The next US subprime problem, apparently, is in auto loans : Ms. Payne went with her daughter to a dealership that arranges loans for Santander and other auto lenders to buy the car. She said an employee at the dealership in Great Neck, N.Y., assured her that, even though she was on food stamps, she could afford the loan. At the time, Ms. Payne said she thought she was co-signing the loan with her daughter. “I looked him in the eye and said, ‘I don’t have any income,’ ” said Ms. Payne. The problem isn’t the origination. It’s the fact that these loans are getting packaged into Asset Backed Securities and sold off to other investors. In a chilling reminder of the original sub-prime problem (housing) we find that the lowest yield tranches of such ABS are also being rated AAA. How does this work? If you package 1000 loans into an ABS package and sell securities off it, you can say: I’ll take the first 10% that loses money (which is the “equity” tranche, all the losses in the first 10% are yours) Someone else takes the next 10% (mezzanine tranche, sold to someone who doesn’t mind the risk, gets high returns) The rest is packaged another next 30% (junior tranche, getting interest just lower than mezzanine, but takes a hit only after the first 20% is gone) The last is the senior tranche, the bottom 50%. … (Read On…)
[via Capital Mind]
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