End of the era of stimulus-distorted consumer credit: car loans, delinquencies, prime and subprime

Auto loan balances are rising at exorbitant prices, despite falling sales. Delinquencies increase until the pre-pandemic downsubprime defaults are back to 2016-2019 levels.

By Wolf Richter for WOLF STREET.

The auto loan and lease balance continued to rise in the third quarter, even though third-quarter new-vehicle sales were at levels first seen in the late 1970s — and that’s no fault impact – with the number of vehicles sold down 19% in the third quarter compared to Q3 2019; and with unit sales of used vehicles down around 15%.

Auto loan balances have jumped because new vehicle prices have jumped as automakers continue to upscale because that’s where the money is, and because they’re constrained by supply and are trying to increase their dollar revenues and profit margins by prioritizing more expensive models and through price increases even though new vehicle sales are in dire straits.

Auto loans also increased because the prices of used vehicles rose ridiculously, although there was never a shortage of used vehicles. Some of these price spikes have finally started to pull back a bit.

As a result, auto loan and lease balances rose 2.2% in Q3 from Q2, and 6.1% year-over-year, to a record $1.52 trillion, according to report data. on New York Fed household debt and credit, on a mix of soaring prices, moving upmarket because that’s where the money is, and falling unit sales, resulting in fewer but larger loans with longer tenors:

But in terms of the number of units delivered to the end customer, new vehicle sales in Q3 fell 19% compared to Q3 2019. But sales had also declined in the years before the pandemic. Compared to Q3 2016, sales are down 22%. At 3.48 million vehicles, sales returned to their late 1970s level.

Price increases and upselling are driving the industry – even as more and more Americans are shut out of the new car market – and this process has been happening for many years:

Delinquencies hit Good Times lows from all-time lows.

The rate on all auto loans and leases — prime and subprime — that were 30 days or more past due hit 6.2% in the third quarter, according to New York Fed Household Debt and Credit data. . That was still below pre-pandemic record lows.

In 2020 and 2021, consumers used their stimulus money and extra unemployment benefits and their PPP loans and leftover money to avoid having to pay rent or mortgages to catch up on their car loans. And some borrowers were able to put their delinquent auto loans into forbearance programs, which turned “delinquent” loans into “ongoing” loans. And the crime rate has plunged to ridiculous historic lows, one of the many distortions of pandemic stimulus economics.

But that era is over and crime rates are returning to pre-pandemic lows, and that’s what we’re seeing here: crime is normalizing to very low levels.

That doesn’t mean it’s going to stay that way: the delinquency rate began to rise in late 2005, alongside the housing crisis, more than two years before the Great Recession, as mortgage troubled borrowers also took behind on their car loans. The crime rate continued to rise during the financial crisis and peaked in 2009 at almost 11%, then began to decline.

But today, unemployment is at very low levels, the number of jobless claims is near historic lows, and the economy is a far cry from the kind of unemployment crisis it experienced during the Great Recession. So for now, consumers are still taking good care of their auto loans.

Subprime and unpaid loans.

The share of subprime auto loans — borrowers with credit scores below 620 — that were originated in the third quarter fell from a record low to a 17.8% share of total auto loans in the quarter, and remained in the same low range of the last two years. Before the financial crisis, the share of subprime auto loans that were issued varied between 25% and 30% and more (red line).

In contrast, prime loans with a credit rating of 720 and above that were issued in Q3 accounted for a 47.8% share of total originations, at the upper end of the range (green line).

This means that the overall credit quality of auto loans issued in the third quarter – as perceived by credit ratings – was relatively high.

Total outstanding subprime car loans was around $250 billion, according to data from Experian. So the dollar amounts are not huge.

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

October’s delinquency rate of 5.1% was down from the October 2019 rate of 5.4%. The index has been in this range since 2016, after subprime lending and more aggressive securitizations came into vogue from around 2014.

Securitization of subprime auto loans spread the risk and make them immensely profitable due to high interest rates, relatively easy warranty retrieval, and the liquidity of the wholesale used-vehicle market where these repossessed units are sold. Most subprime loans finance the purchase of used vehicles that are several years old, and the losses to the lenders when they repossess the vehicle and resell it at auction are usually not huge.

As for the lenders: most of them securitize their subprime auto loans and sell them to investors, so if something goes wrong, investors bear a lot of the risk. The lenders have a little skin in the game by having to keep a small part of the equity of the ABS which suffers the first losses.

Some small, specialty subprime lenders periodically collapse because they have tripped up in some way. Some of them did before the pandemic. And there will be others, but that’s the way it is. In a 2009-type jobs crisis – if we get another one like this – most of the losses will be borne by investors such as bond funds, pension funds, life insurers, etc. .

But the amounts just aren’t huge: the total amount of outstanding subprime auto loans is only about $250 billion, and that’s mostly spread across investors’ fixed-income portfolios.

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