You would be surprised. A subprime ABS stops being a subprime ABS when you cut it up the right way, at least parts of it do.
Think of it as a pool of loans. You take, say, the first 25% of the money collected from the ABS, make this the most senior debt, label it as an AA credit rating tranche of loans, and sell it.
Then you take the next 25%, make it less senior, label it A, and sell it.
Then you take the next 25%, make it junior to the first two, give it a BB rating, and sell it.
Then you take the next 15%, Label it B, and sell it, it is under the first 3.
The last 10%, Label it CC, sell it, it is junior to everything else.
This is how you get AA rated instruments out of subprime loans. It is a bit more complicated than this in reality, but this the basic process that turns a bundle of subprime loans into majority investment grade ABS tranches.
I did something similar with a rental property. My market was welfare tenants (because that was the small town I was in) but I figured if I was the best low end housing option I could get the top tier of welfare tenants - I.e people who are just poor, not poor and criminal or poor and addicted.
It mostly worked. Guaranteed rent collection and minimal damage.
Santander financed a lady with $40,000 in negative equity on a Rav-4 at my prior dealer, which came out to like $90,000 in financing. This was pre COVID too.
Not surprised.
The 3-4 previous vehicles said person bought on loans that were rolled into said Rav-4 Prime loan?
I've heard about people putting $50,000+ negative equity on a loan for a F-150...
Also usually the only dealers offering those customers are predatory to begin with so likely lots of added on packages($500 nitrogen tires, $3K protection package, etc.) that aren’t worth the paper they’re printed on
I used to work in auto finance where Santander was a partnered lender. I hated the company. People would be in a bad spot but need a vehicle and Santander always would come back with something like 29% APR on something like a Nissan Versa. Yea they couldnt afford it but you cant really get anything with the $500 downpayment which was all they had even before the used car market went wild. Some people are indeed dumb and try to swap cars constantly rolling negative equity but it’s absolutely predatory to offer loans at such high interest rates to those who have pretty much no other option
You aren't thinking like a banker. Santander makes these subprime loans, packages them up into asset backed securities, and sells them to different institutional investors. It doesn't matter who Santander is making loans to, just as long as it makes enough loans to aggregate the portfolio with the law of large numbers. The subprime portfolio has an aggregate average higher default rate and credit spread corresponding to the underlying borrowers, which means that the yield on this ABS will be higher than a prime borrower ABS.
There is a market for subprime loan ABS and Santander is proving those products. There are institutions who want the extra yield and have the risk tolerance to take on the various tranches of subprime ABS'. The institutions can also hedge out the credit risk they take on if they so choose to. Most of these loans aren't on Santander's books.
This isn't really news. Most banks are playing wait and see with their big deals and delaying their issuances for the next 1-3 months.
Not really, sub prime auto ABS' aren't being used as collateral for overnight swaps, repos, and money market securities unlike mortgage MBS' back in 2008. One of the reasons the financial crisis was as bad as it was was due to that collateral factor.
The subprime housing market wasn't very big actually and wouldn't have cause the GFC if it wasn't for subprime MBS' use in overnight collateralized repos and money market securities. Once the MBS' value fell with the housing bubble crash, money market liquidity dried up nearly instantly as the collateral for those securities fell in value. That was the major factor that accounted for financial contagion to all other sectors of the global economy.
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