John Oliver Issues A Warning On Subprime Auto Loans

HBO’s John Oliver spent this week’s episode of “Last Week Tonight” discussing the rise of subprime auto loans and making comparisons to the subprime mortgage bubble. According to Oliver, nearly 25 percent of all auto loans are now subprime.

While the total size of the asset-backed securities (ABS) market peaked in 2007, auto loan ABS have been steadily on the rise since 2010. One of the driving forces behind deteriorating loan quality is strong ABS demand.

“While the new issue market persistently offers a diverse array of ABS supply, many of these assets run off because they amortize,” Citi explains. “The runoff creates perennial demand for high-quality assets.”

Related Link: Auto Loan Delinquencies Have Eclipsed 2008 Levels, And They're Secured Just Like Home Loans

Despite fears that the auto market has ushered in the second coming of the mortgage bubble, some analysts say that the auto ABS market remains safe.

“Despite the higher delinquencies and the increased liquidation rates that come along with them, we find that stressing both default rates and loss severities would rarely lead to even the most subordinated investors experiencing losses,” Morgan Stanley analyst Jeen Ng explains.

However, as John Oliver pointed out, those arguments are eerily similar to the ones made about mortgage-backed securities (MBS) during the last bubble.

Investors looking to hedge against another subprime loan-driven market collapse should consider selling Bank of America Corp BAC and Credit Acceptance Corp. CACC. Both companies have relatively high exposure to the auto loan market.

Disclosure: The author is long BAC.