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Subprime Lending Idea Proposal

Subprime Lending Idea Proposal

What is the level of risk for financial institutions from the failure of subprime auto lenders and the rapid growth of subprime mortgages?

Report Available: May 31, 2018


Blueshift’s initial research found that three small specialized subprime auto lenders recently went bankrupt or closed. Several others are at high risk of failure due to the highest subprime delinquency rate since the Financial Crisis. Subprime and nonprime mortgages are making a comeback. Yet, housing prices have skyrocketed in some markets leading to talk of possible housing bubbles in these areas. The level of risk to banks is unclear and additional lender failures or a slowing economy could pose challenges in the financial industry.



  1. Several business and financial publications recently highlighted the collapse of three specialty subprime lenders due to runaway subprime auto loan delinquency rates. Summit Financial Corp., Spring Tree Lending, and Pelican Auto Finance filed for bankruptcy or shut down operations. These small lenders could be the canary in the coal mine as industry experts predict continued pressure on small subprime auto lenders.
  2. Another eye-opening development is the return of subprime mortgages and subprime mortgage bonds. Subprime mortgages doubled over the past 12 months and the expectation is that they will double again in 2018. Meanwhile, subprime mortgage securities, too risky for Fannie Mae or Freddie Mac, nearly doubled in Q1 and it is estimated that the issuance of these bonds will reach $10 billion this year, up from $4.1 billion a year ago.
  3. With subprime auto loans tanking and subprime mortgages are on the rise, a few financial experts are pointing to a second housing bubble or at least housing bubbles in some markets. Financial manager James Stack, who predicted the housing crash in 2005, said the housing market is flashing red again. He noted that the market could correct itself gently but history indicates it will more likely “come down hard” during the next economic downturn.
  4. It is not just the small lenders that are at risk. Big banks have a lot of exposure to subprime lending because of the practice of lending to non-bank institutions that engage in both subprime auto and mortgage lending. This back door to the subprime market has allowed large traditional banks to provide $345 billion in loans to non-banks through the end of 2017. Some of that back door lending is now at risk. A partial list of banks and their 2017 loan totals to nonbanks includes WFC: $81 billion, up from $14 billion in 2010; C: $30 billion; BAC: $30 billion; JPM: $28 billion; GS: $22 billion; and MS: $16 billion.
  5. Blueshift’s Jan. 4 Subprime Lending report found that subprime lenders with disciplined yet dynamic underwriting policies were expected to perform well and experience positive returns in 2018. Demand for subprime loans likely will remain strong, but originations were expected to decline in 2019 because of tighter lending standards. Meanwhile, small lenders and private-equity backed lenders that aggressively pursued subprime and deep subprime loans will see their returns pressured by rising household debt and increasing delinquencies. Private-equity investors have lost their appetite for this space and are trying to exit.


With rising auto loan delinquencies and defaults, what is the risk level for small bank and non-bank subprime lenders? What is the risk level for large banks lending to non-banks in the subprime space? What is the risk level for subprime mortgage lenders as housing prices approach their highest levels ever in some markets? How will the Fed’s plan to increase interest rates several times throughout 2018 affect lenders? How will the re-emergence of subprime mortgage securities affect the financial market? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Bank and Non-bank Lenders, New and Used Car Dealers, Mortgage Brokers, Debt Collection/Auto Repossession Firms, and Industry Specialists.


Companies: Ally Financial (ALLY), AutoNation (AN), Bank of America (BAC), Capital One Financial (COF), CarMax (KMX), Citigroup (C), Credit Acceptance Corp (CACC), Goldman Sachs (GS), Group 1 Automotive (GPI), JPMorgan Chase (JPM), Lithia Motors (LAD), Morgan Stanley (MS), Nationstar Mortgage Holdings (NSM), Penske Automotive Group (PAG), Santander Consumer USA Holdings (SC), Sonic Automotive (SAH), Wells Fargo (WFC)


Research Begins: May 7, 2018


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