Subprime vehicle loans – according to an article in Automotive News and Bloomberg “about a third of the risky car loans that are bundled into bonds are considered “deep subprime,” a level that has surged since 2010 and is translating to higher delinquencies on the loans, according to Morgan Stanley.”

Automotive financing is following the wise (that is intended to be sarcastic) decisions made in the mortgage lending market.  Surprise –  Morgan Stanley’s Vishwanath Tirupattur, James Egan and Jeen Ng said in a report dated March 24 that “consumers are falling behind on most subprime car loans, but deep subprime borrowers have deteriorated fastest.”  The subprime loans are sold on the high-risk lending market in a method referred to as “securitization”.  Which means loans that are high risk are bundled together and sold to investors (like your retirement loan portfolio).

So who is obtaining these “subprime” auto loans?  Usually this is a borrower who has a credit score below 600.  Folks in this group are considered high credit risks.

Bank/Investors willing to take high risks

As Wall Street banks have found it tougher to profit under new regulatory regimes born out of the last subprime crisis, they’ve become more willing to underwrite riskier auto-loan asset-backed security sales. Investors, starved for returns with about $8 trillion of debt globally carrying negative yields, have in turn proven to be insatiable, further facilitating higher levels of risk in the market for the securities.

Losses increasing higher than expected

“Many companies are increasing their loan loss provisions, which has caused some formerly profitable companies to become unprofitable. Other newly formed companies are still striving to break even,” analysts at S&P including Amy Martin said in a March 20 report.

Is this similar to a pyramid scheme?

The foundation for the loan (value of the vehicle) is a very poor investment, but initial investors may see a significant return on their investment, but as time passes those who buy this junk paper will find their investment lost because it never really existed.