Auto loan delinquencies have surged to the highest level since 2011 and are approaching levels seen at their peak during the Great Recession.
The percentage of outstanding auto loans in serious delinquency (90 days or more past due) jumped to 4.69% in the first quarter of 2019, according to thelatest data from the New York Fed. At their peak during the recession, auto loan delinquencies hit 5.27%.
The total amount of delinquent auto loans totals about $60 billion. In dollar terms, the amount of delinquent auto debt is already far above levels seen during the Great Recession.
Meanwhile, total outstanding balances on auto loans and leases grew by 4% year-on-year in Q1 to $1.28 trillion. While the dollar amount of outstanding auto loans has surged, the number of accounts has only grown by 34% over the last decade, according to WolfStreet.
“In other words, what caused much of the increase in the auto-loan balances is the ballooning amount financed with each new loan and longer loan terms that causes those loans to stay on the books longer.”
Here we have yet another bubble blown up by the Federal Reserve’s easy monetary policy.
The bulk of the delinquent accounts are subprime loans. In other words, loans made to risky borrowers. Many of these have been packaged by banks, similar to what was done with subprime mortgages in the years leading up to the housing crash. As Bloomberg noted last spring, the pain among small auto lenders “parallels with the subprime mortgage crisis last decade, when the demise of finance companies like Ownit Mortgage and Sebring Capital Partners were a harbinger that bigger losses for the financial system were coming.”
The Federal Reserve is crashing the debt & real estate bubble it created worldwide.
The collapse of the subprime auto market probably won’t have the same impact on the economy as the housing crash did in 2008. The industry isn’t as big in terms of dollars. But what’s going on in the auto industry is indicative of broader trends in the US economy.
None of this is good news for the auto industry.
Auto lenders have already seen the writing on the wall and have been tightening underwriting standards. This has pushed more subprime borrowers into the used car market. We have already seen this trend. New vehicle sales peaked in 2016. Through Q1 this year, new-vehicles sales, fleet and retail, were down 3.2% from Q1 2018. It appears 2019 will be another down year for the industry. That would make three straight years of declining sales.
More troubling is the fact that we are seeing these high delinquency rates and falling auto sales in the midst of what is supposed to be a booming economy.
As WolfSteet put it, this is all the result of reckless auto-lending “aided and abetted by yield-chasing investors piling into subprime auto-loan-backed securities because they offer a little more yield in an era of central bank engineered financial repression.”
“It’s a sign like so many others in this economy, that the whole credit spectrum has gone haywire over the years. Thank you, Fed, for having engineered this whole thing with your ingenious policies. So now there’s a price to pay – even during good times.”
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