It looks like the subprime auto loan bubble has popped.
Last year, we reported that the auto industry's check engine light was on. Now it looks like the thing is totally breaking down. Small subprime auto lenders are starting to go belly-up due to increasing losses and defaults. As ZeroHedgenoted, "we all know what comes next: the larger companies go bust, inciting real capitulation."
Bloomberg recently reported that not only are subprime auto lenders facing tough business conditions, there are also allegations of fraud and under-reporting of losses.
Growing numbers of small subprime auto lenders are closing or shutting down after loan losses and slim margins spur banks and private equity owners to cut off funding. Summit Financial Corp., a Plantation, Florida-based subprime car finance company, filed for bankruptcy late last month after lenders including Bank of America Corp. said it had misreported losses from soured loans. And a creditor to Spring Tree Lending, an Atlanta-based subprime auto lender, filed to force the company into bankruptcy last week, after a separate group of investors accused the company of fraud. Private equity-backed Pelican Auto Finance, which specialized in 'deep subprime' borrowers, finished winding down last month after seeing its profit margins shrink."
We've heard this song and seen this dance before. As Bloomberg noted, the pain among small auto lenders "parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming."
The common denominator here: rising interest rates. Easy money pumped up both the housing and auto loan bubble. When the Fed takes away the punchbowl, bubbles burst.
Chris Gillock works as an analyst for Colonnade Advisors, focusing on subprime auto investments. His description of the auto loan industry sounds a lot like mortgage lending back in the years leading up to the housing bust.