For months we've argued that record auto sales have been propped up by low interest rates, a perpetual loosening of auto lending standards with terms being stretched to the max and a wave of leases, all of which have allowed the American consumer to trade up to more expensive vehicles while maintaining low monthly payments.

That said, with rates recently on the rise and a flood of lease returns driving down used cars prices (see "Record High Lease Returns Set To Wreak Havoc On Used Car Prices"), the tailwinds that have propelling auto sales to record highs over the past several months look set to change course.

Certainly, a quick look at the 61+ day delinquencies in General Motors' subprime securitization book would seem support our rather negative thesis on future auto sales with January 2017 delinquency rates soaring to the highest levels since late 2009 / early 2010.

Meanwhile, looking at GM's subprime data going back to 2001 implies that historical spikes in 2-month delinquency rates is a fairly decent indicator that all is not well.

Moreover, as the Financial Times pointed out today, it's not just subprime borrowers that are having problems making their monthly auto payments. According to data pulled from Transunion, more than 1 million U.S. auto borrowers, subprime and otherwise, were behind on their payments as of Q4 2016 as overall delinquency rates also soared to 2009 levels.

More than a million US consumers have fallen at least two months behind on car loan repayments as the delinquency rate reaches its highest level since 2009, in the latest sign of stress in the $1.1tn market. The proportion of soured car loans showed a 13 per cent increase to 1.44 per cent in 2016, according to data published on Thursday by TransUnion, the US credit bureau with an anonymised database of 220m consumers. The rise in bad loans comes despite persistently low borrowing costs and unemployment levels — suggesting lenders may be letting consumers take on bigger debt burdens than they can handle. Lending to consumers with weak credit scores has been one of the fastest growing parts of the industry.

Though warning signs have been evident for some time now, at least to us anyway, lenders are just now starting to dial back their subprime exposures.

Nancy Bush, an analyst at NAB Research, said: “Auto lending was so hot for a while. It’s almost inevitable the credit quality would be stretched. “Investors have tended to worry less than they should about banks going out on a limb with credit quality, just because we haven’t seen the evidence up until the last few quarters.” Across the industry, subprime car loan originations fell 3 per cent in the third quarter from a year ago. In contrast, so-called prime plus and super prime originations rose. “This is at a period where we, as an industry, should stay disciplined,” Dean Athanasia, co-head of consumer banking at Bank of America, told an investor conference last week. “You got to watch credit. You got to make sure we’re not diving too deep into the lower end,” he added.

And while underwriters of auto loans will undoubtedly reassure investors that subprime auto securitizations performed relatively well, even at the height of the 2009 'great recession', we would note that borrowers have never been so underwater of their cars as they are right now.

Losses are never possible on those highly-engineered, complex wall street structures...until they are.