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Subprime Lending Idea Proposal

Subprime Lending Idea Proposal
 

Can the subprime lending industry sustain its late year bounce and extend gains through 2019?

Report Available: January 23, 2019

 

Blueshift’s ongoing research found that the subprime lending industry saw significant gains in the second half of 2018. The economy and the current regulatory conditions seem to be lining up to drive even more growth in 2019 but there are headwinds that must be navigated.

 

Observations

  1. The Q3 TransUnion Industry Insights Report indicates subprime loans grew year to year after several consecutive quarters of decline. Subprime personal loans led originations, growing 28% between Q2 2017 and Q2 2018 (originations are viewed one quarter in arrears to account for reporting lag). Subprime auto originations increased 7.3% year to year, after falling 7.8% year to year in Q2 2017. Credit card subprime originations rose 3.6% year to year and subprime mortgage originations increased 3.4% year to year, reversing its declining trend since 2016.
  2. Fintech startups and a lighter regulatory touch on payday lending from the Trump administration are expected to open the spigots on subprime lending in 2019. TransUnion predicts that subprime personal loan balances will increase 20% in 2019 and the last three months of 2018 are expected to set records for the most loan originations ever. Nonprime and subprime loan demand is expected to be a key driver of that growth.
  3. Subprime mortgages are also on the rise again. Thanks to a program run by the nonprofit, Boston-based brokerage Neighborhood Assistance Corporation of America (NACA), thousands of would-be borrowers are lining up for zero-down-payment subprime mortgages. BAC is backing the program with $10 billion in mortgage commitments. So far, 10,000 potential borrowers have shown up at various NACA events in cities like Charlotte and Atlanta, and more such events are planned. BAC says it has a 90% approval rate for people that go through the NACA program.
  4. Despite the strong economy and increasing subprime lending environment, two of the largest credit card issuers are tightening lending standards. COF and DFS have reduced their credit limits and are questioning how much longer the economic recovery will last. In the past, credit card limits have served as an indicator of banks’ economic outlook. During COF’s Q3 earnings call, the CEO commented on the economy saying, “it almost feels too good to be true.” Both banks are known to carry a substantial amount of customers with less-than-pristine credit scores and it is estimated that 33% of COF’s credit card debt is held by subprime borrowers.
  5. In an article published by the Foundation for Economic Education, the return of subprime mortgages raises concerns that nothing was learned after the 2008 housing crisis, suggesting that history may repeat itself. The article said banks and the media are praising the return of subprime mortgages, calling it good for the economy and assuring that mistakes of the past will not be repeated. Adding to the FEE’s concern is the lending industry’s plan to securitize and sell some of the loans that the FEE suggests have been issued with a less-than-rigorous approval process.
  6. Blueshift’s May 31 subprime lending report found some nonbank subprime auto lenders with little lending discipline and that chased high returns are at risk of closure or failure. Twelve of 21 sources interviewed expect more nonbank lenders to fail and for money to decline in 2018 from both traditional banks and private equity that have fueled subprime lending. Traditional banks that practice backdoor lending to the subprime space may face moderate risk, but will overcome the exposure as they pull back and tighten their lending practices.

 

Can the subprime lending industry sustain the gains it has made in the second half of 2018?  What is the risk level for banks and nonbank subprime lenders across auto, personal, credit card, and mortgage lending? How will the Fed’s interest rate action affect lenders? How will the re-emergence of subprime mortgage securities affect the financial markets? 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 nonbank 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), Discover Financial Services (DFS), 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: December 17, 2018

 

 

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