American consumers are now more likely to pay off their cell phone bill than their auto loan, a new report by PeerIQ has found. However, instead of focusing on this as a potential catalyst for more pain in the already precarious world of auto loans, the media, always the finder of silver linings, is emphasizing how this finding will boost demand for securities that are backed by cell phone purchases going forward.
Yes, Cell-Phone Backed lines of credit are coming to a Goldman Sachs retail branch near you. From Bloomberg:
U.S. consumers are more devoted to their mobile phones than their automobiles.
The sea change has taken place over the last few years as mobile devices become an integral tool not just for communication with loved ones or employers, but also everything from banking to dating to watching TV and listening to music. As cars grow relatively less important, borrowers struggling to pay back their loans on time are increasingly prioritizing payments on the latest iPhone instead of making sure they hold on to their pickup or coupe.
The shift is increasing the attractiveness of bonds generated from mobile-phone loans, a small but growing portion of the asset-backed securities market. While just $7.7 billion of bonds backed by phone purchases have been issued since 2016 — and all by Verizon Communications Inc. — the number may increase over coming years.
The reason for the skewed importance is simple: mobile phones have become a universal hub of information and accessibility, allowing consumers to order car rides wherever they need at the push of a button while enjoying the wealth of information and productivity provided by a cell phone, including having anything you want delivered directly to your house, making it a more important accessory than owning a car. Of course, one can simply spend hours each day on Facebook stalking one’s ex, which is what most use it for.
Bloomberg continues:
“Payment priority of cell phones is higher than personal and auto loans and similar to or slightly lower than that of mortgage,” Ram Ahluwalia, the chief executive officer of PeerIQ, a New York-based provider of data and analytics for the consumer lending sector, said in an interview. “Now with Lyft and Uber, you can access transportation via cell phone. The car no longer is a central asset. Technological change is driving shifts in consumer behavior.”
Yet despite the “stickyness” of mobile phone cash flows, so far Verizon has been the only company to take advantage of issuing securities backed by it’s cell phone contracts. Incidentally, based on their spreads, the market is treating such cell-phone backed securities on part with prime auto loans.
“Back in 2008 cell phones probably weren’t as present as they are now and have moved up the scale,” said Ken Purnell, the head of ABS portfolio management at Invesco Advisers Inc., based in Louisville, Kentucky. “In the ABS market it gives investors another very high-quality type of security to invest in that didn’t exist two years ago.”
While the market is set for growth, so far there have only been six sales by Verizon, the largest U.S. mobile-phone carrier. Its bonds are backed by customers’ monthly device payments, which are usually bundled with their service bills. The spreads on the securities have tightened and are generally in line with prime auto debt.
And while the above is good news for cell phone sellers and consumer hoping to find easy cell phone financing terms, it’s not so good for providers of auto loans, because as less creditworthy borrowers continue focus on paying off their cell phone bills instead of paying their car payments, this would lead to growing auto loan delinquencies. In 2007 and 2008, one of the reasons for the housing crisis was because it no longer made sense for homeowners to keep paying off their house: either it was worth less than what they paid, they had already extracted the equity from it it simply wasn’t a priority for them anymore, or they simply couldn’t afford it. Ten years later we are back in the same place.
The article concludes:
“Surveys are showing that the cell phone payment is a high priority for the consumer, and from that perspective we think that fundamentally they are pretty sound,” said Clayton Triick, an Atlanta-based portfolio manager at Angel Oak Capital Advisors, which manages $8.5 billion. ”More recently, spreads have just validated that.”
Angel Oak sold its Verizon cell-phone bonds, but Triick said his team would consider buying similar securities in the future if there is an attractive entry point, perhaps when new issuers come to the market.
The idea of creating a brand new bubble in the latest and greatest securitization – cell phone-backed debt securities – is appealing to many, and we have no doubt that companies will be ravenously elbowing each other out of the way to corner the market and issue the riskiest contract backed debt securities possible in as short amount of time as possible to help “diversify” the risk. This will ultimately create yet another more bubble we will have to deal with in the future. However, until then, everyone will be focusing on the new cash flows, ignoring how this will effect other outstanding paper; and nobody is pointing out that this could further exacerbate the already dire auto loan industry.
Meanwhile, as readers will recall, the subprime auto industry is already in a crisis of its own. As we reported just days ago, default rates are now higher than during the financial crisis.
One month ago, when discussing the most recent trends in the US subprime auto loan space, we revealed how despite a virtual halt in direct loans by depositor banks to subprime clients following the financial crisis, the US banking sector now has over a third of a trillion dollars in indirect subprime exposure, in the form of loans to nonbanks financial firms which in the past decade have become the most aggressive lenders to America’s sub-620 FICO population.
As we further explained, the banks’ total indirect exposure to subprime loans – not just auto loans, but also subprime mortgages, and subprime consumer loans – could be pieced together through public filings, and according to FDIC reports, bank loans to nonbanks subprime lenders soared this decade, with the following 5 names standing out:
- Wells Fargo: $81 billion, up from $13.4 billion in 2010
- Citigroup: $30 billion, up from $4.1 billion in 2010
- Bank of America: $30 billion, up from $2.8 billion in 2010
- JP Morgan: $28 billion, up from $10.4 billion in 2010
- Goldman Sachs: $22 billion
- Morgan Stanley: $16 billion
Visually:
But while the supply side of the subprime equation is clearly firing on all cylinders – as only the next crash/crisis will stop desperate yield chasers – things on the demand side are going from bad to worse, and according to the latest Fitch Autoloan delinquency data, consumers are defaulting on subprime auto loans at a higher rate than during the 2008-2009 financial crisis.
It will be ironic if the tipping point that sends the house of subprime auto cards crashing is something as trivial and “novel” as securitized cell phone bills.
And come to think of it, how is it possible that deep into the “second longest expansion in US history”, millions of American consumers can’t even afford to purchase their cell phones outright and instead will serve as the basis for yet another prime, then subprime, securitization bubble product?
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