In the last post, I posited that financial stability concerns could play a role in the Fed’s policy normalization efforts. Commercial real estate is one sector of great importance in this respect. Auto loans are another.
Below are some data points from recent credit statistics and analyses, showing trends in the auto credit sector.
- Delinquencies rising: The prime 60-plus-day delinquency rate in March 2017 was 0.41%. That’s up from 0.35% in March 2016. For subprime, the 60-plus-day delinquency rate was 3.57%, up from 3.40% in March 2016, according to S&P. These are not large increases, but statistics suggest 2011 was the low-point for delinquencies as the numbers have increased in every subsequent year.
- Losses mounting: Cumulative net losses on the 2015 vintage prime auto loans are now at the highest level for any vintage since 2009, according to S&P. Expected cumulative net losses are expected to hit 15% on this vintage year, according to Fitch.
- Recovery rates declining: In March 2017, the prime recovery rate dropped to 56% from 66% and the subprime rate dropped to 42% from 48% in March 2016, according to S&P.
- Loose credit standards: Santander, one of the biggest subprime auto lenders, verified income on only 8% of borrowers whose loans it bundled into $1 billion of asset backed securities, according to Moody’s. This may be an aberration as Moody’s did a calculation for AmeriCredit, another big lender, and found 64% verification.
- More leverage: The weighted average loan-to-value in 2016 for prime loans was 97.91% in 2016. That’s up from the cyclical low point of 94.48% in 2012, but down slightly from 2015. In subprime, the number for 2016 was 112.2%. Again this is down from 2015, which was also down from 2014.
- Lower lending: In Q1, the number of subprime and deep subprime loans – to borrows with credit scores under 600 – fell to a 10-year low, down 8.6%, according to credit scoring company Equifax. Outstanding subprime loans through Q1 were $213 billion out of $1.08 trillion total.
Conclusion: Leverage in the auto sector is declining. And that’s good. Perhaps the slippage in credit standards in the sector has been arrested. Vintage-wise, 2015 seems to be the worst of the bunch. Nevertheless, delinquencies are rising and recovery rates are falling.
Bottom line: Fed Governor Lael Brainard mentioned lax lending standards and mounting subprime losses specifically in her most recent public remarks. The data show that the auto sector should be a financial stability worry for the Fed, but much less so than commercial real estate. Both sectors will probably play a role in the Fed’s interest rate decision today.