What is happening to US auto-loans?

One of the features of expansionary monetary policy has been that it misses some areas and concentrates in others. It reminds me of the word disintermediation which described a similar problem when central banks were trying to restrict the money supply rather than expand it with policies like QE ( Quantitative Easing) ,as the concept was the same albeit in a different direction. I have noted in the past the issue with auto-loans or loans for cars in the United States and am going to look at that in more detail as the situation is showing signs of bubbling under as we worry about it bubbling over.

What is the background?

Last November the Liberty Street Economics blog of the US New York Fed told us this.

The rise in auto loans has been fueled by high levels of originations across the spectrum of creditworthiness, including subprime loans, which are disproportionately originated by auto finance companies.

There was something of a warning tucked in there which was reinforced by this.

Originations of auto loans have continued at a brisk pace over the past few years, with 2016 shaping up to be the strongest of any year in our data, which begin in 1999……..the $1.135 trillion of outstanding auto loans by credit score and lender type, and we see that 75 percent of the outstanding subprime loans were originated by finance companies.

So there are various concerns which are the size of the market and its rate of growth which are highlighted by the way the finance companies seem to have taken over the subprime sector.

The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly six million individuals at least ninety days late on their auto loan payments.

The feeds into the theme of us “forgetting” how we got into the credit crunch or to put it another way the finance sector returning to past behaviours.

Last month it confirmed the 2016 rise.

auto debt (up $93 billion, or 8.7 percent)

Also there were some numbers to cheer any central banker’s heart.

As of December 31, 2016, total household indebtedness was $12.58 trillion, a $226 billion (1.8%) increase from the third quarter of 2016. Overall household debt remains just 0.8% below its 2008Q3 peak of $12.68 trillion, but is now 12.8% above the 2013Q2 trough.

I note that auto-loans began their recent rise in 2013 in terms of number of loans.

Used car prices

These are of course the asset in this market as the loans are backed by the cars. We live in a world where Bank of England Governor Mark Carney calls such loans “secured” and UK radio has adverts for buy-to-let cars. But earlier this month the US National Automobile Dealers Association released this.

NADA Used Car Guide’s seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index figure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.

As you can see prices have been falling for a while and looking at the chart of prices the rate of fall rather resembles that of 2008/09 with a difference which is that we start with prices having been in the low 120s rather than ~108. Last week we saw a warning from one of the companies involved and let me switch to Ed Harrison who has been on this case for a while.

Yesterday, Ally Financial warned that profits would underperform expectations. Now, they did not say that profits would fall or that they were taking credit writedowns. Neverthless, the warning is an important marker and should be of grave concern…………So with Ally, what we are seeing is that these problems have created enough discounting to induce a profit warning at one of the major auto finance companies. Ally is really the former GMAC, the engine of a huge amount of profit for General Motors, as are all of the finance arms of the automakers in the US. So what happens at Ally will definitely pass through to GM and the other carmakers unless the impact is arrested quickly.

There are various issues here but let us start with a clear difference with the housing market where prices have risen and thus boosted the asset value of the lenders books whereas here prices were pushed higher but are now falling. Also if we look we see that in another development familiar from the past the loans were bigger than the car value. Here is an offer I looked up from a company called DCU on what they call second chance auto loans.

Borrow up to 120% of Price – Qualified borrowers can finance up to 120% of NADA retail book value or 120% of the purchase price – whichever is less,

According to the St.Louis Fed yesterday the loans are a lot cheaper than they were.

The interest rate on a 48-month loan from a commercial bank for a new automobile purchase dropped from close to 8 percent prior to the Great Recession to an average of 4.3 percent since the second quarter of 2014.8 Meanwhile, auto finance company rates for new car loans averaged around 5 percent during this same period.

Also it points out this.

Softened underwriting standards have raised concerns regarding the risk associated with the robust growth in auto debt………..lenders have stretched repayment terms and offered higher advance rates, resulting in greater loan-to-value ratios.

In terms of its own region it is seeing this.

Serious delinquency rates among subprime borrowers in Little Rock and Memphis have now markedly increased during two years of an economic expansion.

Asset Backed Securities (ABS)

Yes they are on the scene as we look to see what is happening in a market that Mario Draghi of the ECB is very keen on. Barrons looked into it yesterday.

While delinquencies, liquidation rates and loss severities are higher across subprime ABS deals regardless of the ABS shelf, it appears that certain issuers are seeing larger increases than others. This analysis invites a few questions. Are the capital structures of deeper subprime lenders built to handle larger losses? Which structures, if any, are more likely to take principal losses in their rated debt tranches?

Comment

There are quite a few factors to consider here. Let us start with household debt which will soon pass the pre credit crunch peak. That needs to be compared to GDP ( Gross Domestic Product) which was 12% higher in 2016 than the previous peak of 2007. Regular readers will be aware of my concerns about GDP but for now let us just note that it has grown.

If we move to auto-loans there are a lot of flashing yellow lights. The trend towards subprime lending and the lending going “in-house” for the car lenders only adds to the moral hazards at play. Securitisation of the loans send a chill down the spine and now we see falling used car prices. Even worse the Financial Times has this morning told us not to panic!

Don’t panic about auto loans just yet — tax season isn’t over, after all

This is based on the fact that this year tax refunds have been particularly slow and therefore may well have influenced the February drop but of course not the ones before it. Also there is no panic here but there is a list that is gaining a growing number of ticks on it and this has just popped up under auto loans on Twitter.

Learn How to Get Fast Approved AutoLoans with No Credit Check Requirement in Texas ( @CarLoanBadCred )

Also this.

Gone are the days when you had to wait for getting bad credit auto loans. There are many online auto financing companies who offer competitive interest rates on these loans. Internet is quickly becoming the best place to get a blank check car loans with bad credit history

https://ezautofinance.net/how_to_get_a_blank_check_auto_loan_even_with_bad_credit.html

What could go wrong?

 

 

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33 thoughts on “What is happening to US auto-loans?

    • Forbin,
      Quick answer is no,just repeat the mistake but make it bigger! Replace one bubble with two new ones!

      Auto loans and student loans are going to be a massive problem in the near future,the drop in US housing debt since the GFC of around £1trn has been made up by an increase of $1trn in auto and student loans, loans which are based on a rapidly depreciating assets, i.e the secondhand value of the cars and the fact that unemployment rate amongst US graduates is higher over the period 2008 to now, while it has dropped among non graduates, leading to higher default rates, meaning the value of a degree is somewhat less in terms of attaining employment, during which time of course, the tuition costs have risen annually.

      Further woes for the US auto industry are the increasing incentives dealers are having to offer to shift inventory, with GM in February having to offer on average over $5,000 (industry average was $3,587 per vehicle).That GM figure being an average, hides the fact that higher end vehicles may have discounts of $10,000 and smaller vehicles only $1-2,000, but this obviously eats into margins. March’s figures are slightly better with an industry average incentive of $3,511 but that is an increase of 13.4% on last year, representing an industry rebate or discount of $5.4bn!!! And that is just for March!!!

      Falling real incomes due to low or zero pay rises and rising inflation, higher interest rates and the massive pulling forward of future demand as a result of the Fed’s ZIRP and “cash for clunkers”, mean there is a world of pain coming for US auto makers.

      • Yes i wonder how the young paying off these vast student loans are going to manage to repay this debt and also fund sky high house prices, sky high rents, £2 trillion in public debt … and boomers demanding ever more expensive health care not to mention the ever increasing number of pensioners to workers.

        Possibly by buying a bike or walking to work would be a good start.

    • only when they get burnt. In a democracy this means when voters put enough pressure on politicians for accountability.

  1. Great article as always Shaun.

    With the £200/month specials comprising 90% of sales in the uk, you would think there would be hordes of three year old cars hitting the second hand market. But I’ve heard anecdotally that the car manufacturer are operating a cartel and are removing these cars from the uk market.

    They either dump them abroad or they’re sitting in fields. Is this true?

    • oh no , maybe this is the answer :-

      From FT:-

      But PCP is starting to invade the used car market, too. “In the past four years the number of used cars we sell on PCP has gone from zero to about 30 per cent,”

      time for another scrappage scheme ?

      Forbin

  2. Hi Shaun
    All so very true.
    On the TV this morning I saw Adam Posen predict the US Federal Reserve will raise rates four times this year.Maybe he will be wrong again.

    • Hi Midge

      It is amazing how those who have so often been wrong are indulged because they have a title which in his case is President of the Peterson Institute. I fear for those he advises although of course if they have spotted his record they may listen and do the reverse.

  3. Ha ha! I have an old (1994) Vauxhall Corsa which is still going strong although its body work leaves a little to be desired. I call it a collectors’ item/design classic. my children say it’s fit for the scrap heap! Obviously I am not a “good little consumer” as the TPTB would like but I couldn’t give a fig if used/new car prices are falling/staying the same/rising!

    • Hi Jan

      You have gazumped my 2005 Vauxhall Astra which is similar as there is not much depreciation left! Actually whilst it is nice in a way to have a car I use it very little these days and am beginning to question keeping it.

    • Me too Jan. I run a 1997 Nissan Primera, just upgraded it with all new old parts. 140mph, 40mpg why would i want a ne car?

  4. I understood how the Pass the Parcel worked for securitised sub prime mortgages worked – afterwards. Who loses in this game? The lenders to the finance companies? I can only suppose that everyone’s employee gains and only the shareholder loses?

    • Hi Peter

      Yep the only certain loser is the shareholder who of course has it rubbed in his/her face as well by the fact they are promised profits. The Tesco issue today highlighted another issue.

      “Investors who bought shares between Aug. 29 and Sept. 19, 2014, will be eligible for compensation of 24.5 pence a share, plus interest.”

      Paid for by other shareholders who were guilty of what exactly?

  5. Hi Shaun
    As we all know this problem has been
    brewing since the last big bailout.

    1) Firms who used to be called motor manufacturers
    have become bankers moving the metal.
    2) Subprime never really went away,TPTB don’t know
    what else to do.
    3) Such a large industry will not be allowed to fail.

    I await new headlines saying “We will do whatever it takes”

    JRH

    • I always think this is why Motability exists as its a great subsidy to the car corporations. I remember coming back from Asia where i’d been for several years and being amazed at how many disabled parking spaces there were at Asda … and no one in a wheelchair inside.

      My kids piano instructor parks her brand new Motability VW Sirocco on double yellow lines right outside the building then runs inside.

      • if she parks in a loading zone she will still get a ticket

        also many hospitals are charging for disable spaces – yes you can get to front but you still pay to park ( and get a ticket if you don’t)

        Also my daughter has crutches , she does have a wheelchair too but often all she needs is the crutches.

        And yes I have an ex-mobility car (!) the dealer told me it was the biggest source of second hand cars in the country – anecdotal I know but…..

        Forbin

      • You don’t need a wheelchair to qualify for the mobility element of DLA/PIP. You simply have to experience difficulty walking around unaided, I think the rule is less than 20 metres. So you can qualify with no wheelchair, tri walker or crutches as the idea is it is used in conjunction with a blue badge which allows you to park within 20 metres of wherever you are going.

  6. Shaun
    I have noticed that here in the UK, the car manufacturers are offering “rental schemes”, whereby you pay a monthly fee, but never own the car.
    Is this, in effect, worse than a loan to buy a car?
    Also, have you any idea, as to how large this is becoming?

    • This is massive and was around back in the late90’s when lots of work colleagues jumped on this bandwagon. They had no idea what the final price of the car was, just what the monthly payment was and that was all they were interested in. You can’t save people from themselves.

  7. uber is a possible economic disrupter of the auto loan business. Imagine a world where you summon a driverless car on demand. You don’t need to worry about parking, road tax, insurance and so on. When I lived near central Londdon, I’d rent a car for an occasional weekend – and it was much cheaper than depreciation, maintenance, insurance and so on.

    Self driving cars have some issues to overcome – especially cybersecurity, you’d not want organised criminals or a hostile foreign power hacking them.

    • Hi ExpatInBG

      I am thinking of getting rid of my car as I have replied to Jan pretty much on the grounds you describe as these days I have reached the point of driving somewhere to give it a run. Modern tyres don’t like sitting there….

      As to Uber and driverless cars you clearly have a point although it is not a clear road ( sorry…) I spotted this on Bloomberg earlier.

      “Uber Technologies Inc. is closing its ride-hailing service in Denmark ahead of regulation changes it said would make its app unworkable for consumers.

      The San Francisco-based company said it’s stopping the service used by 2,000 private drivers in the country as of April 18, citing upcoming new proposed regulations that would impose licensing requirements on cars that function like taxis, and require seat sensors and meters, instead of using a smartphone to calculate fares as Uber does.

      The decision to withdraw follows a Danish government proposal to strengthen taxi rules and a high court ruling late last year that ruled the company was an illegal taxi service.”

      • I’d avoid uber shares, as first mover they have lots of costs and political problems to overcome. Plus the auto industry is spending lots of R&D money on software – so change is probable. I read about a fatal crash where a skoda (?) just kept accelerating on the M40 (?). Trying to mathematically prove the absence of bugs in software is difficult to impossible, so I think the car industry needs to create an emergency stop button. If sci-fi is anything to go on, the police will be wanting remote control stop functionality.

  8. Looks like all those guys who missed out last time around are determined to get their cut this time – after all, they know now that its pretty low (financial and legal) risk for them personally.
    The numbers quoted imply that *known* problematic sub-prime loans could be ~10% of the auto-loan market (note: hand-waving estimate), so watch out for “new exciting imaginative investment opportunities”.

  9. Hi Shaun
    You could add student loans and health care to the list. I was just reading this before flicking over to your blog: http://wolfstreet.com/2017/03/27/health-care-industry-debt-turns-into-systemic-recession-risk/.

    The car loan companies which are subsidiaries of the manufacturers have been around for at least 20 years and it was these who contributed to the collapse of 2008 so they’re back in true Terminator style! I remember my brother obtaining a 0% car loan on a new GM Neon in the US in 2000 so it’s all a bit deja vu.

    • Hi Noo2

      It feels like a repeating cycle doesn’t it? The central bankers say they are “vigilant” but of course they want the boom. As to 0% well if we reverse the UBS model where it has fees instead of negative interest-rates then James below was heavily in the red.

  10. I knew something was wrong when I tried to buy a new car for cash but was told that all the discounts etc only kicked in if I borrowed to buy. So, I saved £1500 on the car and paid the loan off after a week.
    This told me that the car is just a sideline for what is a lending business.

    • Hi James

      It makes you wonder about what commissions are being paid doesn’t it? Also you have trebled what a friend of mine got (£500), I mentioned it about a year ago. Both his and you situations point at a worrying issue.

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