AUTO LOANS: ACCELERATION OR DECELERATION IN 2015?
After a bumpy ride in recent years, the US auto industry finally seems to be cruising along smoothly. As Automotive News put it in late December, “the US auto industry returned to full-fledged prosperity in 2014.”
Sales of new cars in the US are expected to reach 16.4 million units in 2014, just shy of the levels before the Great Recession.1 Not long ago, pessimism about the auto industry was rampant, and the situation was indeed dire — sales in 2010 had declined to 10 million units from 17 million in 2005.2
There are a number of reasons for this resurgence. The US economy is recovering at a healthy rate and unemployment continues to decline, and as a result, consumers are more confident and taking on more debt after years of deleveraging. And, of course, lower interest rates, declining oil prices, and aging vehicles have together fueled demand.So it is no surprise that auto lending has also picked up considerably in the last several years. After all, the vast majority of car purchases in the US (85 percent of new and 54 percent of used cars) are now bought with credit.3 As a result, total outstanding auto loans stood at $934 billion at the end of Q3 2014, higher than the pre-crisis peak of $830 billion. In fact, auto loans have grown more than any other type of lending except student loans.
The surge in demand for auto loans has benefitted both banks and finance companies. According to Creditforecast.com, the auto lending portfolios of banks and credit unions reached a record $465 billion in November 2014, 37 percent higher than before the recession. Meanwhile, the auto loan assets of finance companies also shot up to a peak of $481 billion.
Not surprisingly, the auto loan securitization market has also seen impressive growth. According to the Securities Industry and Financial Markets Association, nearly $97 billion of auto loan asset-backed securities were issued in 2014, the highest level since 2005. Clearly, demand for these bonds has been strong.
Despite this buoyancy in the auto lending market, some worry there might be another subprime bubble in the making as some lenders become more aggressive in their underwriting standards.4 Even the regulators have weighed in on this debate. For instance, the Office of the Controller of the Currency has warned: “competition for limited lending opportunities is intensifying, resulting in loosening underwriting standards, particularly in direct and indirect auto lending…”5
Is this concern justified? In my opinion, the data don’t necessarily support this view thus far.
First, in spite of doubling in the last four years, the share of subprime auto loan originations in terms of dollar value is still below the levels seen before the recession.6 And according to TransUnion, the share of subprime accounts has declined by 1.6 million in the seven years preceding Q3 2014, while the total number of auto loan accounts have in fact increased by 4 million over the same time period.7
Second, the average 60-day delinquency rate, in spite of trending up in recent years, is currently at 1.2 percent in Q4 2014, still below the 1.38 percent in Q4 2007. And although the subprime delinquency rate has increased by almost 100 basis points to 5.3 percent in the last couple of years due to the relatively smaller share of outstanding loans of the subprime segment (around 15 percent of total at present), the impact may be limited, until this share goes up dramatically.8
Should we be anxious that things may change in 2015? Probably not. According to Transunion, the delinquency rate at this time next year will still be 1.27 percent.
My personal view is that as the economy improves, the auto loan market will continue to thrive. Most lenders, given the regulatory scrutiny, are likely to remain prudent in their underwriting standards.
But we can be mindful of headwinds as 2015 unfolds. Oil prices might spike, possibly dampening consumer demand for autos, and increased competition and higher rates could also hinder growth.
All of this no doubt makes 2015 an interesting year for auto finance. What is your view? Will the auto lending market continue to grow at a healthy pace? Is the concern about subprime lending justified? Will the positive economic environment offset any challenges from increased regulatory scrutiny?
1 “Top stories of 2014,” Automotive News, December 29, 2014.
2 Keith Crain, “It’s as if the recession didn’t happen,” Automotive News, December 22, 2014.
3 “Car loans in America: Bad carma,” The Economist, September 27, 2014.
4 Matt Robinson, Sarah Mulholland, and Jody Shenn, “Auto Loans: A Subprime Market Grows in the Shadows,” Bloomberg Businessweek, October 2, 2014.
5 Office of the Comptroller of the Currency, “Semiannual Risk Perspective,” Fall 2014, December 17, 2014.
6 Subprime borrowers are those with credit scores below 620.
7 TransUnion, “Auto Loan Delinquency Rate to Marginally Increase in 2015; Debt Levels to Continue Rising Trend,” December 16, 2014.
Val Srinivas, Banking & Securities research leader, Deloitte Services LP, on January 21, 2015