Wall Street analysts have been asking the auto finance industry about the rise of subprime loans since last summer when The New York Times popularized the bubble idea. The paper in July kicked off an occasional series of articles, now numbering at least seven, called "Driven Into Debt." The series features human-interest stories about poverty-stricken consumers who are apparently tricked into taking out loans they can't afford.
What has legs on Wall Street is that the articles compare the current recovery in subprime auto loans to the bubble in subprime mortgages.
The idea of a subprime bubble also appears to have helped inspire investigations into asset-backed securities by the U.S. Justice Department, the Securities and Exchange Commission and other regulators.
The subprime mortgage bubble burst when home prices fell. Much of the subprime mortgage industry was built assuming home values could only go up. The housing bust also hit investments backed by subprime mortgages. Lenders in effect had sold bundles of subprime mortgages to investors allegedly without fully disclosing how risky and prone to default the underlying mortgages were.
Auto lenders, especially in the subprime segment, are large issuers of securities backed by subprime auto loans. The practice was noted in a Times article on Jan. 26: "In a kind of alchemy that Wall Street has previously performed with mortgages, thousands of subprime auto loans are bundled together and sold as securities to investors, including mutual funds, insurance companies and hedge funds. By slicing and dicing the securities, any losses if borrowers default can be contained, in theory."
The continuing news focus on subprime has forced auto lenders to address the issue repeatedly in their conference calls with analysts.
On Jan. 29 Ally Financial CFO Christopher Halmy fielded a question about Ally's "concentration" of nonprime loans. "As long as we're getting the right risk-adjusted returns, regardless of where we play in the credit spectrum, we are very comfortable with that risk," he replied
Ford Motor Credit Co. CFO Michael Seneski was asked about subprime in a separate call the same day. "With appropriate originations and risk management, a portfolio will perform as expected," Seneski said. He noted that Ford Credit's repossession rate in the fourth quarter of 2014 was its lowest fourth-quarter rate ever at 1.06 percent, down from 1.14 percent a year earlier.