The auto loan market and the sub-prime auto loan market have boomed in recent years. The Financial Times reports that cracks are already starting to emerge in the market for car loans with repossessions at their third highest level in the last twenty years. The only time repossessions were higher was during the 2008 / 2009 financial crisis. In other words, we have recessionary levels of car repossessions at a time when the economy is still expanding. What happens during the next recession?
Repossessions in the US hit 1.6m in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8m and 1.9m peaks seen in 2008 and 2009, respectively.
That number is predicted to rise to 1.7m this year, according to Tom Webb, chief economist at Cox’s Automotive.
Ron Neglia, T-Birds’ manager, adds that the uptick from July of this year to now has been “significant”. And that the nature of the job has shifted as well, presenting a troubling insight into the state of the current economy and for areas of the booming market for auto asset backed securities.
A year ago most of the cars that Mr Neglia repossessed were from fraudulent schemes — people renting cars under a fake name and not returning them, for example. Today, he sees a larger number of individuals simply unable to repay on their loans.
Like sub-prime home loans during the last crisis sub-prime auto loans are being packaged up and sold to investors. There is no doubt that, should an auto-loan crisis hit, the banks will get blamed as they should, but would the sub-prime auto loan market be as bubbly as it is, if not for seven years of zero interest rates?
It comes amid rising concern about a crisis in the auto loan market. Analysts say that as competition has grown, lenders have relaxed lending standards, offering bigger loans to consumers and giving them more time to pay the loans back, resulting in borrowers taking on debt that they may not be able to repay. The auto loan market has grown from $750bn in 2011 to $1.1tn at the end of June, according to data from the US Federal Reserve.
The issue is particularly acute for the subprime ABS market, where issuers take loans from less creditworthy borrowers and package them up into bonds that are then sold to investors.
Auto Lending: Last Week Tonight with John Oliver (HBO)
Jeremy Jones, CFA
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