Frauds and Bear Markets

[Morgan]

And those collector cars can go way down.  Sounds like a dumb bubble to me.  Expensive cars to maintain also.

Interesting that no one would listen to you.

 

 

A few years ago I was looking into buying a mid 80s Porsche 911 SC and they were 10k-20k depending on condition. But now, those cars are 40k-50k. I'm definitely not going to buy one at those prices. They'll almost certainly go down eventually. I can wait...

[randomep]

http://s1.q4cdn.com/269973923/files/doc_downloads/prospectus/ABS%20Summary%20Data/DRIVE-2017-B-Final-Prospectus.pdf

 

For anyone who wants to read this:

 

This has the same credit rating as the US Government.

 

I can find 20 more just like this if anyone is interested.

 

EDIT:

Heres another AAA rated filled 13% with loans that have no credit history.

 

http://s1.q4cdn.com/269973923/files/doc_downloads/prospectus/DRIVE-2017-1/DRIVE-2017-1-Final-Prospectus.pdf

 

can you buy CDS on them?  ;D ;D ;D

[Guest Cameron]

http://s1.q4cdn.com/269973923/files/doc_downloads/prospectus/ABS%20Summary%20Data/DRIVE-2017-B-Final-Prospectus.pdf

 

For anyone who wants to read this:

 

This has the same credit rating as the US Government.

 

I can find 20 more just like this if anyone is interested.

 

EDIT:

Heres another AAA rated filled 13% with loans that have no credit history.

 

http://s1.q4cdn.com/269973923/files/doc_downloads/prospectus/DRIVE-2017-1/DRIVE-2017-1-Final-Prospectus.pdf

 

can you buy CDS on them?  ;D ;D ;D

 

Some of the ones I've found are complete shit, if someone had the money to do it they look pretty bad. Santander only does income verification on 8% of their auto loans, Santander is the worse followed by AmeriCredit which is a GM company.

[LongHaul]

Classic car bubble has already popped. They are non-productive assets.

 

http://www.businessinsider.com/the-classic-car-market-is-a-perfect-example-of-how-bubbles-collapse-2017-5

[LongHaul]

The thing about the car lending is that when it likely pops it will have interesting car market ramifications.

It is a self reinforcing cycle now.  In reverse lenders stop lending, go bankrupt, and generally restrict credit to buy cars.  That significantly restricts the ~54% of used car buyers that finance their used car purchases. Then used prices go down, hurting lenders even more, with more people underwater and additional losses.  Spreads will likely go up and terms down.  More repos and supply could push prices down even more. 

[rkbabang]

The thing about the car lending is that when it likely pops it will have interesting car market ramifications.

It is a self reinforcing cycle now.  In reverse lenders stop lending, go bankrupt, and generally restrict credit to buy cars.  That significantly restricts the ~54% of used car buyers that finance their used car purchases. Then used prices go down, hurting lenders even more, with more people underwater and additional losses.  Spreads will likely go up and terms down.  More repos and supply could push prices down even more. 

 

Will this bubble popping be enough to bring down the market though the way the housing bubble did?  I'm not sure this is large enough part of the economy to have a huge effect.  It does sound like after this happens it will be a really good time to buy a good used car though.

 

[ICUMD]

I agree with all rationale in this thread.  Everything is overpriced- classic cars, homes, stocks. 

 

The common issue I believe is low Interest Rates.  With debt so cheap, everything is in a bubble, including Government Debt.

 

The question remains when will the debt bubble pop and what will be the catalyst for this?  If governments continue to lower interest rates when niche bubbles (ex. housing market) appear to destabilize, the action may further propel debt to higher levels.  If and when the debt bubble pops, cash will be king.  I'm just not sure the governments will be passive and allow that to happen as it may very well undermine the financial system.

 

I don't know where inflation factors into all of this, but at some point, I think it will have to rear its head.  What's most relevant is wage inflation - currently in Canada there is a move to increase minimum wage to $15/hr - this maybe the tip of the iceburg.

 

Happy to hear other views that support or refute my thoughts.

 

 

[Guest Cameron]

Pardon if I'm saying something that everyone already knows but,

 

The idea behind subprime auto ABS and subprime RMBS are the exact same in principle but show themselves in a different way which is why I think some brush it off as nothing. To understand this you have to understand how an ABS/MBS is structured and this is what I think is missing in all the books I've read on the 2008 crisis. Its always chalked up to home price and bad loans which is true but its never put in a way that shows how this has an affect on an ABS/MBS. How an ABS/MBS works is you have an aggregate principle of receivables in this example it will be $1.2B in home loans but because RMBS are structured as a company on its own it has a name in this case CoBF Asset Securitization Trust 2017-A because it is its own separate company these 1.2B in home loans are considered assets. Like a regular company they can issue bonds which is where the tranches come into play, Class A, Class B, Class C etc. as we know Class A gets paid first because its a Senior bond and B and C etc. provide subordination for Class A in the event of losses. This is where every book I've read on the crisis stops, for whatever reason, maybe because its boring past this point they don't and ultimately subordination is the least important part of an ABS/MBS. For the trust to be able to sell the riskiest of the bonds that they are issuing, in our made up use case its Class C and because Class C is the riskiest it will have a higher yield than A or B. Because the Trust is issuing the bonds as well as they have to sell Class C because they make the biggest fee on the riskiest bonds they have to provide credit enhancement just like any other company would have to.

 

So while we might have 1.2B in aggregate principle of home loans we are only going to issue 1.14B in bonds or 95% of the principle, I cannot stress this enough this is the most important part of the ABS or MBS  In any case the other 5% of pooled home loans are used as a backstop just like in baseball. This determines how levered the Trust is. What this means is there is a 5% overcollateralization cushion. In the event that any of the 95% of the principle doesn't make a payment we can take the payments from the 5% and fill the gaps. But it doesn't stop there, you can have as big of an overcollateralization % that you would like, what really matters is the collateral behind it.

 

So in our case because we underwrote loans at 75% of home value we have to equity adjust the overcollaterization. So in the event that we have to foreclose on someone we still can sell the home for more than the loan we wrote. In the event of the subprime RMBS crisis, not only can we sell it for than we wrote the loan for even if we have to foreclose in 2 years the home price could go up making our recovery percentage even higher than when we first underwrote the loan. So now when we equity adjust the overcollaterization we have a 30% cushion. Only if the home prices in our trust fall 30% does the equity of our trust get wiped out making the RMBS worthless, and when you throw defaults on top of that your, in a word, in done for, which is what happened in 2008

 

Now with subprime auto loans the initial overcollateralization have sometimes a 12% cushion but unlike in the subprime mortgage crisis they aren't making the loans at 75% L/V in subprime autos they are writing them at 106% value. So on just day one they are wiping out 6% of the cushion and thats without even adjusting for equity. As we all know cars depreciate and fast. The ABS underwriters know this so they have something called excess spread. Alot of subprime auto loans are at 20% APR and the yield on the senior and subordinate classes of the trust are lower than that so they keep the extra interest as cushion. Sometimes this is as high as 9%, but the only way that it provides this cushion is If People Pay Their Loans. When you adjust for equity on just a one year auto Abs O/C falls to below 2%.

 

For some reason people think a subprime auto crisis can't happen like the mortgage crisis because everyone knows that cars can't go up in value like a house on a broad scale. Thats not the issue, what these Auto ABS underwriters think is that people will always pay their auto loan first because thats how they get to work.

 

Two different ideas operating with the same fundamental mindset.

 

[Guest Cameron]

I forgot to add the subprime auto abs that are coming out in 2017 are 1/4th filled with loans made 5 years ago yet in the loan level data they keep the same value of the vehicle when the loan was already written yet about half have only paid down the loan more than 15% so the actual  equity in these loans are awful. This matters because it gives a distorted view of the current L/V of the Trust, the underwriters only have to disclose the L/V of the loan when it was made.

[DTEJD1997]

Hey all:

 

I heard something that I've never heard and I am quite sure that it indicates "frothiness" in the market.

 

It was an ad for how to trade & get rich trading crypto currencies.  I kid you knot!

 

They were running a seminar at one of the local hotel ballrooms...and YOU TOO CAN GET RICH mining and trading crypto-currencies....

 

Nothing could possibly go wrong with this!

[mrholty]

My old CFO went to work for one of these Subprime dealerships with about 60 locations.  He’s early 50s and wants to retire at 55 and could retire now but viewed this as one chance to make a bunch hopefully before it turned. 

Here is the economics of the deals:

 

Buy car at $4,500.  List it on a lot for $10k.  Buyer comes in and they negotiate down to $9k.  They bought the car with a loan at 5% and these guys hold the note and charge 13-17%.  Terms are 4 years and 50% make it to the end.  Even if the loans go bad in 3-6 months they usually get the car back and they either sell it at auction or move it to a different dealership in their network.

 

(edit: my numbers are different than Cameron's above but mine are for a company that is holding the loans themselves (my understanding)

 

Their dealership locations are profitable after 4 months.  His goal as CFO is to push the CEO to get them to open 40 stores a year for 3 years and get to about 200 locations.  Once they get to that size then they can securitize the loans.  If they securitize the loans then they can take the company public = cash out.  When you run the numbers and you realize how long people pay and even if they don’t retrieval rate its an amazing business.

The bubble that I really think is going to burst is healthcare.  If the Obamacare subsidies are really pulled its going to get ugly as guys fight for the remaining dollars.  If they open up a website/phone # to turn in your neighbor for cash its going to get flooded.  The whole discussion on DVA and the private insurance that covers peoples copays feels like the normal and not the exception. 

 

The market that I wonder about is the vet/pet care market.  Its amazing to see how much $ is spent on their pets even in stupid decisions.  My friend, a vet joined a clinic in a small town 10 years ago and the plan was to buy the owner out after 5 years at 4x earnings.  Owner kept extending and then sold to an Australian company at over 10x earnings.  A crazy multiple especially when you figure the barriers to entry are low.  This is a town of 9k people and 10 years ago it was the only other vet, there are now 2 more in the city limits and 2 more in the next town of 7k people. 

 

[mrholty]

Cameron-

 

Quick question.  How does one play this short?  Or is there not a way?

Is there a Michael Burry going and asking someone to sell to him or more appropriately how are these guys hedging so that they are not in the next movie in 10 years.

[Poor Charlie]

The bubble that I really think is going to burst is healthcare.  If the Obamacare subsidies are really pulled its going to get ugly as guys fight for the remaining dollars.  If they open up a website/phone # to turn in your neighbor for cash its going to get flooded.  The whole discussion on DVA and the private insurance that covers peoples copays feels like the normal and not the exception. 

 

Could you elaborate on the healthcare bubble/fraud.  I’m not really familiar with Obamacare—who would be fighting for the last dollar and why would people be calling in their neighbors?  Thanks

 

[randomep]

Hey all:

 

I heard something that I've never heard and I am quite sure that it indicates "frothiness" in the market.

 

It was an ad for how to trade & get rich trading crypto currencies.  I kid you knot!

 

They were running a seminar at one of the local hotel ballrooms...and YOU TOO CAN GET RICH mining and trading crypto-currencies....

 

Nothing could possibly go wrong with this!

 

I am not sure if these obscure seminars really indicate the market. They will exist in bull or bear markets......

 

It reminds me of an informercial I saw as a kid, touting a system for guessing lottery numbers.....

[Guest Cameron]

Cameron-

 

Quick question.  How does one play this short?  Or is there not a way?

Is there a Michael Burry going and asking someone to sell to him or more appropriately how are these guys hedging so that they are not in the next movie in 10 years.

 

I'm still thinking this over, its dumb for investors to think they can get a CDS on a bond after what happened in 2008, I don't even think you can get a CDS on an individual bond anymore anyway. if you want my full opinion an instrument for this isn't made until it is within one of the Wall Street's firm interest to short it themselves, currently they make to much for underwriting these compared to the RMBS.

 

The only sort of "hedging" that I can see is refinances. Basically the lenders hope to get the principle back when people refi with credit unions. This is part of the reason they write the loans at more than the value of the car and this is also why the first tranches get paid so quick, more than half the principle is paid in the first two years on these ABS's.

 

If credit unions specifically were to stop giving these people taking out the loans refi's 12-18 months after they take out the loan then the music would stop. When I've looked at some of the loan level data you'll see people with 500 FICO's no income or employment verification and a payment to income ratio of 20 who got refi'ed a month into the loan. Just from reading some of the FICO forums most of these people get denied from the credit unions when they first apply but for some reason once they have the loan credit unions are more open to buying out the loan and refi'ing them. This leads to the question of why, which is what I'm still trying to answer.

[Guest Cameron]

Also I don't think this is a short yet, some of the worst players in the game aren't public so they don't have to beat any earnings estimates so they can cut back if they feel the need too, one of the biggest players in subprime is trying to go public.

 

It would take to long for me to explain and I might do it when I get back but I have to run out right now, but if anyone is lurking or has been replying just do a little digging on Carvana and its biggest investor as well as its CEO. 

[rb]

Let me add a bit to what Cameron has been saying and maybe clarify a bit. The reason why there was CDS on MBS was not because Goldman did Burry a favour or anything like that. As a derivative the CDS has 2 counterparties the long and the short. Guys like Burry took the long but the shorts were bundled to create synthetic CDOs. It was the demand for synthetic CDOs that created the CDS and allowed Burry to go long. Until we see demand for synthetic ABS there won't be CDS on ABS.

 

Any way this is kind of a moot point. Even if there was CDS on ABS we wouldn't be able to short the markets because nobody here would be able to buy them. But in case anyone can buy CDS pretty please can you share how?

[Guest Cameron]

Let me add a bit to what Cameron has been saying and maybe clarify a bit. The reason why there was CDS on MBS was not because Goldman did Burry a favour or anything like that. As a derivative the CDS has 2 counterparties the long and the short. Guys like Burry took the long but the shorts were bundled to create synthetic CDOs. It was the demand for synthetic CDOs that created the CDS and allowed Burry to go long. Until we see demand for synthetic ABS there won't be CDS on ABS.

 

Any way this is kind of a moot point. Even if there was CDS on ABS we wouldn't be able to short the markets because nobody here would be able to buy them. But in case anyone can buy CDS pretty please can you share how?

 

The derivative or instrument won't be a CDS I'll throw it over to Mary Kane the subprime analyst at the best of the failed bank in the world, Citigroup "It seems like too many people have seen the movie “The Big Short” and are starting to think the movie heroes’ short strategy would translate to the ABS market. By the way, the ABS conference did NOT take place at Caesar’s Palace that year as per the film, it was at The Venetian. So, it’s not wise to believe everything you see in a movie and hit films are not the best source for trade ideas"

 

Also she says

"There are four principal reasons to NOT short auto ABS: 1) consistent and stable long-term performance through numerous cycles; 2) robust credit enhancement protecting principal at risk 3) auto loan growth historically in line while securitization rates remain low, 4) originate-to-sell practices are not and have never been prevalent. Data shows that auto loan growth is not out of line with historical growth and that auto loan financing is not excessively reliant on the ABS market. The auto ABS securitization rate varied from 15–28% from 2004–present. Currently at 16%, it shows that most US auto loans are held on lenders’ balance sheet."

 

Since its not disclosed in her report, I'll add it, Citigroup makes a pretty penny from underwriting these deals.

 

 

[DTEJD1997]

Hey all:

 

I heard something that I've never heard and I am quite sure that it indicates "frothiness" in the market.

 

It was an ad for how to trade & get rich trading crypto currencies.  I kid you knot!

 

They were running a seminar at one of the local hotel ballrooms...and YOU TOO CAN GET RICH mining and trading crypto-currencies....

 

Nothing could possibly go wrong with this!

 

I am not sure if these obscure seminars really indicate the market. They will exist in bull or bear markets......

 

It reminds me of an informercial I saw as a kid, touting a system for guessing lottery numbers.....

 

RandomEP:

 

I am going to have to strongly disagree with you on this one....

 

Looking back, I forgot to mention that I heard this over broadcast radio....One of the local terestial "pop" radio stations.  This was in the afternoon...maybe at the VERY start of rush hour time.

 

This was the first and only time I've heard a commercial for crypto-currencies. 

 

Back before the great crash, there were constantly radio & TV ads about flipping houses,  and "you two can get RICH using leverage in real estate!".  While these ads didn't come on the day or week or month before the crash, they did signal that we were getting near the top.

 

Hope this helps clarify things...

[frommi]

I don`t know if this is a fraud but HCSG is manipulating net income by a lot. They are not able to collect receivables and at some point have to write them off. Their clients are mainly SNF and other healthcare facility operators. But the market is ignoring this fact and values the company on net income and past growth (which is unreasonable to be repeated and probably only fictious, because the growth comes from near-bankrupt clients.) I except it to fall hard in the next bear market, its maybe worth 20-30% of the current marketcap.

[Guest Cameron]

Let me add a bit to what Cameron has been saying and maybe clarify a bit. The reason why there was CDS on MBS was not because Goldman did Burry a favour or anything like that. As a derivative the CDS has 2 counterparties the long and the short. Guys like Burry took the long but the shorts were bundled to create synthetic CDOs. It was the demand for synthetic CDOs that created the CDS and allowed Burry to go long. Until we see demand for synthetic ABS there won't be CDS on ABS.

 

Any way this is kind of a moot point. Even if there was CDS on ABS we wouldn't be able to short the markets because nobody here would be able to buy them. But in case anyone can buy CDS pretty please can you share how?

 

I hate to use semantics but the demand for synthetic CDO's wasn't what created the CDS. It was the fact that the firms could get rich off of selling the CDO, they were 20-50 billion dollar deals. But for the deals to be that large they actually had to lend 20-50 billion. With a CDS you don't have to do that, you just have to find 2 people willing to take one side of a trade. The CDS mimicked a RMBS you had to make monthly payments etc. so they put them in CDO's which allowed them to do 20-50 billion dollar deals. The Goldman John Paulson deal is one like the above example.

 

We had a subprime mortgage crisis before the GFC in the early 1990s. The subprime mortgage market should have collapsed in 2005 and would have if the CDS and CDO wasn't created. The actual subprime mortgage wasn't systemic, what made the crisis systemic was the CDS and CDO. If there is ever a CDS on Auto ABS's we have more problems than just trying to buy one. Subprime mortgages were only 16% of outstanding mortgage debt, it would have collapsed but we wouldn't have had the complete abyss if you weren't able to make side bets on the failings of the mortgages. Because the market was so primitive the CDO made it so no one knew who owed what to who. We also had a subprime auto loan collapse in the mid 1990s, this story has played out before. In 1997 there was 26 public subprime auto finance companies, most were wiped out. Reliance Acceptance Group, Search Financial Services Corp, First Enterprise Financial Group Inc. I could go on.

 

Interestingly when you look at the old subprime mortgage companies in the 1990s that went under and the 2008 companies you'll see familiar names. There is a reason why subprime didn't exist before the 1970s. People who are getting these loans can't get them at traditional financing companies. As long as subprime lending is around for whatever asset you choose it will always blow up.

 

In regards to demand, I have seen one CDO in the auto market but that was because those are so hard to find, just to find information on a public ABS is hard. It was a Santander CDO made up of 4 ABS's they sold that year. 

 

Everywhere theres a bubble there is a CDO, during the tech bubble CDO's during that time were made up of private equity fund fees and air leases.

[ICUMD]

Does anyone know of where it is possible to obtain credit default statistics for home and auto loans?

 

Thanks in advance!

[Guest Cameron]

Does anyone know of where it is possible to obtain credit default statistics for home and auto loans?

 

Thanks in advance!

 

Do you mean the actual default data or the statistics on the credit default swap? 

[rb]

Does anyone know of where it is possible to obtain credit default statistics for home and auto loans?

 

Thanks in advance!

FRED

[Guest Cameron]

Does anyone know of where it is possible to obtain credit default statistics for home and auto loans?

 

Thanks in advance!

FRED

 

just in case he was looking for cds statistics the occ publishes them and so does the BIS

 

http://www.bis.org/statistics/derstats.htm