Just 2 days after President Obama reflected on his glorious ‘save’ of the US auto industry – forgetting to explain how so much of this ‘buying frenzy’ has been predicated on massive low-quality-borrower-based credit extensions – The Wall Street Journal bursts the bubble of ‘contained-ness’. Auto loan delinquency rates are surging to levels not seen since 2008 and stunningly, more than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November. As even glass-half-full-status-quo-hugger Mark Zandi is forced to admit, “It’s clear that credit quality is eroding now, and pretty quickly.”
Borrowers who took out auto loans over the past year are missing payments at the highest level since the recession, fueling concerns among regulators, analysts and some in the car industry that practices that helped boost 2014 light-vehicle sales to a near-decade high could backfire.
“It’s clear that credit quality is eroding now, and pretty quickly,” said Mark Zandi, chief economist at Moody’s Analytics.
More than 2.6% of car-loan borrowers who took out loans in the first quarter of last year had missed at least one monthly payment by November, the highest level of early loan trouble since 2008, when such delinquencies rose above 3%, according to an analysis of data performed for The Wall Street Journal by Moody’s Analytics.
The uptick comes amid an increase in subprime auto loans, raising concerns that car buyers may have taken on more debt than they can handle. For that set of borrowers, defined as consumers with a credit score lower than 620, loan performance also is deteriorating.
More than 8.4% of borrowers with weak credit scores who took out loans in the first quarter of 2014 had missed payments by November, according to the Moody’s analysis of Equifax credit-reporting data. That was the highest level since 2008, when early delinquencies for subprime borrowers rose above 9%.
Of the 15 biggest U.S. auto-lending banks, Santander had the largest percentage of delinquent auto loans in the third quarter, according to SNL Financial. Santander’s delinquency rate of 16.7% was followed by Capital One at 6.6%, according to SNL.
Of particular concern are loans in which car dealers push financing at extended terms of six and seven years at relatively high interest rates, even if the borrowers have weak credit and escalated debt-to-income ratios. The longer loan terms keep monthly payments under control and get buyers to purchase more expensive cars.
This does not bode well for this year…
Low-interest rates and wider credit availability have helped propel the U.S. auto industry’s comeback from the recession, driving new-car sales to 16.5 million last year, the highest level since 2006, according to market researcher Autodata Corp.
To keep the momentum going in 2015, industry analysts said car companies and lenders will likely have to push more aggressive finance deals and tap borrowers with weaker credit. Riskier lending tactics already are drawing regulatory scrutiny.
Kevin Duignan, global head of securitization for Fitch Ratings, said some bigger lenders are starting to pull back and be more conservative on subprime auto lending. The credit-rating firm is concerned that small and midsize lenders won’t follow suit and dive too deeply into subprime lending.
“Subprime delinquencies and losses are beginning to grow at a more rapid pace than we’ve seen in a long time,” he said.
But we leave it up to Honda’s head of sales to sum it all up…
“The industry is starting to do some stupid things,” said John Mendel.
Who could have seen this coming?!!