Delinquencies Rise for Subprime Auto Borrowers: Is a Downturn Ahead?

A peak in delinquencies by subprime borrowers is adding to concerns that the current strong automotive sales cycle in the U.S. could be facing obstacles. 

Fitch Ratings reported that the rate of subprime automotive loans overdue by more than 60 days rose to 5.16% in February. It's the highest rate in the post-financial crisis period, second only to a 5.96% rate in October 1996, Fitch said. 

The high rate is troubling to credit analysts who noted that the packaging of auto loans into bonds and the sale of those securities to investors recalls the events that led to the mortgage and housing crisis in the middle of the past decade. 

"What's driving record auto sales is not the economy, but record auto lending," Ben Weinger, who runs hedge fund 3-Sigma Value LP in New York, told The Wall Street Journal. Weinger has been betting against some auto lenders, who he said have lowered underwriting standards. 

But others said such fears are overblown, with the U.S. economy growing, unemployment down and fuel prices moderate. Still, with the U.S. auto industry having posted six straight years of annual gains, the first time for a streak of that length, some forecasters are referring to a "plateau" in sales, this year and next. 

Equifax reported that outstanding auto loans have topped $1 trillion in the U.S., a fifth of that amount going to subprime borrowers, the credit category for those with the lowest credit scores. Subprime borrowers also pay the highest interest rates -- sometimes as high as 20% -- and usually are the first to be delinquent. 

With more than half of subprime borrowers using their loans to buy used cars, analysts keenly watch how delinquencies, repossessions and other factors affect used-vehicle pricing. Though used-vehicle pricing has been strong for several years, it fell in February, according to Manheim, an operator of vehicle auctions. 

Manheim reported that the average used vehicle sold wholesale for $10,345, down 2% from a year ago. Adjusted for seasonal factors, average prices fell 1.5% to $12,298, representing the second consecutive year-over-year decline in monthly prices. (A new vehicle in the U.S. costs in average of about $33,000 at retail.) 

Tom Webb, chief economist of Cox Automotive -- the owner of Manheim -- said a long-term trend of dropping used-car resale values is coming, though not from credit problems. "We expect pricing to fall over the next two years a much more supply as vehicles come off their leases," Webb said. 

Pressure on used-car prices could have negative repercussions for new-vehicle sales and production. Buyers of new vehicles usually rely on the trade-in of used vehicles for a down payment; if values decline, they may postpone purchasing or buy a less costly model. 

As prices of used and new models diverge, credit-strapped consumers who are considering both may gravitate toward used cars. Automakers often will increase incentives or discounts to encourage the sale of a new vehicle; but eventually the profit margin shrinks too much, the only alternative to slow or suspend production. 

Industry executives and retailers insisted that American consumers remain in the mood to buy. "The energy in showrooms was just starting to build in the last week of February," said Judy Wheeler, Nissan's (NSANY) U.S. sales chief. 

 

 

 

 

 

 

Doron Levin is the host of "In the Driver Seat," broadcast on SiriusXM Insight 121, Saturday at noon, encore Sunday at 9 a.m.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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