Tag Archives: subprime auto loans

Subprime Auto Loans Explode, “Serious Delinquencies” Spike to Record. But There’s No Jobs Crisis, These Are the Good Times, by Wolf Richter

Imagine how bad it’s going to get when the bad times arrive. From Wolfe Richter at wolfstreet.com:

Nearly a quarter of all subprime auto loans are 90+ days delinquent. Why?

Auto loan and lease balances have surged to a new record of $1.33 trillion. Delinquencies of auto loans to borrowers with prime credit rates hover near historic lows. But subprime loans (borrowers with a credit score below 620) are exploding at a breath-taking rate, and they’re driving up the overall delinquency rates to Financial Crisis levels. Yet, these are the good times, and there is no employment crisis where millions of people have lost their jobs.

All combined, prime and subprime auto-loan delinquencies that are 90 days or more past due – “serious” delinquencies – in the fourth quarter 2019, surged by 15.5% from a year ago to a breath-taking historic high of $66 billion, according to data from the New York Fed released today:

Loan delinquencies are a flow. Fresh delinquencies that hit lenders go into the 30-day basket, then a month later into the 60-day basket, and then into the 90-day basket, and as they move from one stage to the next, more delinquencies come in behind them. When the delinquency cannot be cured, lenders hire a company to repossess the vehicle. Finding the vehicle is generally a breeze with modern technology. The vehicle is then sold at auction, a fluid and routine process.

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The Holy-Cow Moment for Subprime Auto Loans; Serious Delinquencies Blow Out, by Wolf Richter

The auto industry is discovering the folly of lending to people with iffy prospects of paying the loan back. From Wolf Richter at wolfstreet.com:

But it’s even worse than it looks. And this time, there is no jobs crisis. This time, it’s the result of greed by subprime lenders. 

Serious auto-loan delinquencies – auto loans that are 90 days or more past due – in the third quarter of 2019, after an amazing trajectory, reached a historic high of $62 billion, according to data from the New York Fed today:

This $62 billion of seriously delinquent loan balances are what auto lenders, particularly those that specialize in subprime auto loans, such as Santander Consumer USA, Credit Acceptance Corporation, and many smaller specialized lenders are now trying to deal with. If they cannot cure the delinquency, they’re hiring specialized companies that repossess the vehicles to be sold at auction. The difference between the loan balance and the proceeds from the auction, plus the costs involved, are what a lender loses on the deal.

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The Boom Turns Into A Bust – Here are 14 Signs That The U.S. Economy Is Steadily Weakening, by Michael Snyder

Michael Snyder is usually pessimistic, but he’s got hard evidence to back up his pessimism. From Snyder at theeconomiccollapseblog.com:

There should no longer be any doubt that the U.S. economy is slowing down, but most Americans still don’t realize what is happening because the major news networks are completely focused on the endless impeachment drama that is currently playing out in Washington.  And without a doubt that is important, because it threatens to literally rip our entire nation in two.  But meanwhile, economic activity has taken a very ominous turn.  Hiring is slowing, consumer confidence is plunging, defaults on auto loans are rapidly escalating, the “transportation recession” continues to get deeper and it appears that the housing bubble is popping.  Everywhere we turn, there are signs of economic trouble, and many are deeply concerned about what this will mean for us as we head into a pivotal election year in 2020.

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Subprime Auto Loans Blow Up, Delinquencies at 2009 Level, Biggest 12-Month Surge Since 2010, by Wolf Richter

Imagine where delinquencies would be if we weren’t in “the best economy ever.” From Wolf Richter at wolfstreet.com:

But these are the good times. Automakers are not amused.

The auto industry depends on subprime-rated customers that make up over 21% of total auto-loan originations. Without these customers, the wheels would come off the industry. And tightening up lending standards to reduce risks would cause serious damage to the undercarriage. Subprime lending is very profitable – until the loans blow up – because interest rates can be high. But those subprime auto loans are blowing up at rates not seen since the worst days of the Financial Crisis – and these are the good times!

Serious auto-loan delinquencies – 90 days or more past due – in the second quarter, 2019, jumped 47 basis points year-over-year to 4.64% of all outstanding auto loans and leases, according to New York Fed data released today. This is about the same delinquency rate as in Q3 2009, just months after GM and Chrysler had filed for bankruptcy. The 47-basis-point jump in the delinquency rate was the largest year-over-year jump since Q1 2010:

But this time there is no economic crisis. The unemployment rate and unemployment claims are hovering near multi-decade lows, and employers are griping about how hard it is to hire qualified workers without having to raise wages. So, unlike during the Financial Crisis, this surge in the delinquency rate has not been caused by millions of people having lost their jobs. It’s not the economy that did it. It’s the industry.

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Subprime Auto Delinquency Rates at Levels Higher than During the Financial Crisis, by Peter Schiff

Cars have gotten very expensive. Most purchases are financed; the buyer takes out a loan. Loan terms keep stretching out, to make cars more “affordable.” And now delinquencies are rising on subprime auto loans, which is probably a harbinger of troubles for all auto loans and the auto industry in general. From Peter Schiff at schiffgold.com:

Here’s another sign that the air is starting to come out of the subprime automobile bubble.

The default rate on subprime auto loans has reached levels higher than we saw during the financial crisis. As a result, lenders are shutting off the easy money spigot. That’s bad news for the auto industry.

According to the latest data from Fitch and reported by Bloomberg, the delinquency rate for auto loans more than 60 days past due hit 5.8% in March. That’s the highest level since 1996. The default rate during the peak of the financial crisis came in at around 5%.

And this is happening while the economy is supposedly doing great. What will delinquency rates look like when the economy goes bad?

So far, small companies have borne the brunt of rising defaults. According to Bloomberg, “an influx of generally riskier, smaller lenders flooded into it in the post-crisis years, bankrolled by private-equity money, which pursued the riskiest borrowers in order to stay competitive.” Those companies are beginning to go belly-up. But as ZeroHedge noted, “we all know what comes next: the larger companies go bust, inciting real capitulation.”

Meanwhile, the number of auto loans and leases extended to customers with shaky credit has plunged, falling almost 10% from a year earlier in January, according to Equifax. Auto-lease origination to high-risk borrowers decreased by 13.5%.

The auto industry faces a double-whammy. With defaults on the rise and tighter lending standards, its pool of customers is shrinking. Meanwhile, rising interest rates will push the price of vehicles even higher than they already are – and they are high. That means even more consumers squeezed out of the market.

As we reported last month, the price of a new car has risen to the point that the vast majority of Americans simply can’t plunk down some cash and drive off the lot. Even a decent used car is out of reach for most American consumers. The average price for a new vehicle is at a record high $31,099, and the average used car price is also in record territory – $19,589.

To continue reading: Subprime Auto Delinquency Rates at Levels Higher than During the Financial Crisis

Subprime Chaos: The Auto Bubble’s Bursting And It’s Worse Than 2008, by Adem Tumerkan

Debt implosions usually begin on the fringes of the debt market, generally in a segment that has received a massive and unsupportable infusion of credit. Like the subprime housing market 2004-2007…or the subprime auto loan market the last few years. From Adem Tumerkan at palisade-research.com:

Last week, used car prices had their biggest drop since 2009 – directly after the financial market meltdown of 2008.

And right now, the auto market is showing signs of incredible worry.

Delinquent subprime auto-loans are higher than they were in the last recession.

Look for yourself. . .

What’s interesting – and worrisome – is that consumers are defaulting on subprime auto loans when the economy is supposably doing ‘very well’.

Like I wrote last week – there are cracks under the economy’s foundation. And it’s like a bucket of cold water in the face of the mainstream financial media that’s pushing the ‘growth’ story.

We must ask ourselves – “if things are going so well, why are subprime loan delinquencies at a 22-year high?”

I can’t help but feel a bit nostalgic. This was the same situation that led up to the 2008 housing crisis. . .

First, there was massive growth in mortgage-backed securities and mortgage debt. Then, the Federal Reserve – led by Alan Greenspan – began aggressively raising rates after years of low rates. Soon after, subprime loans started blowing up – which trickled into the prime loans. And eventually, everything was in chaos.

Using the often-ignored Austrian Business Cycle Theory (ABCT) – coined by the little-known but brilliant economist Ludwig Von Mises – I am blaming the Fed for all this.

Thanks to the Fed, a near decade of zero-interest rate policies (ZIRP) and three rounds of Quantitative Easing (which totaled over $3.8 trillion in printed money) – the consumers’ became hooked on cheap auto loans. . .

Their policies made the entire system fragile by getting consumers addicted to cheap debt through their easy money.

They then began tightening credit – crippling the borrowers.

To continue reading: Subprime Chaos: The Auto Bubble’s Bursting And It’s Worse Than 2008

The Coming Carmageddon, by David Stockman

The auto industry has crested the hill, but the backside is going to be not a gently ride down, but a nervewracking plunge. From David Stokman at dailyreckoning.com:

Ben Bernanke’s successors at the Fed and other global central banks still don’t get it.

Falsified debt prices do not promote macroeconomic stability. They lead to reckless credit expansion cycles that eventually collapse due to borrower defaults. We’re now seeing that play out in the auto sector, especially since anyone who can fog a rearview mirror has been eligible for a car loan or lease.

If that reminds you of the sub-prime housing disaster, you’d be right.

That, in turn, will make the looming collapse even worse, due to the sudden drastic shrinkage of credit in response to escalating lender losses.

How did we get here?

Let’s start by looking at the Fed. Its reckless monetary reflation cycle in response to the Great Recession caused auto credit, sales and production to spring back violently after early 2010.

Accordingly, that reflation has powerfully impacted the growth rate of total U.S. domestic output. And it’s had a massively distorting effect.

Auto production has seen a 15% gain over its prior peak, and a 130% gain from the early 2010 bottom. But overall industrial production is actually no higher today than it was in the fall of 2007. Real production in most sectors of the U.S. economy has actually shrunk considerably.

That means if you subtract the auto sector, there has been zero growth in the aggregate industrial economy for a full decade.

So the auto industry has actually distorted the effects of monetary central planning.

But the real point here is that the financial asset boom-and-bust cycle caused by monetary central planning is making the main street business cycle more unstable, not less. And it means the next auto cycle bust is certain to be a doozy.

To continue reading: The Coming Carmageddon

Subprime on Wheels, by Eric Peters

Like the housing industry before it, the auto industry has employed dicey credit to juice sales, and there can be no doubt the industry will meet the same fate as the housing industry in 2007-2009. It’s already started. From Eric Peters on a guest post at theburningplatform.com:

It’s a good time to be a repo man. . . again.

Lots of business picking up used cars people’ve stopped making payments on.

According to S&P Global Ratings and an article in Bloomberg News, defaults on these subprime loans are at their highest water mark since the subprime collapse of 2008 and the “recovery rate” – what the lender ends up recouping of the original debt principle – is a mere 34.8 percent.

It’s a lot money flushed.

But how is it that cars – all of them, not just the used ones – bleed value this quickly and this much?

It’s because they’re not really worth that much to begin with.

As distinct from what their price was to begin with.

New car prices are hugely inflated – mostly because of electronic gadgets that dazzle when new and for which people will pay (that is, finance) top dollar . . . but which get old and lose value quickly.

They don’t get old in a calendar year or wear-and-tear sense but in terms of their “latest thing-ness,” which vanishes like a late April snow shower. Think how quickly your smartphone or computer hags out. Now consider the screens and apps and other such they’re installing in cars.

How useful is a five-year-old GPS system with a non-touchscreen and without the latest version of whatever-the-latest-apps are? It probably doesn’t even have the latest app to version up to.

And how much is a five-year-old laptop worth? It cost $1,200 new.

To continue reading: Subprime on Wheels

Subprime Auto-Loan Delinquencies Surge to NY Fed’s Attention, by Wolf Richter

Debt will be the fulcrum of the next financial crisis and surging delinquencies on subprime auto loans are a dead canary. From Wolf Richter at wolfstreet.com:

The increasingly turbulent sector of subprime auto loans bubbled to the attention of the Federal Reserve Bank of New York. In its Liberty Street Economics, it worries about the “notable deterioration in the performance of subprime auto loans” – Fed speak for the momentum with which these loans are going to heck.

About six million people with subprime credit scores (below 620) are now at least 90 days past due on their payments for their car or truck.

The New York Fed worries about the lenders that specialize in these loans, and it worries about the “large number of households” whose vehicles are at risk of repossession: “The increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” it says.

If the vehicles are repossessed, people might lose their ability to go to work, go to the grocery store, and do the normal things in life that drive the economy forward. Six million people are in that position.

Auto loan balances jumped by a breath-taking $32 billion in the third quarter, to $1.135 trillion, according to the New York Fed’s current Household Debt and Credit report today. According to the Board of Governors of the Federal Reserve, which released its own set of numbers a little while ago, auto loan balances jumped by $30 billion in Q3, to $1.1 trillion (chart below). Both agree: It was the biggest jump in auto loan originations in US history for any quarter and year-to-date.

To continue reading: Subprime Auto-Loan Delinquencies Surge to NY Fed’s Attention

Subprime Auto-Loan Backed Securities Turn Toxic, by Wolf Richter

The subprime auto lending bloom is deflating. From Wolf Richter at wolfstreet.com:

What will sink the US auto boom?

In the subprime auto loan market, things are turning ugly as delinquencies and losses have begun soaring. Specialized lenders – a couple of big ones, and a whole slew of small ones that service the lower end of the subprime market – slice and dice these loans, repackage them into auto-loan backed securities (auto ABS), and sell them to investors, such as yield-hungry pension funds.

Delinquencies of 60 days and higher among subprime auto ABS increased by 22% year-over-year in August, Fitch Ratings reported on Friday – now amounting to 4.9% of the outstanding balances that Fitch tracks and rates. And subprime annualized losses increased by 27% year-over-year, reaching 8.9% of the outstanding balances of auto ABS.

Even delinquencies among prime borrowers are rising, with delinquencies of 60 days or more increasing by 17% from a year ago, and annualized losses by 11%, though they’re still relatively tame at 0.4% and 0.6% respectively of the balances outstanding.

And according to Fitch, the toxicity level in the subprime auto ABS space isgoing to rise, with “subprime auto losses to pierce 10% by year-end.”

Total auto loan balances, both subprime and prime – given the soaring prices of cars, the stretched terms of the loans, and the ballooning loan-to-value ratios – have been skyrocketing, up 46% from the first quarter in 2011 through the second quarter in 2016, when they hit $1.07 trillion:

Fitch blamed the higher losses on several factors:

•  The “weak 2013-2015 vintage pools” – hence the more recent loans, when underwriting standards in the zero-interest-rate environment got increasingly loosey-goosey

•  Seasonality

•  And wobbly wholesale values of used vehicles.

High wholesale values of used vehicles are a gift from the government to the entire industry. The federal $3 billion cash-for-clunkers program that kicked off in July 2009 wiped out the cheaper end of the used vehicle market, to the detriment of lower-income people. Vehicles they could afford were largely removed from the market. But to heck with these folks. They had to figure out how to scrape more money together or go deeper into debt to be able to buy higher priced vehicles.

That concentration of demand has distorted and inflated used wholesale prices ever since. It tremendously benefited auto makers and the industry overall. The Manheim Used Vehicle Value Index, which tracks wholesale prices of used vehicles, shot up to record highs in 2010. It hit its all-time peak of 128 in 2011, up about 10% from the previous all-time peak set at the end of the bubble in January 2001. After some significant zigzagging since 2011, it was a still lofty 126.9 in August (chart).

High wholesale prices have been a boon for the entire auto industry. They raised trade-in values, which helped people to buy ever more expensive new and used vehicles. They raised profits for dealers. They boosted prime and subprime auto lenders and their financialized products. They gave rise to a whole gaggle of smaller subprime auto lenders that have crowded into this high-profit securitization market.

And high wholesale values are crucial for lenders when a loan defaults, and lenders have to repossess the vehicle and sell it in the wholesale market. A high wholesale value lowers the loss. When wholesale values fall, losses rise.

Now used vehicle prices are showing signs of wobbling rather than soaring. And they’re scheduled for a descent, according to Fitch:

[D]espite the current strength of the wholesale vehicle market, used vehicle values will come under pressure from slowing consumer demand and rising supply in the latter part of the year and early 2017.

This would come at the worst possible time. New vehicle sales seem to have peaked last year (unit sales were down 0.5% in September year-over-year). Automakers have piled up incentives to move the inventories off dealer lots. And according to Fitch, “used supply is rising fast, driven by higher off-lease vehicles and trade-in volumes.”

To continue reading: Subprime Auto-Loan Backed Securities Turn Toxic