There is a lot of talk out there about the auto-loan market right now.
Hedge fund manager Jim Chanos has said the auto-lending market should “scare the heck out of everybody,” while used-car dealerships and their auto lending practices have been given the John Oliver treatment on TV.
It’s a topic we’ve been paying attention to, too. In a presentation in September at the Barclays Financial Services Conference, Gordon Smith, the chief executive for consumer and community banking at JPMorgan, set out some eye-opening statistics on the market.
Now the New York Federal Reserve is taking a closer look at the market. In a blog published Wednesday, November 30 on the NY Fed’s Liberty Street Economics site, researchers highlighted the deteriorating performance of subprime auto loans, and set off the alarm.
“The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,” the report said.
To be clear, the overall delinquency rate for auto loans is pretty stable, and the majority are performing well.
There are, however, signs of stress in the subprime market segment, which has seen rapid growth. Here are the key numbers from the report:
- The subprime delinquency rate for the trailing four quarter period moved to 2% in the third quarter. The only other time it was 2% or more was in the aftermath of the financial crisis.
- Subprime auto loan originations hit $31.3 billion in the third quarter, down from $33.6 billion in the second quarter. Bank and credit unions originated $9.5 billion in subprime auto loans in the period, a record high.
- Outstanding subprime auto loan balances now stand at $280.2 billion, a record high. For perspective, the pre-crisis high was $249.5 billion, in the fourth quarter of 2007.
In other words, the subprime delinquency rate is creeping up while the subprime market is ballooning in size. The Liberty Street Economics post, written by Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert Van Der Klauuw, said:
“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.”
This research has broader significance, beyond the auto loan market. We’ve previously reported at length on the worrying state of US consumer finances.
According to UBS research, 65%, 36%, and 22% of lower-, middle-, and higher-income cohorts are “stressed.” That means their income falls below or barely covers their expenses. And almost one in five “stressed households,” or 18%, agreed or strongly agreed with the likelihood of a default over the next year.
When these stressed households were asked what debt they were most likely to default on, auto loans ranked third, behind credit cards and student debt.
“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” the Liberty Street Economics post said.