Wall Street is starting to worry about the auto loan market as millions of Americans are falling behind on their car loans. The increased interest in the auto loan market seems to be based on commentary from Ally Financial, weak guidance from Ford and what Evercore ISI called “a splurge in incentive spending.” Here’s what you need to know:
- The delinquency rate for subprime auto loans is at the highest level in at least seven years.
- Banks are pulling back and newer players with loose lending standards are stepping in.
- Used vehicle prices are dropping sharply, as the market is flooded with off-lease vehicles.
- The percentage of trade-ins with negative equity is at an all-time high.
- Asset-backed securities based on auto loans are showing signs of stress.
- A growing proportion of the auto loan ABS market is now made up of “deep subprime” deals.
The 60+ day delinquency rate for subprime is the highest it has been in seven years. A key driver of the increasing delinquency rate is a spike in the proportion of “deep subprime” deals, or those with an average FICO score of less than 500. In other words, the subprime delinquency rate is creeping up while the subprime market is ballooning in size.
The Liberty Street Economics post, written by Andrew Haughwout, Donghoon Lee, Joelle Scally and Wilbert Van Der Klauuw said, “The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households with roughly six million individuals at least ninety days late on their auto loan payments.”
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