New vehicle sales in the US have been on a tear in 2014, rising 5.6% to 16.5 million units, the highest since banner year 2006. Light-truck sales jumped 10%, cars edged up 1.8%. The industry is drunk with its own enthusiasm.
General Motors CEO Mary Barra sees “still plenty of room for the auto industry to grow.” She rattled off politically correct reasons: consumers who’re “feeling pretty good about the future,” due to “the strength of the labor market, better job security and the recovery in home prices,” topped off by the “sharp drop in fuel prices and rising incomes,” possibly confusing their stagnant or declining incomes with her rising income.
So sales could hit 17 million in 2015, she said in the statement. It would take the industry back to the car-glory days of 2001. It’s going to be younger buyers – the Holy Grail of everyone. They’re not just moving out of their parents’ homes, where they’ve been holed up for years because they can’t afford the soaring rents or home prices, but now they’re also going to splurge on a set of wheels. Because it’s a great time to buy.
Interest rates for six-year new-car loans are as low as 2.75%, according to Bankrate.com. Loan terms can be stretched to seven years, to where these younger buyers will be awfully close to middle-age before they finally get out from under it. Loan-to-Value ratios have soared well past 100%; everything can be plowed into the loan: title, taxes, license fees, cash-back, and the amount buyers are upside-down in their trade. The package is governed by loosey-goosey lending standards. Bad credit, no problem.
And that’s exactly the problem.
Over 8.4% of subprime auto loans taken out in the first quarter of 2014 were already delinquent by November, according to an analysis of Equifax data by Moody’s Analytics for the Wall Street Journal. That’s the highest rate of early subprime delinquencies since Financial-Crisis year 2008.
Stuffing people into cars they can’t afford and ultimately may not be able to pay for is big business. Auto loans to subprime borrowers (credit scores below 640) make up over 31% of all auto loans, according to Equifax. Outstanding loan balances have soared nearly 17% over the last two years. At this rate, they’ll breach the $1-trillion mark by the end of the first quarter this year.
In broader terms, 2.6% of the auto loans taken out in Q1 2014 were delinquent by November, the highest rate of early delinquencies since crisis-year 2008, when they rose above 3%.
The bailed-out former auto lending unit of bailed out GM, Ally Financial, now the largest non-captive auto lender, reported $355 million in nonperforming auto loans in Q3 2014, up 8% from a year earlier. And during the first three quarters, it charged off as uncollectible $341 million, up 18% from the prior year.
Santander, one of the top 15 auto lenders in the US, discovered that it’s overall auto-loan delinquency rate in Q3 was a vertigo-inducing 16.7%, highest in the nation, followed by Capital One’s delinquency rate of 6.6%.
But there’s nothing to worry about.
“Auto loans continue to perform well, as they did during the recession,” explained Bill Himpler, Executive VP of the American Financial Services Association, a lobbying organization for the consumer credit industry, including auto lenders. “Concerns about a spike in delinquencies have not been substantiated by evidence,” he said to mollify our concerns, echoing Equifax’s soothing statement in October that “a bubble is not occurring” in subprime auto lending.
Regulators beg to differ.
“We’re putting banks on notice that we have concerns,” Darrin Benhart, deputy comptroller of supervision risk management for the Office of Comptroller of Currency, told the Wall Street Journal. They’re worried about the lackadaisical lending standards and extended loan terms, and about the high interest rates for subprime borrowers who don’t have other options. “It’s definitely an area that warrants some attention,” he said.
The subprime lending tactics of Ally, GM’s new captive lender GM Financial, and Santander have come under investigation by the Justice Department last year. So the bigger lenders might try to be a little less aggressive with subprime loans. But smaller lenders are jumping into the fray.
“Subprime delinquencies and losses are beginning to grow at a more rapid pace than we’ve seen in a long time,” said Kevin Duignan, global head of securitization for Fitch Ratings.
Lenders are on the hook for nearly $1 trillion in auto loans. A good part is subprime, and if the subprime bubble blows up, losses will hit these banks, and they’ll bleed, and their stocks will swoon, but it won’t take down the megabanks. The amounts aren’t big enough. A specialized lender or two might sink, and nerves on Wall Street would get rattled until a member of the FOMC tells Bloomberg TV that QE4 might be a possibility, which will jar stocks back into rally mode.
Lenders, while licking their wounds, will tighten lending standards and shorten terms, and they’ll keep an eye on LTV ratios and credit scores. With shorter terms, payments jump. And with limits on LTV ratios, people who’re upside-down in their trade, have no cash, and want title, taxes, and license fees rolled into the deal, have trouble financing a new car.
These aren’t just a few individual cases, but much of the hollowed-out, over-indebted, underpaid middle class, the new American proletariat, the 62% of the population that has no emergency savings to cover even a $500 car repair or medical bill. These households face, as the Federal Reserve said last year, “large-scale financial strain.” They’ve been bypassed by the Fed’s “wealth effect.” And with tighter lending standards, many of these folks can’t buy a new car.
Auto sales have been a big force in boosting retail sales, consumer spending, manufacturing, transportation (trucking, railroads), and service activity. So when the auto subprime bubble pops, it won’t take down the financial system; but it will hit the broader economy.
And if it pops just when the shale boom is unwinding, it would knock down in one fell swoop the two major growth industries that have largely been responsible for whatever “recovery” we’ve had in the US. Read… Oil-Bust Bloodletting: Projects Cancelled, Layoffs Ripple to Other Areas, Default Hits Private-Equity and Pension Funds
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
In terms of the size of the “self destruction,” the USA is the biggest ever. (But there isn’t a Wolf Richter in the main stream press anywhere, so it’s all a great mystery to most.) Robert is what we’ve done to ourselves. Some people care about the Roberts in our country; but, these days, a great number of people don’t give a darn. Robert: http://youtu.be/mB2onhhb-jg
Could this subprime auto loans be the “trigger” plus junk bond defaults akin to subprime mortgages crash while the student loan default is rising astraonomically and many of these youngsters feel they are entitled to some kind of loan forgiveness?
Guess next up is TBTF bankster bailout never mind the banksters made a killing charging double digit plus interest rates on money that costed them nothing paying the depositors close to zero % interest rate…
This time it’ll be a deluge, not a trigger. Emerging markets, oil, commodities, auto subprime, debt market, stock market, japan, china, the EU…..
My understanding is that debt forgiveness implodes the system, so that ain’t gonna happen.
Consider for a moment if you have a 100T national debt market made up of 10 different segments. These are all kinds of bonds, loans, and such. It is very important to note: each loan is an ASSET to someone and a LIABILITY to someone else (this simple truth conflates so many issues and is likely why many people never get it when it comes to topics like this). Anyway, forgiveness means someones asset just became a big fat zero. The money supply is reduced and the asset holder eats the loss and likely adjusts their behavior (if they aren’t bankrupt in the process). That is deflation, the whole reason the fed is in the mess (i.e. fighting deflation).
If you held some assets in this very large 100T national debt market and the government comes along and nukes 500B of debt in a segment where you do NOT hold assets – what would you think about that? Sell is probably what you would think, not wanting to be next in line. So for 500B of forgiveness, the 99.5T starts to become a bit unstable. How much is too much? I can tell you this; too much won’t be enough to matter.
In short, it is a path that can not be started down, lest it all come down. This would destroy businesses, pensions, and the economy – because all these things have money tied up in assets backed by debt and they need that money to operate, issuing payroll, buying supplies, etc. This punishes savers and rewards debtors (no debt, no gain).
As close as it will ever get is a TAX PAYER BAILOUT so that the debt is just moved to a new owner. That is what you saw in 2007/2008 and it was only for insiders.
Personally, I am expecting debt PRISONS instead, simply because it will keep things going a bit longer. If your kid was going to prison for a house loan, as a parent would you cough up?
Regards,
Cooter
Debt is either paid off or defaulted. Guess 3rd and recently popular option is to to kick it down the road or somethings.
The complex web of derivatives, swaps and counterparty risk galore will be hard to unwind let alone figure out who owes whom. Feds acquired AIG to pay off the banksters all over the world back in 2008 but the demise of Bear Stearns/Lehman is child play compare to what Mick noted “Emerging markets, oil, commodities, auto subprime, debt market, stock market, japan, china, the EU”.
Basically we never really resolved the 2008 crisis and it literally exploded to perhaps mother of all inter-related bubble…
The picture is this.
The car industry has been swimming in overcapacity for at least five years now. Until everything was fine in China, nobody really cared. But the tide there is shifting: President Xi’s anti-corruption campaign has cooled the seemingly insatiable demand for Ferrari’s and BMW’s and there are signs the rest of the market may have already been saturated by overenthusiastic domestic and foreign manufacturers. Far from modern corporations to show restraint in any form or shape.
Suddenly the US and Europe, where low segment models carry higher margins than in China, seem palatable again.
Small problem: apart from the very top segment, which doesn’t buy Ford’s and Nissan’s, consumers on both markets were still deleveraging. Many still carried bad credit ratings which made buying a car on credit impossible.
Not to worry, let’s just reinflate yet another burst bubble… what can possibly go wrong? Hence auto loans in basket case Italy jumped by 26.4% in the first six months of 2014 in face of growing unemployment and corporate bankruptcies. Damn the torpedoes, full speed ahead.
The credit bubble found an almost perfect soul mate in the car industry. Cars are usually the second most expensive item households own after housing. Hence there was a time when the turnaround on them was quite long, with the average car on the road being 8 years old or so.
But in the early years of the XXI century, the model shifted as the Maestro and his apprentices were about to unleash the furies.
Car manufacturers shifted their model to much shorter lifespans in that period, on the assumption households awash in a sea of cheap money would be able to change a car every few years and even hamburger flippers would able to buy a new SUV on credit. Carlos Ghosn of Renault-Nissan fame even went as far as declaring the target was to “incentivate” owners to change their cars every three years. For a time it worked. Apart from cheap money courtesy of the Maestro, every little dirty trick in the book was employed, very often with a nice assist from politicians and the media… where have I seen this before?
Then came 2008, with its nasty tail of deleveraging central banks have fought against ever since with the same determination and callous disregard for casualties as Hitler fighting the Red Army.
The lesson has not been learned. Despite the bailouts (credit to Sweden for being the only country which allowed a manufacturer to go bankrupt), despite the carnage, auto CEO live in a fantasy world of their own making where it’s always 2007 and what came after just a hiccup which needs to be corrected and fast. I’ve met accountants driven to their wits’ end to explain the reality to their corporate masters to no avail. Their advice has been the same since 2008: reduce capacity because 2002-2007 was a one time freak event that will never come back, change our business model to one more sustainable long term. Nothing. Like the Fed’s and ECB’s printing presses, assembly lines have to run at full speed, nevermind the fact a large part of what comes out is left to rot in the elements because there are no buyers.
I just hope Daimler, Ford, Mazda and the rest of the gang sent a free car to the Maestro as a thank you gift for the job well done.
I sold new cars from 1978-1981 at a Chevy dealer (now out of business) and we all gathered around a new Caprice Classic that had everything but birth control, and listed for slightly over $10,000. We all shook our heads and the sales manager asked “Who in his right mind would pay 10,000 for a Chevrolet?”
Most buyers at the time bought a 36 month loan from GMAC though the 48 month loan was just coming into vogue. No one was leasing except for businesses. Now you’re lucky if you can find a salesman who isn’t a moonlighting software engineer who really doesn’t care if he sells you a car or not.
I went to the credit union to inquire as to why I had not received my 2nd half booklet for my loan. He told me they don’t automaticly send them out, and it would cost me 5 dollars. I feel like I’m walking down a carnival midway. “Step right up! $5 to see JoJo the dog-faced boy! He walks, he talks, he crawls on his belly like a reptile!” Yeesh
Julian, good to know that you were a car guy.
I ran a big Ford store from 1985-1995. We had similar experiences.
BTW, you might like my short novel, TESTOSTERONE PIT, about life on the showroom of a Ford store:
http://www.amazon.com/gp/product/B009NOFGXA/
Cheers to moving the iron.