The Era of Incentive-Distorted Consumer Lending Is Over: Auto Loans, Delinquencies, Prime and Subprime

Auto-loan balances increase at skyrocketing prices despite declining sales. Crime rises to pre-pandemic ups and downsSubprime delinquencies returned to 2016-2019 levels.

By wolf richter For wolf street,

The balance of auto loans and leases continued to grow in the third quarter, although third quarter new vehicle sales were at levels seen for the first time since the late 1970s. and that’s not a typo – 19% decline in the number of vehicles sold in the third quarter as compared to the third quarter of 2019; And used-vehicle unit sales are down about 15%.

Auto loan balances increased because automakers increased new-vehicle prices, because the money is right there, and because they are supply constrained and preferring more expensive models and increasing their dollar-revenues from price increases. And trying to boost profit margins. Even the sales of new vehicles are in dire straits.

Auto loans also increased as the prices of used vehicles increased ridiculously even though there was no shortage of used vehicles. Some of those price spikes have finally started to pull back a bit.,

According to New York Fed data, outstanding auto loans and leases rose 2.2% from Q2 and 6.1% year-over-year in Q3 to a record $1.52 trillion. Home Loan and Credit ReportOn a mix of rising prices, upscale happening because the money is right there, and falling unit sales, leading to fewer but bigger loans with longer terms:

But in terms of the number of units delivered to the end customer, sales of new vehicles in Q3 declined by 19% as compared to Q3 2019. But sales were also down in the years before the pandemic. Compared to Q3 2016, sales were down by 22%. At 3.48 million vehicles, sales were back where they were in the late 1970s.

Price increases and higher levels are driving the industry – even as more and more American new vehicles are out of the market – and this process has been happening for several years:

Crime rises from historic low to all-time low,

The rate on all auto loans and leases — prime and subprime — that were 30 days and more in arrears rose to 6.2% in the third quarter, according to home loan and credit data from the New York Fed. It was still below the record low from before the pandemic.

In 2020 and 2021, consumers used their stimulus money and additional unemployment benefits and their PPP loans and cash left over from not making rent or mortgage payments to get stuck on their auto loans. And some borrowers were able to enter their delinquent auto loans into forbearance programs, which turned “delinquent” loans into “current” loans. And crime rates plummeted to record ridiculously historic lows, one of the many distortions of the pandemic stimulus economy.

But that era is over, and crime rates are returning to pre-pandemic Good Times lows, and that’s what we’re seeing here: crime is returning to normal at a much lower level.

That doesn’t mean it’s going to stay that way: In late 2005, in lockstep with the housing bust, more than two years before the Great Recession, delinquency rates began to rise, as borrowers under mortgage stress were also paying more for their autos. had fallen behind on the loan. The crime rate continued to rise throughout the financial crisis and peaked at about 11% in 2009, and then began to decline.

But today, unemployment is at a very low level, the number of unemployment insurance claims is near historic lows, and the economy is far from the type of unemployment crisis it was during the Great Depression. So for now, consumers are still taking good care of their auto loans.

subprime loans and delinquency,

The share of subprime auto loans – borrowers with credit scores less than 620 – that originated in the third quarter increased from a record low to a share of 17.8% of total auto loan originations in the quarter, and the same low range as the previous two remained in the years. Before the financial crisis, the share of subprime auto loans that were originated was between 25% and 30%-plus (red line).

In contrast, prime loans with credit scores of 720 and above that originated in Q3 accounted for 47.8% of total originations in the upper part of the range (green line).

This means that the overall credit quality of auto loans originated in Q3 — as seen by credit scores — was relatively high.

total subprime auto loan outstanding According to data from Experian, amounting to about $250 billion. So the dollar amount is not huge.

subprime auto loan delinquency Subprime auto-loan balances fell to 5.1% in October, according to the Fitch Auto Loan 60+ Days Delinquency Index, which tracks subprime loans that have been rolled into asset-backed securities (ABS) and sold to investors.

October’s crime rate was down at 5.1% from October 2019’s rate of 5.4%. The index has been in this range since 2016, after more aggressive subprime lending and securitization starting around 2014 became all the rage.

securitization of subprime auto loans Spreading the risk and making them highly profitable due to the high interest rates, relatively easy recovery of collateral, and the liquidity of the used vehicle wholesale market where these repossessed units are sold. Most subprime loans finance the purchase of used vehicles that are several years old, and the loss for the lender when they repossess the vehicle and sell it at auction is generally not very large.

In terms of lenders: Most of them securitize their subprime auto loans and sell them to investors, so if any hiccup occurs, investors bear a large portion of the risk. Lenders have some skin in the game by first retaining a small equity portion of loss-making ABS.

Some smaller specialty subprime lenders do collapse from time to time because they get bogged down in some way. Some of them did so before the pandemic. And there will be more of them, but this is what happens. During the 2009 jobs crisis – if we get another one like this – most of the losses will be borne by investors like bond funds, pension funds, life insurers, etc.

But the amounts aren’t huge: The total amount of subprime auto loans outstanding is about $250 billion, and it’s spread around most investors’ fixed-income portfolios.

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