Throughout 2016 there have been rumblings that increasingly loose auto credit is inflating an economic bubble alongside record-level sales of new cars and trucks. Prominent figures such as JPMorgan Chase CEO James Dimon and comedian John Oliver have poured varying amounts of fuel on such a fire.
A report released earlier this month by credit-tracking firm TransUnion seemed poised to add a further can of gasoline. TransUnion’s report projects that serious borrower-level delinquency rates on auto loans will have risen by 21 percent over the five-year period from 2012 to 2017. It defines “delinquency” as a loan that is 60 days or more past due.
TransUnion expects an overall auto loan delinquency rate of 1.4 percent in the fourth quarter of this year, a 7 percent rise from 1.3 percent in the same period of 2015.
So auto loan defaults are climbing. But despite this evidence, TransUnion economist Jason Laky said that such a trend does not necessarily signal a bubble, especially given the fierce rebound of U.S. auto sales since the bleak days of 2008 and 2009. “The auto industry during the recession took a big hit, new-car sales dropped in 2009, then went on a path to recovery that was pretty swift compared to other parts of the economy,” he said.
As a result, auto lenders were among the first in the banking sector to bounce back from the economic downturn, he said. As lenders have become more comfortable, they have also begun to reach out to more subprime borrowers, who are typically defined as those with credit scores of 660 and below. That in turn has led to more loan delinquencies, Laky said.
Even with the overall auto-loan delinquency rate projected to rise to 1.4 percent in 2017, it is still down from 1.6 percent in the fourth quarter of 2009, during the so-called Great Recession.
Still, if there were systemic cracks in this growing number of subprime loans, could it have the kind of disastrous effect as when Lehman Brothers and Bear Stearns closed their doors? Not really, thanks in part to the difference in volume, Laky said.
“We reported $1.1 trillion in auto loan and lease balances,” Laky said. “Of that, about 16 percent were subprime loans. So subprime is not a big category of overall auto lending.” By comparison, total mortgage-loan balances at the end of the third quarter stood at $8.35 trillion, according to the Federal Reserve Bank of New York.
Mortgage loans and securities are far more complex than auto loans, Laky said. “It’s a well-understood lending product,” he said of vehicle loans. “It’s secure in that if someone does get really late, you can repossess the car” and close out the loan. This may not give solace to the apparently rising number of subprime borrowers struggling to make payments.
And a downturn in the economy, which has been humming along lately, could put serious pressure on the balance sheets of lenders who have been increasingly relying on subprime auto loans. But for the moment, Laky said, “the idea of a bubble is probably a little overblown.”
from Car and Driver BlogCar and Driver Blog http://ift.tt/2irD0s3
via IFTTT
0 comments:
Post a Comment