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Auto Lending Idea Proposal

Auto Lending Idea Proposal
 

Are rising delinquencies of subprime auto loans signs of a bubble set to burst or is it the new normal?

Report Available:March 22, 2017

 

Blueshift’s initial research shows subprime auto loan delinquencies continuing to increase. According to the S&P Global Rating data, 1 in 5 borrowers in the subprime category are 60 days behind on their car payments. This represents the highest delinquency rate in more than six years. With subprime loans making up 19% of the $1.1 trillion in U.S. car loans and the rising frequency of borrowers missing payments within the first six months of securing their loan, questions linger as to whether there is reason for concern or if this is just the risk lenders have to endure in order to compete.

 

Observations

  1. New York Fed’s Center for Microeconomic Data’sQuarterly Report on Household Debt and Credit showed a rise in auto loans with high levels of originations across all creditworthiness levels, including subprime loans. A close look at repayment rates by credit score reveals signs of distress for loans issued to subprime borrowers—those with a credit score under 620.
  2. The CEO of Consumer Portfolio Services, a specialty finance company that provides indirect automobile financing to individuals with past credit problems, low incomes or limited credit histories, told Auto Finance News that the auto finance industry needs a subprime correction. “There are an awful lot of numbers that all point down: delinquencies are higher across the board for everyone, losses seem to be creeping up for everybody, used car prices are going down for everybody,” Charles Bradley said during a meeting at the National Automotive Dealers Association Convention & Expo. “You put all those things together, it doesn’t bode for a huge bangin’ year for 2017.”
  3. In the /Feb. issue of Subprime Auto Finance News, an article quotes Lou Loquasto of Equifax saying the news about a subprime lending bubble is “fake news.” Mr. Loquasto was a presenter in the Subprime Forum at the Used Car Week meeting in November. He added that the general media keeps writing about a bubble because they do not understand subprime lending. According to Loquasto, subprime lenders know that these loans drive up delinquencies, but it amounts to 4 or 5 out of 100 and these lenders have proven through the Great Recession that they know what they are doing.
  4. A Dec. 31, 2016, Forbes article makes the case for the higher delinquencies of auto loans being the new normal. The improving economy has allowed for greater access to loans for non-prime borrowers. This strategy by lenders to increase loans in the higher risk category allows for higher compensation due to the additional risk. With TransUnion’s prediction of a 60-plus day delinquency rate of 1.4% by the end of 2017, compared to an estimated 1.36% in 2016, a disruption of the auto finance market is not expected to occur.
  5. Blueshift’s Aug. 17, 2016, report found that subprime auto loan market conditions had deteriorated since Blueshift’s Feb. 4, 2016, report. What was three of 17 sources observing a bubble in February turned into six in August. As expected, all five subprime lender sources did not see a bubble. However, even four of these five indicated that subprime loan delinquencies and defaults were rising. Sources were unclear when the bubble would burst, if at all. Some said the industry had been policing itself and would have a soft landing. The large banks’ subprime lending pullback was a signal that credit terms would be tightening and interest rates would increase throughout the entire industry. One source said the big banks’ actions also were a sign that they were bracing for a difficult third and fourth quarter.

 

Are subprime auto loans actually in a bubble? Will this bubble soon pop? Are other weak economic indicators the beginning of a new downturn, and if so, will subprime auto loans be the first to break? Or is this all just a new way of doing business, with risks and fears overblown? To answer these and other questions, Blueshift will gather data and issue a market research report from independent sources in the following areas: Used car dealership executives, Auto finance companies, Auto repossession companies, and Industry specialists.

  

Companies: Credit Acceptance Corp (CACC), Santander Consumer USA Holdings (SC), Ally Financial (ALLY), Springleaf Holdings (LEAF), Lithia Motors (LAD), America’s Car-Mart (CRMT), ACE Limited (ACE), AutoNation (AN), Capital One Financial Corporation (COF), Sonic Automotive (SAH), Penske Automotive Group (PAG), Group 1 Automotive (GPI), CarMax (KMX)

 

Research Begins: March 6, 2017