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 would guess a lot....can they even ask for ID or citizenship status?
These poor lenders need your help. They are doing business out of their cars, not out of multi billion dollar buildings.
Christmas is coming and some of them are grandmas and they just want to be able to buy their kids Christmas.
Submit your bailout dollars here.
In fact the high prices of new vehicles are linked with the fact that most finance it. Nobody cares how much does it cost. Everybody is interested how much to pay each month. Here we have a 50k pickup truck as a result. It is not inflation. In Asia they still have nice 20k trucks and 18k cars too.
I bought a brand new Honda Fit for $15K cash a couple of years ago, a good deal for a brand new reliable car. I can afford to buy more expensive vehicles but I just don’t. Other (bigger) cars and trucks can be bought used with cash, but Cash for Clunkers made those deals less so of course. . .
Not to be confused with the Fed's "not QE" repo. :)
You’re right about the payments. The monthly payment. That’s all that matters to these yahoos.
They don’t care that the average loan has gone from 4 and five years. To 6 and seven years.
“In Asia they still have nice 20k trucks and 18k cars too.”
Tata Motors. In India. Actually they mass produce millions of cars all over the world.
They could import a Tata Nano here in the US for sale at less than $5,000.00
https://en.m.wikipedia.org/wiki/Tata_Nano
This car is every bit as good and safe as your typical econobox sold here in the 80’s. But would the US allow them to be sold?
Hell No.
Way to see the opportunity in this!
OTOH, I wonder when Bernie and Warren will start talking about everyone has a right to a decent car and that no one should have to have DEBT in order to have a nice car.....
Gonna be lots of cheap, slightly used cars soon. I don’t trust the owners so I won’t buy one, but college kids and poor folks are going to have a bonanza.
It is a ponzi scheme. They make money until it all blows up in their face.
Oh, the real profit comes when the Fed Gov gives them their taxpayer bailout. Then it is gravy time. Par-tay!
The fallout from Cash for Clunkers is still being felt.
Of all the FUBAR moves that Obama made - that was one of the worst.
I doubt they can ask...
This is just my observation but from time to time when people come through here loaded to the brim with household stuff- going TO Mexico, they always seem to have really nice new pickup and often wife is following in new car. I have talked to some of these people, they are moving back to Mexico and I have wondered once they cross the border is it even possible to repo vehicles from there if they don’t make payments?
Just my curiosity.
Tata is too low-end. Mitsubishi Triton aka L200 is near as good as any regular truck. They also have “super-select” transmission making the truck so much better than most of the rest if you need to drive in different demanding conditions. Starts just north of 20k in Asia and Europe.
My old man would pick up a car for 100-200 bucks, tinker with it if it needed tinkering and do just fine. When the car died, it was no big deal to replace it. No bankers needed. Simpler times.
Hmmm, could use a new work truck. I wonder if the price of used stuff will come down?
Based on YouTube videos of reposessions, nearly all.
Trump’s fault.
Cars are ridiculously expensive. And due to that people are getting 7 year loans. So 500.00 for 7 years of not more. Then you have people not making a decent wage and you have a disaster happening. I about blew a gasket when I paid 20K for my 2011 car. I hadn’t bought a new car in 14 years prior. My next car will be in 2025 or so. I hear the car companies are charging 40 grand for a car. Ridiculous!
Chinese Cars are the future. Shoot, they are the NOW!
https://en.wikipedia.org/wiki/Automotive_industry_in_China
“Since 2009, annual production of automobiles in China exceeds that of the European Union or that of the United States and Japan combined.”
Trade Wars and Protectionism are but a few reasons why the US cannot buy quality cars are half the cost. But maybe things will change.
Those $85K F-150’s must have something to do with it.
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