Skip to content
Subscriber Only

This Is What's Going On Beneath the Subprime Auto-Loan Turmoil

Higher delinquency rates at aggressive new lenders.
Much of the jump in delinquencies can be traced back to the new issuers crowding into the booming industry.
Photographer: Daniel Acker/Bloomberg

Never underestimate the creativity of business people in need of new business and investors in need of something in which to invest.

After the financial crisis decimated the market for bundled home loans that weren't backed by the U.S. government, bankers and lenders seized on a host of alternative assets that could be sliced and diced and served up to investors. Sales of commercial mortgage-backed securities (CMBS), along with collateralized loan obligations (CLOs) consisting of loans made to junk-rated companies, subsequently surged past their precrisis highs. Bonds backed by auto loans made to riskier borrowers also proved to be a sweet spot for yield-seeking investors and the companies and bankers that sold such debt to them. People might walk away from their homes, so the bull case went, but in the driving culture that is America, very few would ever willingly choose to fall behind on their car payments.

This state of affairs encouraged new lenders to pile into the subprime auto lending space, including Exeter Finance Corp. and Skopos Financial. Skopos hit the headlines last year for peddling two deep subprime bond deals featuring ultralow credit scores and sometimes no credit scores at all. The concern has been that such upstarts, often backed by private equity firms, will lower their underwriting standards as they fight for market share in an effort to produce relatively quick returns.