As Subprime Dents Auto Loan Quality, CUs Should Look at Risk Exposure

Subprime lenders are generating rising automobile delinquencies, but credit unions might suffer collateral damage, an economist said.

Elliot Eisenberg said Thursday the chances of a recession are low, but lenders nonetheless should prepare for one, including looking at their exposure to areas with rising risk, especially auto lending.

The value of automobile loans delinquent at least 90 days peaked at just over 5% in 2010 in the wake of the Great Recession, and fell to a low near 3% by 2015. Since then, the rate of serious delinquency has slowly crept back up nearly 5% again, according to the New York Fed.

The value of seriously delinquent auto loans hit an all-time his of $60 billion this year, according to the Fed.

“The amount of delinquent loans in autos is approaching the all-time high,” Eisenberg said during a webinar sponsored by CU Direct, based in the Los Angeles area.

“The whole situation is going to continue to deteriorate depending on how fast auto loans continue to go bad,” he said. “If the economy gets meaningfully worse, those default rates are going to go up considerably.”

During the Great Recession, the total value of serious delinquencies was dominated by home lending as the housing bubble burst and foreclosures soared. Those amounts have subsided to pre-recession levels, leaving the biggest amounts of serious delinquencies with student loans followed by credit cards and auto loans.

Most student debt is held by the federal government, but its level is holding back young people from borrowing for homes and cars.

The rate of credit cards in serious delinquency is also rising, but the increase is slower and the rate is still below the pre-recession rates of the early and mid-2000s.

Total delinquency rates remain low for car loans at credit unions.

NCUA data shows auto loan balances that were at least 60 days delinquent Sept. 30 were $2.2 billion, or 0.58% of total auto loans, up 2 basis points from a year earlier. The delinquency rate was flat at 0.39% for new cars, and down 4 bps to 0.71% for used cars. Over the past three years, car loan delinquency rates have ranged from 0.53% to 0.72% based on rolling 12-month averages.

Among all lenders, Experian estimates that 0.75% of auto loan balances were 60 days or more delinquent as of Sept. 30, up from 0.73% a year earlier. The increase was up almost entirely among finance companies, which tend to cater to subprime borrowers.

• Credit unions’ 60-day delinquency rate stood at 0.23% Sept. 30, down from 0.24% a year earlier.
• Banks’ 60-day delinquency rate was 0.66% Sept. 30, up from 0.65% a year earlier.
• Finance companies, however, had an 1.85% delinquency rate Sept. 30, up from 1.76% a year earlier.

Finance companies accounted for 8.5% of all car loans originated in the third quarter, down from 10.5% a year earlier, according to Experian. Nonprime, subprime and deep subprime accounted fo 38.3% of all loans and leases originated in the third quarter, according to Experian.

Eisenberg said reasons for rising auto loan defaults include:

• Rising payments. Not only are prices rising, but borrowers are also taking on bigger loans to get bigger vehicles. “We drive SUVs; we drive crossovers. You don’t see many four-door sedans anymore.”
• Lengthening terms. Experian shows that 32.2% of new car and 19% of used car loans carried terms over 72 months.
• Sinking equity. Drivers trading an old car with negative equity to buy a new car has risen from 25% in 2013 to 33% this year, according to Edmunds.

“That’s a lot of cars being bought on time with upside-down buyers,” he said.

Even for those lenders without subprime loans, they could be hurt because the used market can be flooded with repossessed vehicles sold at discounts that lower residual values.