Explosion of "Deep Subprime" auto loans

Late in the cycle of the housing boom in 2007, analysts and hedge fund managers at prescient firms such as Scion Capital and FrontPoint Partners became aware of a strange new phenomenon in home mortgages that were being “securitized” into mortgage-backed securities (MBS).  What they found was that so-called NINJA applicants, which stands for “No Income No Job and No Assets”, were becoming a larger and larger component of MBS’s but were nonetheless being labeled as safe investments by the rating agencies.  Well, as Mark Twain is believed to have said, “History doesn’t repeat itself but it often rhymes.”  In research from Point Predictive, a startup firm that helps lenders discover bogus borrowers, the firm reveals that “borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during the last decade’s housing bubble.”  As many as 1% of U.S. car loan applications include some type of material representation, Point Predictive says.  Frank McKenna, chief fraud strategist at the firm, said: “We see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud.”  As of right now, it remains to be seen if this revelation in the auto loan sector will have the same impact on the overall economy as it did for the housing market.

The following chart, from Point Predictive, graphically shows the explosion of “Deep Subprime” loans as a percentage of all auto loans.

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