The arrival of subprime mortgages: the unpaid loans of auto-contracted reach levels of great recession

"Surprising Development in a Strong Economy and Labor Market": New York Fed

Serious outstanding loans for auto loans loans in arrears for 90 days or more – jumped to 4.47% of the total auto loan balance in the fourth quarter of 2018, according to data from the New York Fed released this morning. This has placed the default rate of auto loans at the highest level since the first quarter of 2012 and only 0.6 percentage point below the peak reached during the Great Recession in the first quarter of 2011.

By the end of 2018, more than 7 million Americans had overdue auto loans for over 90 days, a million more than at the end of 2010, at the peak of the overall rate. delinquency, according to a separate report from the New York Fed. He added that "the large and growing number of troubled borrowers indicates that not all Americans have benefited from the strength of the labor market."

The dollars are big. Since the peak reached in the second quarter of 2008, the total loans and leases of motor vehicles have almost doubled to $ 1.27 trillion (slightly higher than last week's data from governors of the Federal Reserve as part of its consumer credit data).

But the number of self-loan accounts increased by only 28% over the decade, from 88 million accounts in the second quarter of 2008 to 113.4 million accounts in the fourth quarter of 2018, even though ready sales almost doubled.

The chart below shows the dollar amounts of auto loan balances (blue columns, right scale) in trillions of dollars and the number of auto loan accounts (red line, left scale) in millions of ready:

The percentage of vehicles financed, compared to the total number of new and used vehicles sold, remained roughly stable, between 50% and 60% over the decade, according to the New York Fed. Sales of remaining vehicles were paid in cash.

Here are the unpaid subprime auto loans

The share of total unpaid car loans that came from subprime borrowers – with a credit score below 620 – decreased slightly to 22%. However, the New York Fed pointed out, while auto loans have increased, that:

1. "There are now more auto loan borrowers at risk than ever before, and therefore a larger group of borrowers with a high risk of delinquency."
2. "The overall performance of auto loans has slowly deteriorated, despite the increase in the share of privileged loans in the stock."

Hence the 7 million Americans with auto loans that are late for more than 90 days.

And the flow of loans in cases of serious delinquency accelerates. The proportion of loans in arrears or in arrears in Q3 and having been heavily indebted in Q4 reached 2.4% of the total balance of motor loans.

But among subprime auto loans, the share of delinquent loans has reached more than 8% of their balances in the fourth quarter, "a surprising development in a strong economy and labor market," added the New York Fed.

For loans to borrowers whose credit is much higher than that of subprime mortgages (620 to 659), the proportion of loans that became delinquent was about 3%. For borrowers with a credit rating between 660 and 719, the rate was slightly above 1%. And for higher credit ratings, the rates were tiny.

Who is behind the subprime auto loans?

About $ 273 billion in outstanding auto loans are underway. So who created them?

Lenders specializing in auto financing – among the many non-banking institutions or "shadow banks" – have infiltrated the sector aggressively. While they are originally only about $ 150 billion of all unpaid car loans, half of their loans ($ 75 billion) are subprime.

These are automatic loan balances by type of lender, not necessarily by whom. Securitized car loans are held by investors. And specialized car lenders are trying to securitize most of their loans.

Large banks – those with badets exceeding $ 500 billion – are behind the largest number of auto loans ($ 389 billion), 25% of which are subprime mortgages.

"Captive" auto lenders, such as Ford Motor Credit, provided $ 281 billion in auto loans, but only 19% of them were subprime mortgages. Small banks and credit unions had the lowest risk profile, with only 14% of their loans rated as subprime. But credit unions are the second largest auto lender after the big banks:

So, who has problems with subprime auto loans?

Not credit unions, with their own loan portfolio: only 0.7% of car loans of credit unions have been in arrears for more than 90 days. And not the small banks and captive lenders.

The "big banks" – banks with more than $ 500 billion in badets – provided $ 97 billion worth of auto loans. But some of these loans have been securitized and are now in the hands of investors. The exposure that remains is small compared to the size of these banks. There are only six in this group, ranging from Morgan Stanley ($ 852 billion) to JP Morgan Chase ($ 2.5 trillion). And each of them is big enough to digest the losses that could occur in the subprime auto loan segment that it may still contain.

This has been and is going to be a bit harder for specialized auto lenders – a number of them have already collapsed in 2018 – and for auto loan ABS investors.

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