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The U.S. economy seems to be humming along. Unemployment is at just 3.9 percent after hitting an 18-year low in May 2018, and real GDP is forecast to grow at 3.1 percent for 2018. While news about the economy and the stock market, which is just off record highs, seems to be getting all the headlines, there is another area that’s in record territory but getting almost no news. What’s seeing tremendous growth under the radar are auto asset-backed securities (ABS).

Auto asset-backed securities are essentially a bundling of car loans that are then sold to investors. They are grouped by the creditworthiness of the borrowers and categorized as prime, nonprime or subprime. According to S&P Global Ratings, 2017 was the biggest year in auto ABS since 2007, with more than $70 billion sold. As the Financial Times noted in December 2017, demand for these types of investments is coming from “investors who are seeking alternative assets as the premiums offered on corporate bonds and loans continue to decline.” Considering current market jitters tied to a potential trade war and volatility of the Turkish lira, it’s understandable that auto ABS is drawing attention as an investment opportunity.

Another thing driving the auto ABS market is the general uptick in vehicle sales. In July 2018, 16.77 million vehicles were sold. That’s almost 1.5 million more than the same period five years ago. Since most Americans purchase their cars on credit, this presents a tremendous amount of money that can be packaged and sold off to potential investors. But, like any investment, there are risks. Auto ABS is no different.

Delinquency rates are on the rise in auto ABS, especially in the subprime category. According to a May 2018 story in PYMNTS, “subprime delinquency for loans more than 60 days past due reached its highest since 1996 at 5.8 percent.” That number, according to Business Insider, was a jump of 0.6 percent from the year prior and up 2 percent from the same time period in 2014. Perhaps even more telling, according to PYMNTS, the default rate leading up to the 2008 financial crisis was around 5 percent.

The subprime auto ABS market is already seeing some of this pain. Bloomberg reported in April that two smaller subprime lenders – Summit Financial and Spring Tree Lending — filed for bankruptcy while Pelican Auto Finance shut down completely. Furthermore, the publication notes that rising interest rates will likely make things more challenging for these lenders.

But this doesn’t mean we’ve reached a crisis similar to that of the subprime mortgage debacle of a decade ago. As Business Insider notes, “Of the $1.11 trillion in total auto loans outstanding at the end of 2017, about $280 billion were subprime – less than a quarter of the $1.3 trillion subprime mortgages before the financial crisis.”

So is the auto lending market in a credit bubble that is going to burst? The auto asset backed securities market is certainly in an interesting time. While reaching new heights, there is some concern about its short-term prospects, especially in the subprime category. But with companies like Volkswagen ($1.1 billion) and Tesla ($540 million) diving in to the sector in recent months, it’s clear that automakers are confident that long-term prospects remain solid. Whether the subprime market is in a credit bubble that is going to burst, only time will tell.

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