From Gina Proia, a spokeswoman for Ally Financial Inc., a leader in car loans, referring to a recent increase in loan delinquencies:
[The increase in losses] is related to growth in the consumer portfolio as well as our strategy to diversify the business and book a more balanced mix of assets. The increase in losses was expected and in line with our expectations. We continue to have a robust underwriting policy and price for risk appropriately.
“Robust underwriting policy,” assuming Ally is following standard industry practice, is to make loans to people with little income and few assets. It’s Son of Subprime, this time in the auto sector. Some of the auto industry’s recent strength can be attributed to easy credit.
To see how relaxed standards have become, consider this quote from Patrina Thomas, who had her car repossessed after she was unable to make her $385-a-month payments.
“Now my credit is ruined. I can’t buy a house for a while.”
The Wall Street Journal, “Car Loans See Rise In Missed Payments,” 1/9/15
If Ms. Thomas can’t make car payments, what makes her think that it will be her “ruined” credit, rather than her lack of income, that will prevent her from buying a house, if only just for “a while?” The auto lenders have reached the same point as their subprime mortgage predecessors: anyone who can sign their name can get a loan.
Presumably lenders like Ally build in default probabilities when deciding what rate to charge borrowers. Ms. Thomas was paying 20.4 percent interest, which covers a lot of delinquencies and defaults. But haven’t we heard this song before, say in 2006 and 2007 just before housing went bust? Delinquency rates on auto loans are ticking up even while the economy is supposedly recovering. The auto loan market is nowhere near as large as the residential mortgage market. Bad auto loans won’t take down the economy, but if things head south for other reasons, those loans will administer a body blow, perhaps lethal, to auto lenders and to automobile sales. An interesting side bet is whether the government will find a way to put taxpayers on the hook for those loans. Anyone making odds?
