Posted on 11/14/2019 2:09:46 PM PST by LesbianThespianGymnasticMidget
But it’s even worse than it looks. And this time, there is no jobs crisis. This time, it’s the result of greed by subprime lenders.
Serious auto-loan delinquencies – auto loans that are 90 days or more past due – in the third quarter of 2019, after an amazing trajectory, reached a historic high of $62 billion, according to data from the New York Fed today:
This $62 billion of seriously delinquent loan balances are what auto lenders, particularly those that specialize in subprime auto loans, such as Santander Consumer USA, Credit Acceptance Corporation, and many smaller specialized lenders are now trying to deal with. If they cannot cure the delinquency, they’re hiring specialized companies that repossess the vehicles to be sold at auction. The difference between the loan balance and the proceeds from the auction, plus the costs involved, are what a lender loses on the deal.
The repo business, however, is booming.
But delinquencies are a flow: As current delinquencies are hitting the lenders’ balance sheet and income statement, the flow continues and more loans are becoming delinquent. And lenders are still making new loans to risky customers and a portion of those loans will become delinquent too. And now the flow of delinquent loans is increasing – and this isn’t going to stop anytime soon: These loans are out there and new one are being added to them, and a portion of them will be defaulting.
Total outstanding balances of auto loans and leases in Q3, according to the New York Fed’s measure (higher and more inclusive than the Federal Reserve Board of Governors’ consumer credit data) rose to $1.32 trillion:
Serious delinquencies jumped to 4.71% of these $1.32 trillion in total loans and leases outstanding, the highest since Q4 2011, when the auto industry was emerging from collapse. And on the way up, this 4.71% is just above the level of Q3 2009, months after GM and Chrysler had filed for bankruptcy and a year after Lehman had filed for bankruptcy, when the US was confronting the worst unemployment crisis since the Great Depression, and when people were defaulting on their auto loans because they’d lost their jobs:
The current rate of 4.71% is just 56 basis points below the peak of Q4 2010. But these are the good times – and not an employment crisis, when millions of people who lost their jobs cannot make their loan payments.
So what is going to happen to auto loan delinquencies when employment experiences a pullback, even a fairly modest one, such as when one million people lose their jobs? That was a rhetorical question. We know what will happen: The serious delinquency rate will set a record for the annals of history. But it’s even worse than it looks.
“Prime” auto loans have minuscule default rates. The total of $1.3 billion in auto loans and leases outstanding includes leases to consumers who could pay cash for the vehicles but lease them for various reasons. According to a different measure by Fitch, “prime” auto loans currently have a 60-day delinquency rate hovering at a historically low 0.28%.
Of the $1.32 trillion in auto loans outstanding, about 22% are subprime, so about $300 billion. Of them roughly, $62 billion are seriously delinquent – or around 20% of all subprime loans outstanding. One in five!
But this subprime delinquency fiasco is not a sign of an employment crisis and a brutal recession as these types of numbers indicated during the Financial Crisis. Employment is still growing, and unemployment claims are near historic lows. Nevertheless, subprime auto loans are defaulting at astounding rates. What’s going on? Greed – not an economic crisis.
Subprime lending is risky but immensely profitable. The thing is: Customers who have a subprime credit rating are painfully aware of it. They have been turned down for low-interest rate loans. They have been turned away. And now they walk on a car lot where their credit rating suddenly is no problem. And they become sitting ducks. The industry knows this.
They don’t even negotiate. They just accept the price, the payment, the interest rate, and the trade-in value. They’re ecstatic to get a car. And they end up with a huge payment at a high interest rate, and given how strung out they already are to be subprime rated in the first place, that loan is doomed.
That’s the irony: a low-interest-rate loan on an affordable car, sold at an average profit, would give the customer a much higher chance of keeping the loan current than a loan with a 15% interest rate on a car the customer cannot afford, including a big-fat dealer profit of the type that can only be obtained from a sitting duck. Those loans, born out of greed, and are doomed.
This is what we’re seeing here. These loans were born out of greed over the past few years, as the industry was getting very aggressive in pursuing subprime rated customers because they’re sitting ducks and so immensely profitable. What we’re seeing now are the consequences of that greed.
I’m so in the market for a midsize truck. I’ve owned several Rangers, an S10, and 2 Frontiers.
I almost pulled the trigger on a 2019 Frontier this year. Even though it is 98% the same as the 2006 Frontier I had.
Would I buy a new Ford Ranger? Hell no. A new Jeep Gladiator? DOUBLE HELL NO.
Maybe a Tacoma. But the good old Frontier - unchanged for 15 years is the best bargain today.
Unless of course the less expensive and far better trucks sold in Europe, China, South America and Asia were available here in the States. But they’re not.
We are so screwed.
Thanks to over regulation, cars are becoming unaffordable, as planned.
I refer you to my tagline...
I’m reading about the current crop of Great Wall trucks.
https://en.wikipedia.org/wiki/Great_Wall_Wingle
The Wingle 7 was introduced in September 2018. The Wingle 7 is available with the 4D20 diesel engine paired to a 6 speed manual gearbox. Pricing is between 95,800 and 117,800 yuan (13,930 to 17,120 USD) with 8 trim levels. [11]
As they say... Shut up and Take My Money!
As much as we hate all things Chinese I think the best deal for a durable work truck anywhere on Earth is Foton Tunland. That’s essentially a one-ton Toyota Hilux clone but it has heavy-duty everything installed for every sensitive part. The engine in Cummins 2.8 commercial turbodiesel, transmission is Getrag and BorgWarner, axle is Dana 44. It would outlive anything you metioned and cost half that much.
Yup. I don’t understand people who spend big money on new cars. My wife and I make well north of $200k a year. I drive a 18 year old Tacoma, she drives a 5 year old Camry. Both bought used. But to each their own I guess.
Financial institutions might not make a lot of money in subprime, but I would think a used car dealer would make a ton of money on subprime. Lease out a car, and when they don’t pay, repossess it and sell it to someone else the next day.
Drove 2008 “fishface” wingle for a couple of months. Not as fancy as WV Amarok but does the job. There are a lot of them with 200k+ miles on sale so I think they are somehow durable too.
I am curious what interest rates these people are paying. Because they are subprime the lenders are probably charging a lot more than the advertised APR for cars. I just wonder whether if these people had smaller payments to make more in line with the advertised APRs if they would make or be able to make the payments.
Sure, greed. But what about common sense, impulse control, ans a basic knowledge of finance?
ROFL!
BEST sarcasm in a while on here!
Good grief! How many cars make up $62 billion in worth?
They’re the same ones who sacrifice health care. They look like fat cats but are a paycheck away from crapping in the streets and living in tents.
After working overseas for the US military and others for 20 years, my credit score was reset to zero. You know what that means.
Only place that took me was a sub-prime lender with 39.96% interest. No choice. With no bus service it was either walk 10 miles each way in the Seattle winter or stay unemployed after I was replaced at Microsoft by an H1B Indian. (I was in walking distance to where I worked while at Microsoft)
Yeah most idiotic choice I made in my life, but no honest dealer would take me.
A fishface.
Yeah I can see why they call it that. That is one ugly truck.
Agreed. I've seen them too.
Maybe the strategy isn't to make money, but to actually crash something.
So, you are saying that lending someone $3,000 and them not paying it back is “neutral” to the company?
Because if you think that, you are incorrect.
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