By on March 13, 2014

Sanjiv Yajnik

As fears of increasing auto loan delinquencies are giving some lenders pause, Capital One Auto Finance president of financial services Sanjiv Yajnik calls said increase a return to “norm,” with pent-up demand and greater competition will maintain availability of credit.

Automotive News interviewed Yajnik last week about the state of auto loans, beginning with a recent statement made by Capital One CEO Richard Fairbank about how lending had experienced a “once in a lifetime” period of growth prior to the start of the Great Recession. He explained the resulting downturn led to a higher quality of lending due to both lenders and consumers becoming more conservative, prompting “very low losses and good returns” that are continuing to this day for the most part:

Now as we come out of the downturn, conditions are becoming more normal. Some consumers are coming to the high side of what they should be borrowing. Private equity-funded lenders and other lenders are coming back to autos. Some lenders are developing habits in loan amounts and loan approvals that mean one has to be discerning in what loans you approve. It’s not the volume of loans; it’s the quality.

Yajnik goes on to state that while auto lending continues to increase overall, top-line growth is still in the offing. He also cautioned lenders to “be careful with maintaining the right customers with the right cars,” and to take “the high road” when lending, lest a repeat of 2008 occurs.

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29 Comments on “Yajnik: Loan Delinquency Increase A Return To “Norm”...”


  • avatar
    SCE to AUX

    Some people will still borrow too much, and many banks are more than willing to help them do that.

    • 0 avatar
      Xeranar

      Truthfully it has more to do with derivatives than any moral to this story. When Banks can sell loans to the market ignoring the consequences of their deals (as Dodd-Frank has been largely unenforced) then lending will once again get out of whack. I would say if we’re seeing a slightly higher default rate but within normal parameters (say pre-Glass-Steagal repeal) then I would agree otherwise welcome to meltdown 2.0, the stupidifying…

      • 0 avatar
        28-Cars-Later

        Oh so that’s gonna be the title, I like it.

      • 0 avatar
        ellomdian

        “Derivatives” has been a dirty word since ’08, but I have a hard time finding the inherent evil in them. Especially when Capital One is talking, since they hold most of their own paper because the rate-of-return is so good.

        But the hell does Glass-Steagall have to do with your statement other than a topical buzz-word point in time? Home loans, car loans, and private loans are typically 3 completely different types of banking actions, and turning the paper-writers into printing presses didn’t really happen until years after the repeal.

        This just in – we’re recovering from an economic crisis, and some people are loosening their financial belts – both from the lending and the borrowing side. I think the OP was largely trying to convince people this is a normalization trend and not another slide.

        • 0 avatar
          Pch101

          The simple math: Consumer Lending + Alternative Finance Products = Excessive Risk

          When lenders find ways to pass on risk, they respond by creating more risk. And that risk is necessarily systemic — passing it on to someone else only reassigns who is contractually obligated to absorb it, but it doesn’t get rid of it.

          • 0 avatar
            28-Cars-Later

            Given the consumer based model of the economy, is there any way to mitigate or eliminate the inherent risk you describe other than passing the buck?

          • 0 avatar
            Pch101

            The only way to reduce the systemic risk is to avoid creating the excessive risk in the first place. Until the loan is paid off, restructured or forgiven, the risk remains.

            Lenders don’t care about the entire bundle of risk, just their own piece of it. Hence, the problem.

          • 0 avatar
            28-Cars-Later

            Thx for the explanation.

        • 0 avatar
          Xeranar

          I’m actually surprised I got some push back on this issue since it was scientifically and mathematically identified. I mean if you want to debate the psychological underpinnings of it I guess we can but the facts are facts.

          Derivatives aren’t inherently evil, I have no problem with banks selling loans onto the market. I was using derivatives in a generic way to keep it simple but I guess I can explain it further.

          A derivative is any product sold onto the market. The first derivative isn’t that big an issue in a fundamental situation. The problem is that the majority of rating agencies are paid by the lenders to rate their products. This creates a negative relationship because rating firms want to protect their business so they’ll willingly give bad paper a good rating.

          This then leads to CDOs (Collateralized Debt Obligations) which is what a marketized loan package is. These are usually far too big for one person/agency to handle so tranches (unequal shares) are sold to people based on value to risk, higher prices equal lower risk, and any losses are hit by the cheapest tranches first.

          Then you get into the issue of shorts and the complicated game involving effectively insuring against failure (Default Credit Swaps) that will pay off if your tranche defaults. Knowing this these Commercial Banks were selling the paper through their investment bank arm and then buying shorts on the entire package regardless of who owned the tranches because apparently that was legal.

          Which takes us back to Glass-Steagall which is a good benchmark for a society’s default rate because it was before commercial banks could buy investment banks and increase incentives to create these economy-crashing risky financial products.

          If you think I’m trying to throw buzzwords at you I hope you’re satisfied. I was actually making no indictment on Capital One’s part, I was just unfamiliar with the actual numbers to see if we’re re-inflating a bad bubble or is it actually a return to normalcy after a severe credit market freeze.

          If you want to know more I suggest you read Crisis Economics: A Crash Course in the Future of Finance by Nouriel Roubini and Stephen Mihm. I used it this year to do economic policies in the post-modern era.

          http://www.amazon.com/Crisis-Economics-Course-Future-Finance/dp/014311963X

          As for ‘consumer-based economies’ being inherently risky, that’s not a functional statement. Every economy barring some state-run systems is consumer-based. What happened was a few key players figured out how to push the system out of balance for their own benefit. This isn’t even a debate between left and right, as the financial systems become a much larger part of economy we’re going to have to clamp down on huge institutional players abusing the system by monitoring them more carefully.

          • 0 avatar

            In other words, all together, say it with me now: RRRRRRRRREGULATION!

          • 0 avatar
            ellomdian

            So it has very little to do with derivatives and more to do with the shitty ratings fiasco – just that the ability to generate securities at pre-set risk and return levels using (generally) computerized models based on a flawed premise meant that people were able to do it much, much faster, and it was much, much harder to pick apart and clean up. Fair enough, and I agree with your clarification – the market is greedy and as long as banks are allowed to offload debt, there will always be pond scum looking to pick it up.

            Your book is on my kindle now, most of my teaching is 1-week training at work trying to teach Visa business partners about ‘Banking’ in general – I used “I.O.U.: Why Everyone Owes Everyone and No One Can Pay” as a primer last time we discussed ” ’08 ” but we typically keep it pretty light.

  • avatar
    Astigmatism

    OK, let’s all guess: over-under $3,000 for the cost of printing the enormous novelty check and staging the photo-op? I’m taking the over.

    • 0 avatar
      Scoutdude

      Sorry but they likely print those more than one at a time, though even if they did them singly it would cost less than $100 for the check. Then you send out someone with the camera and a couple of PR people out for an hour or so. Under $1000 total including gas to get there.

  • avatar
    tuscreen-auto

    “pent-up demand and greater competition will maintain availability of credit.”

    Great, so the American Dream (TM) is alive and well…..

  • avatar

    I appreciate Capital One and I love banking with them. When I was a fresh-out-of-college-student, I had poor credit, student loans and needed to build up my self.

    I used a Capital One Auto loan, my own car insurance and credit cards to build my credit score to the uncharacteristically High score I maintain today.

    I was a “risk” and they gave me a chance.
    They also kept the Keurig stocked with great flavors, making my trips to the bank exciting.

    I LOVE Capital One and will continue to bank with them…and MCU…and bank of Switzerland.

  • avatar
    Lorenzo

    If he’s talking about the long term average delinquency rate, that’s possibly okay. The difference is that disposable income isn’t what it used to be, and that rate may be too high for the current conditions. A second problem is that bank income isn’t what it used to be, making write-offs of bad loans more painful to the banking system. The fact that many banks borrow interest-free from the Fed and invest in treasuries instead of making loans should be a warning sign for the health of banks dealing with auto loan defaults.

  • avatar
    olddavid

    The best rated risks have unexpected problems. The most marginal will surprise by being “as agreed” for the entire term. Finding the sweet spot is the tough part. Then, you have to package a little of each into one basket. Great fun. For the masochist.

  • avatar
    sco

    “one has to be discerning in what loans you approve. It’s not the volume of loans; it’s the quality”

    I reject this message.

    Sincerely,
    Paul Blanco

  • avatar
    PrincipalDan

    I love that people don’t understand that just because the bank says you can borrow X amount, that doesn’t mean that you should borrow the maximum. I’m sure the banks and the automakers will offer to loan me $30-35K but I’m comfortable with less than $25,000 and that’s where I’ll keep it.

  • avatar
    Big Al from Oz

    “Pent up demand” might be an overstatement.

    If the “pent up demand” was that large why do the financiers require near on home mortgage length loans to move cars? Why is the vehicle oversupply increasing. What would happen if the US Federal Reserve stops printing money?

    Hmmm…..sounds like he’s justifying a position to suit him and the industry he represents and not the truth.

    I would take his comments with a grain of salt.

    • 0 avatar
      highdesertcat

      This does seem to be a topic with money mavens. I just checked my DVR and this was also a topic on Gerri Willis’ show today when she had Lauren Fix on and discussed auto loans.

      The price of cars is steadily rising and more and more people have to take out these long-term loans. Today’s borrowers do not seem deterred by the larger amounts and most lenders will gladly fork over the money to them.

      So, if “increasing auto loan delinquencies” = ” a return to “norm,”” then basically, nothing has changed and it is business as usual, except on a scale where the cost of the cars is higher than ever before.

      It doesn’t alter my plans since at my age I can’t get decent financing that doesn’t require me to donate both arms and both legs, and I believe it won’t alter the plans of most other people either.

      Young people will still obligate themselves to these loans, and there will be some who default on them. Just like before, except now maybe the amounts will be greater.

      Maybe what America needs is another Great Recession….

      • 0 avatar
        Big Al from Oz

        @Highdesertcat
        There are plenty of vehicle offerings in the US that will not break the bank.

        The reality is the money lenders are lending too much, especially if the lengths of loans is increasing.

        The US government should make a car loan can’t be any longer than 5 years for a new vehicle and 3 years for a second hand vehicle.

        • 0 avatar
          highdesertcat

          It’s really strange about what the US government involves itself in.

          Government intrusion extends to the most unlikely of issues but the common sense ones like loans and borrowing money seem to be off limits.

          In order for the lenders to make money, they must loan money. There is so much free money floating around because people with money are basically sitting on their hands, not spending the cash, not applying it to anything, and not investing it.

          It’s stagnant. Old people like me are sitting on a ton of cash money they keep in their stash at home and out of the banks, all because they fear that the current administration wants to redistribute America’s wealth from those who have it to those who don’t.

          This whole situation forces lenders to put their money into circulation in the form of loans in order for the lenders to make money and create income.

          So the loan application standards are relaxed, and we’re headed down the same path as prior to 2008. I see this in more and more “Buy Here, Pay Here” used car dealers popping up everywhere I go in the Great Southwest.

          No doubt the new car dealerships have taken notice and are applying pressure on lenders to help them move their iron off the lots.

          A vicious circle that will end in disaster, just like it did in 2008 and the years leading up to the Great Recession in America.

          Old people like me are forced to focus on looking out for our own instead of falling prey to inhibiting government programs and lenders that will finance us beyond our means.

          I don’t want any of my grandkids to have to take out a loan for their new car and be burdened by any indebtedness when they enter the workforce.

          • 0 avatar
            Big Al from Oz

            @Highdesertcat
            All of that printed US Fed money has found it’s way into developing nations as investments through Euro banks.

            So much for the Europeans tightening lending standards.

            My view is a restriction on loans doesn’t just protect the incompetent from borrowing, but it also protects the many that will come unstuck when another Freddie Mac/Fannie Mae, Lehmann Bros arises.

            The Wall St bankers and finacial whips can’t be trusted to make decisions in the national interest, when they only think of themselves and f#ck the world if they can profit.

            All of this printed money, protectionism, etc creates false economies.

            Sort of like maxing out one credit card, getting another to keep on existing.

            This isn’t sustainable.

            Car loans are no different. When the sh!t hit the fan, who will be the ones paying? The people who are liquid……again.

          • 0 avatar
            highdesertcat

            BAFO, I agree with what you wrote but I would add that there is now a new national political philosophy that has arisen in America, and that is of the never-ending taxpayer funded bailouts, handouts and nationalization.

            It started under Shrub and Hank Paulson. O***a and the ‘crats just doubled down on it, inspired by the Larry Summers economic philosophy and doctrine that you cannot ever dump enough money into the American economy to keep it afloat.

            The majority in America ate this sh!t up. Free money! Free food stamps. Free cell phones.

            So things have changed since Post-WWII America. I can live with that, as long as I don’t have to pay for it.

            It’s scary to think how many people with money in America have withdrawn their support by sitting on and sheltering their money.

            Loans of any kind usually go to the folks who do not have the cash to pay for their purchases.

            Some people like to offer the argument that you should conserve your capital and gamble with other people’s money in the form of a loan. I think that’s BS.

            I know of no one with money who prefers a loan over paying cash for their purchases, although old people often may want to redistribute their personal wealth before they die so the government doesn’t get a hold of it.

            In that case, they may choose to let Probate handle their financial affairs when they die penniless. But that normally only applies to people who have reached the age of 73 or older.

  • avatar
    CapVandal

    Where to start:

    1. I don’t know how many auto loans are ‘packaged’ as collateralized debt obligations. The market for these went to zero in 2008-2009. Banks can keep them for their own account or package them.

    2. The problem with pre 2008 CDO’s was the quality of the assets, the structures of the deal, and unrealistic ratings. And most of all, the total lack of due diligence on the part of the buyers.

    3. Post 2009 deals have none of these problems.

    4. Minor point but structured debt isn’t a derivative. A classic derivative is an instrument that ‘derives’ its price from that of an underlying asset. The value of an American call option, for example, is largely determined by the market price of the underlying asset.

    5. Buyers are no longer naive about these instruments. They actually read the prospectus. Well, maybe that is too much, but they had their come to Jesus moment and haven’t forgotten

    6. Rating agencies also had their come to Jesus experience and are much more conservative. They have downgraded the hell out of everything and race to be the first agency to do it.

    7. There is plenty of room in the bottom tranches. These are not typically sold to investors but are held by the principals of the deal. Anyone that is really curious can read the prospectus — which are available for free on the SEC web site. I actually read a fair chunk of an auto deal last year.

    8. Believe it or not — mortgage backed securities were sold in the 1920′s. And they went tits up in the 1930′s. No one that bought one of those deals is still alive — and I don’t expect to see the same abuses in the lifetime of current investors.

    9. We will NEVER see another CDO^2 — or CDO’s of CDO’s. They were unbelievably complex. No one could value these things with any precision and they were the worst of the worst.

    10. I agree that there are still sketchy instruments being traded … primarily Credit Default Swaps — which are financial weapons of mass destruction. These things need regulation. Unfortunately, a lot of them could simply move to the Cayman Islands or some other off shore, lightly regulated country.

    11. Simple common sense will tell you that auto loans that have interest rates of 20-30% have room for a LOT of defaults before they lose money.

    finis

    Sorry for the length.

    • 0 avatar
      Big Al from Oz

      @CapVandal
      So, if and when the sh!t hits the fan with these so called safe assets you speak of, what will the value of the assets be?

      How much is the quantitative easing or ‘money printing’ propping up asset prices?

      So, how safe and how real are the asset prices you speak of?

      • 0 avatar
        CapVandal

        The value of the assets depends on the tranch. I just looked at an Americredit deal — which is GM financial. It is $108,000,000. There are 5 tranches of notes that add up to $108,000,000. Plus there is over collaterization of about 8%. Plus there is excess interest, which is a big number. The bottom of the structure isn’t sold to the public and the parts that are — are bought by accredited investors.

        I would say that the risk on everything except the bottom trench rounds to zero.

        The over collateralization — there is risk in that, but it is fully recognized. It is kept by the people that set up the deal or someone else that know what they are doing.

        Remember that even if the buyer defaults, the note holders get the benefit of the down payment + whatever the car can be resold for. Plus, the average credit score was in the low 500′s which means that people getting these loans have jobs.

        Quantitive easing isn’t printing money. The fed buys assets for cash. This doesn’t increase the overall money supply. Cash is injected into the economy and bonds are taken out. It is popularly referred to as sterilization. The idea is that this process lowers interest rates — which has happened.

        The Fed + the GSE’s – Fannie Mae and Freddie Mac kept liquidity in the housing market and prevented housing prices from collapsing further. The GSE’s were taken over by the government and are now making money. Anyone that thinks that the ‘big boys’ were bailed out with this government intervention in the GSE should note that the senior management were fired and the owners — in this case stockholders, were essentially wiped out. The people that were bailed out were the holders of the GSE loans, which include pension funds, mutual funds, regular individuals — plus lots of other entities. But especially people that needed to move — sell a house and buy a house.

        I don’t expect to change anyone’s mind, but it is hard to get factual details. If anyone has another view of auto CDO’s I would be happy to hear it.

        • 0 avatar
          CapVandal

          Just to Clarify one point. A lot of economists would object to my characterization of QE. In fact, it is hard to get economists to agree on anything.

          QE and the Fed open market operations increase the monitory base or ‘narrow money’ or M1. Treasuries and agency mortgage backed securities (which are essentially government guaranteed) can’t be immediately spent and are either not money or ‘broad money’.

          However, if I printed money that looked authentic, I would spend it and it would increase the money supply. I sure as hell wouldn’t invest it in bonds.

          The Feds balance sheet increases on both the asset and liability side. http://www.frbsf.org/education/publications/doctor-econ/2010/march/banks-excess-reserves-monetary-policy
          Look at slide 2, which is a nice graph of the Fed’s balance sheet.

          I’m not an economist and haven’t read an economics book in decades.

          For people that are highly dissatisfied with the US economy, I would suggest spending some time in Argentina and reading Irving Fisher’s discussion of a deflationary spiral.
          http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf

          The only global economies that I think are better than the US are Norway and Switzerland. Norway has 5 million people, Switzerland 8 million and good luck getting in Switzerland.


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