Auto Lenders’ Subprime Delinquencies Climb

The Federal Reserve Bank of New York is not quite sounding the alarm bell for auto lenders, but they are certainly trying to draw some attention to the issue.

Subprime borrowers, it seems, are having a tough time keeping up with their monthly auto payments, as delinquencies among the group were up during Q3. That amounts to 2 percent of auto loan balances being at least 90 days’ delinquent, a 0.4 percent increase from the 1.6 percent in 2014.

Rates peaked at around 2.4 percent at the low water mark of the great recession.

“The increased level of distress associated with subprime loan delinquencies is of significant concern,” researchers for the New York Fed wrote in a blog post on Wednesday.

That uptick, however, is made a bit more alarming by the fact that unemployment is low at present, meaning borrowers should in theory be able to make those payments. One explanation is that auto lenders have gotten a bit too lax in their standards — and have helped buyers get in over their head with credit lines.

The concern among economists is that even in the midst of a recession, the number of Americans on the edge of having their cars repossessed has swelled quite high.

Subprime auto lending has been a growth industry over the last few years. There are presently about $1.1 trillion in outstanding auto loans.

The good news is that unlike the mortgage crisis before it, auto lending is a much, much smaller part of the economy than mortgage underwriting is. Moreover, bank-based auto loan defaults remain low, and financing companies are the more likely group to be hit by the wave of delinquencies than more traditional lenders are.

Subprime auto lending has attracted a series of financial players on the margins — those attracted to the much higher interest rates that can be charged, up to as much as 30 percent. Those loans can then be securitized and sold to investors.  But higher interest rates are justified by a higher risk of default — and now those defaults are coming to bear.

The good news — sort of — is that analysts at Fitch Ratings said that although losses on subprime loans were rising, they were within the firm’s expectations.

But even that comes with an “if.”

“Subprime auto performance could decline further if there are any stresses to the underlying economy,” said Kevin Duignan, Fitch’s global head of structured finance, in an interview.