"Auto loan delinquencies are soaring"

WABAC

Read all about it.

Auto delinquencies are up more than 50% since 2010 and have transitioned from the safest to riskiest consumer commercial credit product in that time frame, according to a Friday report from VantageScore.

I hope your bond funds are only in the "safest" tranches of asset-backed car loans.

But wait, there's more . . .

“The bigger picture: the auto market is a bellwether for household financial health,” the report says. “A sustained climb in auto delinquencies signals deeper affordability challenges across the consumer economy.”

The country is seeing “the most precarious consumer credit health situation since the last financial crisis,” said VantageScore Chief Economist Rikard Bandebo.

OTOH, the same source report goes on to say:

Delinquencies among other loan categories, like credit cards and first mortgages, have declined since the first quarter of 2010, making autos a bit of an outlier, VantageScore said.

That's reassuring for now; but I still don't look at any bond fund that is more than 25% securitized. YMMV.

More grisly vehicle loan numbers at the link.

yogibearbull

Linked article does mention 2 recent bankruptcies, Tricolor and First Brands. Several regional banks and smart folks have been burnt. Asset-backed securities (ABS) has been weak.

Tricolor has Treasury's CDFI certification that may have fooled many.

Securitized AAA isn't the same as genuine AAA (only 2 companies).

WABAC

Here's a link from The Telegraph riffing on the issues raised by @yogibearbull.

The International Monetary Fund (IMF) warned this week that banks now have about $4.5tn of exposure to the “shadow banking” sector, a sum exceeding the size of the entire British economy.

Throw in a bout of geopolitical turmoil – which, with Donald Trump in the White House, is never far off – and the IMF says up to a fifth of banks could be in some kind of strife.

/snip

“If the problems in the illiquid markets persist and grow, they may start to become a systemic risk, forcing the Fed and other central banks to intervene,” analysts at Panmure Liberum wrote in a note to clients.

That scenario still felt quite distant until two regional American banks, Zions Bancorporation and Western Alliance Bancorp, revealed that they had found bad loans on their books. There has also been increased activity in the repo market, where banks go for cheap emergency cash.

/snip

“The Fed and other central banks can in theory provide liquidity by accepting these private loans as collateral for liquidity injections in affected funds,” Panmure Liberum’s analysts said.

But they finished with a warning: “We are old enough to have been around in the run-up to the financial crisis of 2007 and 2008 and we are fully aware that we could have written similarly comforting lines ... back then.”

larryB

@WABC. The standard issue , generic bond ETF is 25.42 % “securitized “. You gotta go outta your way to avoid that stuff. Have you paid attention to an auto loan failure of last week called Tricolor? Wonder how many bonds funds were holding some of that? I paid particular attention to that story because as a young man I was an auto dealer manager. I was aware of one of Tricolor’s locations near me and it was very low end and the bottom of the barrel operation.

rforno

Not that I own bond funds, but whenever I see 'securitized' in a fund's holdings, my radar goes into high gear, because who knows what dodgy debt they've stuffed in there?

As 'The Big Short' concluded:

“In 2015 several large banks began selling billions in something called a “bespoke tranche opportunity.” [beat] Which according to the Wall Street Journal is just another name for a CDO.”

WABAC

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larryB

Dodix ,,, over 37% securitized. Vanguard Total Bond. Over 21%. Two biggies of the managed and indexed bond mutual funds. Know knows what sort of garbage lies in those tranches? The ratings of the funds quality has to be taken with a big grain of salt.

WABAC

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msf

Securitized AAA isn't the same as genuine AAA (only 2 companies).

There is a difference between securitized and structured.

Securitized debt is debt created when a financial institution pools multiple loans together and issues its own debt instrument backed by the payment streams of these loans. Because of this backing, you're not relying strictly upon the soundness of the issuing institution (the one that pooled the loans together). You have the "security" of knowing that there's an income stream providing the cash to service the secured debt.

When it comes to a GNMA bond it is the US government pooling the mortgages together. You're really relying upon the soundness of the issuer (full faith and credit of the Treasury), not the underlying mortgages. Since you're relying upon a AA+ rated institution (the US Treasury), these securitized GNMAs (bonds or funds) get only a AA rating.

If it's the Canadian government (AAA rated) creating an MBS, the bond is AAA rated. See ZMBS (Canadian MBS ETF, 100% AAA rated holdings).

By the time you drop down to nonagency MBSs, you're relying as much on the underlying mortgage payments as the soundness of the financial institution issuing the securitized debt.

Same idea with securitized debt backed by a pool of loans other than mortgages (e.g. car loans). They're as safe or as risky as their underlying loans. No vanilla securitized debt issued by a US financial institution will be AAA rated. The issuer isn't AAA rated and the underlying bonds aren't AAA rated.

Structured debt builds upon securitized debt. Instead of treating the security as homogenized debt, it stratifies that debt, somewhat like a centrifuge separates different layers of a solution.


In most cases, when there's a default with a debt, it isn't a 100% loss. A payment may be simply be late. Or even in the case of bankruptcy, rarely does a bond fail to pay off at least a few pennies on the dollar. If you could skim off those few pennies and leave other investors getting nothing, that would leave you in good shape.

Even better if you could get the other investors to give you whatever income they're getting from the underlying bonds still making payments in order to keep you whole. Your risk is decreased and the others' risk is increased. This "centrifuging" of risk is what structuring does.

Since the creation of CLOs thirty years ago, not a single AAA tranche has defaulted. (That beats AAA corporate record of 0.52% cumulative default over ten years.) Hartford (admittedly an interested party) estimates that 87% of a CLO's portfolio would have to default before the principal of AAA tranches was affected.

Which brings us full circle to auto loans.

Among CLOs that hold [First Brands'] loans, the median concentration of First Brands is a relatively modest 0.5% of collateral. CLO structures limit concentrations of assets from any single obligor. ... CLOs as a class have a relatively low exposure to the auto sector (just 1.5 percent of collateral).

https://www.privatedebtinvestor.com/first-brands-group-bankruptcy-two-rating-firms-say-dont-panic/

“securitized “. You gotta go outta your way to avoid that stuff.

Still, that's easy to do. M* has a category called "corporate bonds". Lipper (which MFO uses) has "corporate debt A" and "corporate debt BBB". Both classifications miss funds like VWEHX (high yield), but they're good places to start. I'm willing to live with a modest amount of securitized debt in my bond fund(s) if they are actively managed and I have confidence that the manager is keeping an eye on risk.

Edit: Didn't see WABAC's post until after I posted this. Writing these tomes takes more than a couple of minutes.

Dodix ,,, over 37% securitized
If you're getting this from M*, take a closer look. M* doesn't have portfolio data for DODIX. M* says that the sole holding of DODIX is ... DODIX. And the breakdown it shows is for the fund category, not for this fund. OTOH, the actual percentage (as of Sept 30th) was 53.1%(!), including 1.3% in Ford Motor Credit Company.

https://www.dodgeandcox.com/individual-investor/us/en/investing/our-funds/income-fund.html?share-class=class-i

On the third hand, back on March 31st (the latest date I can find grouped holdings) auto loans constituted 2.2% of the portfolio, while about 2/5 was in Fannie Mae and Freddie Mac.

It was the poor performance of the loans in these “private-label” securities—those not owned or guaranteed by Fannie and Freddie—that led to the financial meltdown, according to the bipartisan Financial Crisis Inquiry Commission, among other independent researchers.

https://www.americanprogress.org/article/7-things-you-need-to-know-about-fannie-mae-and-freddie-mac/ (2012)

larryB

@WABC. M* for DODIX portfolio exposure shows Gov 30.50%,,,, Corp 25.84%. And Securitized 37.61%. This data as of 9/30/25. Am I missing something?

WABAC

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yogibearbull

Good explanations by @msf.

Agency mortgages are a different world.

Beyond those, most securitized debt is structured. Reason is simple - the pools have medium credit quality that may be difficult to sell/unload as a whole. So, the next step of securitization is both profitable and makes resulting tranches more saleable.

Securitized debt is just the BUNDLING of the debt, securitization is the PROCESS of creating the structured debt with various TRANCHES.

So, we have this valid statement: Structured debt is securitization of securitized debt.

msf

Structured debt is securitization of securitized debt.

Cute

hank

From one frequent contributor (Mr. Skin) on Bill Fleckenstein’s Daily Rap last week:

”I bet I can find a way to securitize cow farts, get a blessing from the GS securitization dept. and gain self esteem from the global warming morons, thus securing my entry into that exclusive club reserved for the terminally insane.”

There is at least a shred of truth to the comment.

larryB

@msf @yogibearbull. Thanks for sharing your knowledge.