally doesn't file the form unless it's a big loan like a mortgage or HELOC, but the customer doesn't know that.

So sure, they might only verify the income 8% of the time, but if the customer thinks they are verifying income 100% of the time then the customer isn't going to lie.

katsiki

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #4 on: May 30, 2017, 09:08:35 PM »
4506T

I use to work in a bank and those 5 digits keep most people honest about their income. When you request a loan at a bank they have you sign an IRS form 4506T. This form allows the bank to go to the IRS and request your recent tax forms. The bank normally doesn't file the form unless it's a big loan like a mortgage or HELOC, but the customer doesn't know that.

So sure, they might only verify the income 8% of the time, but if the customer thinks they are verifying income 100% of the time then the customer isn't going to lie.

Is that the norm across banks and CUs?  I have done a few loans lately and did not provide that.  Does it vary by credit profile?

I agree with the OP that this is scary.  I am shocked at how much credit Chase has extended my wife and I as of late...  So many good sign-up bonuses and they keep doling out tens of thousands in CC limits.  At least on an auto loan, they have something to go pick up..

ChpBstrd

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #5 on: June 06, 2017, 02:18:25 PM »
It would seem like a few put options on subprime industry participants would provide cheap hedging for a recession.

waltworks

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #6 on: June 06, 2017, 03:37:06 PM »
It's cars. You just repossess them if they don't pay, no muss, no fuss, no 2 year long legal battle to foreclose. Auto lending standards have always been nutso loose for that reason.

Nothingburger, unless your point was that people shouldn't be borrowing money for cars on minimum wage jobs and paying a ton of interest to the rich folks who own stock in the banks.

-W

ChpBstrd

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #7 on: June 06, 2017, 03:42:49 PM »
If repossession was economical, we would never have had a housing crisis. Actually, it costs hundreds if not thousands to repo a car, store it, auction it, pay people to fix the paperwork, cover insurance, and be on the losing end of the bid-ask spread at a dealer auction.

So the possible losses to banks and bondholders could be 50% or more, just like the housing crisis.

waltworks

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #8 on: June 06, 2017, 06:41:38 PM »
If repossession was economical, we would never have had a housing crisis. Actually, it costs hundreds if not thousands to repo a car, store it, auction it, pay people to fix the paperwork, cover insurance, and be on the losing end of the bid-ask spread at a dealer auction.

So the possible losses to banks and bondholders could be 50% or more, just like the housing crisis.

Try foreclosing on a house. The cost is at least an order of magnitude greater, if not more.

Also, the potential losses are tiny in the grand scheme of things. There's like $25 billion in delinquent auto loans right now. That's a rounding error.

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RangerOne

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #9 on: June 06, 2017, 07:19:21 PM »
I agree car loans are vastly different than mortgages. But in theory it seems it would still be possible to cause a great deal of pain if a boat load of ill advised car loans all went belly up.

It would likely take a lot of work and numbers to show a scenario where say a bank suffered irreparable losses due to a realization that they had to take a massive loss on millions of bad car loans all at once.

And even then what are your options. None of the bullshit done in reaction to the housing crisis is even possible. You can't can kick a car loan till the value goes up.

I assume a car loan bubble would result in a market sector crash where the value of many large auto manufactures plummeted as the market was flooded with a vast amount of cheap used cars. If that kind of scale for repossession is even possible. So more like a tech bubble and less like a housing bubble.

PDXTabs

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #10 on: June 06, 2017, 09:55:17 PM »
Try foreclosing on a house. The cost is at least an order of magnitude greater, if not more.

But houses usually have PMI or positive equity. Lots of autos are underwater.

Paul der Krake

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #11 on: June 06, 2017, 10:01:11 PM »
Try foreclosing on a house. The cost is at least an order of magnitude greater, if not more.

But houses usually have PMI or positive equity. Lots of autos are underwater.
Not when the market drops by 20% they don't. Cars on the other hand have a very predictable depreciation curve, and subprime autos are sold at inflated prices anyway.

Vindicated

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #12 on: June 07, 2017, 06:30:36 AM »
I assume a car loan bubble would result in a market sector crash where the value of many large auto manufactures plummeted as the market was flooded with a vast amount of cheap used cars. If that kind of scale for repossession is even possible. So more like a tech bubble and less like a housing bubble.

This is more along the lines of what I expect.  ~17M new cars and ~40M used cars are sold each year.  That's more than one car for every 4 people of age to buy a car, every year.  So, if the average person is buying a car every 4 years, but cars last 10+ years, there has to be some sort of market correction.

maizefolk

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #13 on: June 07, 2017, 06:41:23 AM »
I assume a car loan bubble would result in a market sector crash where the value of many large auto manufactures plummeted as the market was flooded with a vast amount of cheap used cars. If that kind of scale for repossession is even possible. So more like a tech bubble and less like a housing bubble.

This is more along the lines of what I expect.  ~17M new cars and ~40M used cars are sold each year.  That's more than one car for every 4 people of age to buy a car, every year.  So, if the average person is buying a car every 4 years, but cars last 10+ years, there has to be some sort of market correction.

But the used cars represent both someone buying a car and someone selling a working care they previously purchased so I think they cancel out for these purposes, and we're left with only ~17M new cars being added to the total supply of cars in the country.

There are a total of ~250M cars registers to drive in the US, so if the average useful lifespan is about 14 years, then about 17M of those cars would be retired each year, about 17M new cars are added, and the total population of cars would be flat. If the average useful lifespan is more than 14 years, the population of cars should be growing, if less than 14 years shrinking.

Vindicated

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #14 on: June 07, 2017, 06:48:29 AM »
I assume a car loan bubble would result in a market sector crash where the value of many large auto manufactures plummeted as the market was flooded with a vast amount of cheap used cars. If that kind of scale for repossession is even possible. So more like a tech bubble and less like a housing bubble.

This is more along the lines of what I expect.  ~17M new cars and ~40M used cars are sold each year.  That's more than one car for every 4 people of age to buy a car, every year.  So, if the average person is buying a car every 4 years, but cars last 10+ years, there has to be some sort of market correction.

But the used cars represent both someone buying a car and someone selling a working care they previously purchased so I think they cancel out for these purposes, and we're left with only ~17M new cars being added to the total supply of cars in the country.

There are a total of ~250M cars registers to drive in the US, so if the average useful lifespan is about 14 years, then about 17M of those cars would be retired each year, about 17M new cars are added, and the total population of cars would be flat. If the average useful lifespan is more than 14 years, the population of cars should be growing, if less than 14 years shrinking.

Good logic.  Thanks Maizeman for correcting my misunderstanding.

Indexer

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #15 on: June 10, 2017, 01:54:16 PM »
4506T

I use to work in a bank and those 5 digits keep most people honest about their income. When you request a loan at a bank they have you sign an IRS form 4506T. This form allows the bank to go to the IRS and request your recent tax forms. The bank normally doesn't file the form unless it's a big loan like a mortgage or HELOC, but the customer doesn't know that.

So sure, they might only verify the income 8% of the time, but if the customer thinks they are verifying income 100% of the time then the customer isn't going to lie.

Is that the norm across banks and CUs?  I have done a few loans lately and did not provide that.  Does it vary by credit profile?

I agree with the OP that this is scary.  I am shocked at how much credit Chase has extended my wife and I as of late...  So many good sign-up bonuses and they keep doling out tens of thousands in CC limits.  At least on an auto loan, they have something to go pick up..

Did you apply for secured loans or revolving unsecured lines of credit(credit cards)? I'm assuming credit cards based on the second paragraph. The bank is almost guaranteed to get a 4506T on mortgages, more likely for auto loans, and  unlikely on credit cards. With unsecured credit the bank cares more about your credit score, and if you have a history of not paying your bills who cares what your income is? They will just deny the application or only approve you for a very small amount. 

In addition, if you get a loan at a dealership or bank you might not even remember the 4506T. You sign lots of documents for a secured loan. If you were honest about your income then the 4506T will seem like one of the least important forms you sign. If someone inflates their income they tend to pause at that document, and then correct the error.

PDXTabs

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #16 on: June 10, 2017, 04:19:32 PM »
There are a total of ~250M cars registers to drive in the US, so if the average useful lifespan is about 14 years, then about 17M of those cars would be retired each year, about 17M new cars are added, and the total population of cars would be flat. If the average useful lifespan is more than 14 years, the population of cars should be growing, if less than 14 years shrinking.

I don't disagree with your math, but there are 1.16 cars per licensed driver in the US. That seems like a number that could come down in the future. https://www.fhwa.dot.gov/ohim/onh00/onh2p11.htm

katsiki

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #17 on: June 10, 2017, 05:54:07 PM »
4506T

I use to work in a bank and those 5 digits keep most people honest about their income. When you request a loan at a bank they have you sign an IRS form 4506T. This form allows the bank to go to the IRS and request your recent tax forms. The bank normally doesn't file the form unless it's a big loan like a mortgage or HELOC, but the customer doesn't know that.

So sure, they might only verify the income 8% of the time, but if the customer thinks they are verifying income 100% of the time then the customer isn't going to lie.

Is that the norm across banks and CUs?  I have done a few loans lately and did not provide that.  Does it vary by credit profile?

I agree with the OP that this is scary.  I am shocked at how much credit Chase has extended my wife and I as of late...  So many good sign-up bonuses and they keep doling out tens of thousands in CC limits.  At least on an auto loan, they have something to go pick up..

Did you apply for secured loans or revolving unsecured lines of credit(credit cards)? I'm assuming credit cards based on the second paragraph. The bank is almost guaranteed to get a 4506T on mortgages, more likely for auto loans, and  unlikely on credit cards. With unsecured credit the bank cares more about your credit score, and if you have a history of not paying your bills who cares what your income is? They will just deny the application or only approve you for a very small amount. 

In addition, if you get a loan at a dealership or bank you might not even remember the 4506T. You sign lots of documents for a secured loan. If you were honest about your income then the 4506T will seem like one of the least important forms you sign. If someone inflates their income they tend to pause at that document, and then correct the error.

I was referring to auto loans (in paragraph 1; para 2 was referring to Chase credit cards).  One was a credit union and the other was Lightstream.  I am certain Lightstream did not do a 4506T but they are a bit of a non-standard lender, I suppose.  ie no title required on auto loans if your credit is good enough.

Great info.  Thanks for the follow-up.

maizefolk

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #18 on: June 10, 2017, 07:18:34 PM »
There are a total of ~250M cars registers to drive in the US, so if the average useful lifespan is about 14 years, then about 17M of those cars would be retired each year, about 17M new cars are added, and the total population of cars would be flat. If the average useful lifespan is more than 14 years, the population of cars should be growing, if less than 14 years shrinking.

I don't disagree with your math, but there are 1.16 cars per licensed driver in the US. That seems like a number that could come down in the future. https://www.fhwa.dot.gov/ohim/onh00/onh2p11.htm

Oh I don't disagree that the ratio of cars to drivers could come down in the future. Or the proportion of adults who are licensed drivers could decline (apparently kids turning 16 or 18 are much less likely to get their licenses right away than in the past). The quoted post was just about that specific piece of data, not arguing about the odds WRT the general trend towards more or less cars.

Vindicated

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #19 on: June 13, 2017, 07:35:57 AM »
New update today on car industry warning signs:

A recent study shows that 32.8% of people trading in their cars for new vehicles this year are upside down.  The average amount they're under water is $5,195.

This is due to longer loan terms (32% of new vehicle loans are 73-84 months), to reach a lower monthly payment.

Why do people need a 73+ month loan?  Because the average new car purchase price is now up to $33,560, thanks to the trend of everyone wanting trucks and SUVs.  All that matters is that you can afford the monthly payment!

So, roll that $5k into the next car, get a loan that's a year longer, and your payment is the same!  What a deal!

Vindicated

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #20 on: June 13, 2017, 08:00:11 AM »
I'm worried about it.  But maybe I'm just being bearish.

Every Automotive OEM is retooling factories to make more SUVs and trucks, because they're selling now.  However, when this bubble pops, I bet cheap/small cars are going to come back, but the OEMs won't have the volume available.  It'll be interesting to see what happens.

Maybe it'll come right as ride-hailing companies are kicking-off the automated car revolution, and everyone will start Ubering to work for $5 / day.

Worst case scenario:  Automotive OEMs crash, and a few don't survive.  All of a sudden we'd find ourselves with high unemployment and no where for all of those factory workers to go.

I read somewhere that 1 in 10 people work in the Automotive industry, or in a job directly related to it.  Maybe it would be as bad as the housing crash.

OK, I'm done with my Doom-saying for the day.

PDXTabs

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #21 on: June 13, 2017, 08:32:17 AM »
Every Automotive OEM is retooling factories to make more SUVs and trucks, because they're selling now.  However, when this bubble pops, I bet cheap/small cars are going to come back, but the OEMs won't have the volume available.  It'll be interesting to see what happens.

Yes, but how much does one of those lines cost? And how much more profit are they going to make between now and when the bubble pops? And when is it going to pop? It could be another 7 years (but probably not).

Vindicated

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Re: Santander Only Verifies Income on 8% of Sub-Prime Auto Loans
« Reply #22 on: June 13, 2017, 09:06:10 AM »
Yes, but how much does one of those lines cost?

Just a quick Google search to find this one example from March.

Quote
The centerpiece of Ford’s investment package involves spending $850 million to upgrade its assembly plant in Wayne, Mich., to build a new Ranger pickup and Bronco S.U.V.

This is the largest part of their $1.2B investment into retooling to SUVs & trucks this year.

How much they make due to this investment is hard to estimate.  But Ford had Net Income of $4.6B for 2016 on $10.4B Pre-tax profit.  Since SUVs and Trucks are more expensive, it's fair to say that their profit would increase on similar volume*, due to this retooling.

It seems like a wise business decision for now.  I don't think I'd do anything differently.

*Seasonally Adjusted sales is estimated around 17M cars this year.  Sales reached 17.5M last year.