By on May 3, 2017

dealership

April was the fourth consecutive month to see U.S. auto sales underperform compared to 2016, leading many to speculate that the long-awaited slump has finally arrived. New car sales aren’t the only thing slipping, as used vehicle values — diminished by a flood of off-lease stock and new car incentives — is on the same downward trajectory.

At the same time, the country’s biggest auto lenders have taken a look around and do not like what they see. No bank wants to be stuck with a low-value repossessed car, so purse strings are tightening across the United States. Securing that next loan just became harder.

Of course, this is the last thing any automaker wants to hear.

According to the Wall Street Journal, growing losses on defaulted auto loans have forced banks to dial back their generosity towards borrowers.

While the trend stands to hit subprime buyers the hardest, even those with good credit scores are starting to feel banks’ newfound caution. Wells Fargo recorded a 29-percent drop in auto loan originations in the past quarter, compared to a year prior. Santander Consumer USA saw a 21-percent drop in originations during the same period.

“It’s been an overheated sector,” Fifth Third Chief Executive Greg Carmichael told WSJ. “The auto business just isn’t as attractive right now.”

Annualized net losses on auto loans are up, hitting 10 percent late last year before dipping slightly. While the delinquency rate is on the upswing (especially among subprime borrowers), the reduction in used vehicle values plays a major role — banks are only recovering 51 percent of a repossessed car’s unpaid balance, according to S&P Global Ratings, down from 65 percent in 2011.

Fewer people being approved for loans, coupled with a glut of cheap used cars, should make a nervous auto industry even more pensive. The move to curtail auto loans comes as new car inventories soar. It’s a very different picture from the one seen over past several years, when new vehicles sales (and loan approvals) soared in the wake of the recession, though it has also been a long time coming.

[Image: Faris/Flickr (CC BY 2.0)]

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35 Comments on “Lenders Snatch Back the Piggy Bank After Taking a Hit on Auto Loans...”


  • avatar

    Just because someone will sign on the dotted line to a stupid deal does not mean you should offer it. I refuse to believe folks roll over debt, er, alternative equity, car to car…. insane.

    • 0 avatar
      SCE to AUX

      “…does not mean you should offer it”

      In America, we nobly call that ‘giving someone a second chance’, rather than assuming their deadbeat ways will continue.

    • 0 avatar
      kvndoom

      I did just that for the longest time. It was a mental disease or something.

      Let’s just say that while you can probably pay $60,000 for a new Dodge Ram off the lot pretty easily today (BIG TEXAS HELLCAT HARLEY RANCH DALLAS COWBOYS TRUMP RUMBLEBEE INDY THATTHINGHASAHEMI EDITION), I managed to do that in 2001.

      Ugh, I don’t miss “old me” at all.

      • 0 avatar
        Lorenzo

        A lot of people do that, and they’re not stupid or financially uneducated. It’s a kind of tunnel vision where income is steady and increasing, and maintaining that upward social trajectory involves only the monthly outgo vs. income, instead of the long view. You’re one who got over it; I know people who can’t stop rolling over debt, whether for a better car or a better house, or better whatever. For them, the crash will be ugly.

  • avatar
    SCE to AUX

    Those are staggering numbers.

    Is this trend also happening at the mfrs’ captive financiers?

    How long before someone cries ‘discrimination’ against the financially challenged, and the loan gates are re-opened? Same thing happened in housing, since we want the markets to be ‘available to all people’.

    I would guess most defaults occur in the first year or two, making the low recovery rate of 51% of the balance a real problem.

    • 0 avatar
      highdesertcat

      “Those are staggering numbers.”

      Yes they are, staggering numbers!

      Maybe we should blame George W. Bush for this mess, too. Isn’t that what we heard from the last guy?

      The new guy said the last administration left him a mess. Is this just the beginning, starting with the auto-financing sector?

      Disgusting.

      • 0 avatar
        Lou_BC

        highdesertcat – it was Bush deregulation of the financial sector that lead to the 2008 melt down.

        “The new guy said the last administration left him a mess.”

        “The new guy” is full of sh!t.

        Statistically only 3% of what “the new guy” says is 100% true.

        Please post the economic indices that show #emptypotus inherited a mess?

        • 0 avatar
          4drSedan

          Lou, does BC stand for British Columbia?

        • 0 avatar
          deanst

          It was actually Clinton who started the deregulation. He was also the guy who made student loans bankruptcy-proof, which will be the next big financial disaster.

          • 0 avatar
            highdesertcat

            “student loans bankruptcy-proof, which will be the next big financial disaster.”

            I can believe that.

            Does anyone know how the rich guy from Manhattan feels about student loans?

            We already know how he feels about the Paris Accord, because he’s leaning toward pulling out of it.

          • 0 avatar
            Salzigtal

            Deregulation (big government is BAD) predates Clinton by decades: https://en.wikipedia.org/wiki/Savings_and_loan_crisis The 1st one. Not to be confused with the Stock Market crashes 1-6.

        • 0 avatar
          SCE to AUX

          @Lou_BC:

          I think it’s fair to say that every President inherits a mess.

          Some messes take longer to clean up than others, but six years on, it’s tiring to hear about what the last guy left you.

          Off topic, but I believe each US President should get one 6-year term only. Campaigning for Term Two wipes out the 2nd 2 years of the 1st term anyway, and 6 years ought to be enough time to do some stuff.

          • 0 avatar
            Lou_BC

            SCE to AUX – I do agree that there is always something to clean up form the prior establishment but often that “mess” is because of differences in political ideology.
            Your “term” comment is interesting. I belonged to a local dirt bike club and the executive terms were 1 year. Nothing ever got done since it took at least a year to settle into the position, formulate a plan and then implement it. When I got elected, myself and the other executive changed it to 2 year terms which worked much better.

          • 0 avatar
            cdotson

            “Campaigning for Term Two wipes out the 2nd 2 years of the 1st term anyway”

            That’s a feature, not a bug.

        • 0 avatar
          Salzigtal

          POTUS Asteriscus V

    • 0 avatar
      never_follow

      As someone who worked for a captive financier, the worst I ever saw was a 70k Civic level car, and this was a year and a half ago. Lots of companies were willing to roll negative equity into loans, and I don’t imagine they’d stop until they were bitten hard enough.

      I’m no longer in that industry, but friends say that it’s same sh*t, different day. They’re thinking that the merry go round might break down soon though.

  • avatar
    Stumpaster

    Hurray! Looking forward to my visits to the dealers in the fall.

  • avatar
    stevelovescars

    It seems to me that the staggering statistics here aren’t fully explained. How much is the default issue is concentrated in sub-prime industry vs conventional and captive loans?

    I am not familiar with all of the ins and outs of the subprime auto financing industry, but their profits must be enormous given the interest rates and upnfront fees they charge. “Unrecovered loan balance” means little when a customer has been making a year’s payments of nearly all interest at a usury rate on a car that was likely garbage and overpriced to begin with. I find it hard to believe that they are really losing money rather than seeing reduced profits. There is a difference. And not to sound all socialist, but if a customer is having trouble making payments at 30% interest and is about to default, wouldn’t the bank and the customer both be better off if the interest were reduced and the default is avoided? Instead, the banks pile on the pain and raise rates pushing people into increasingly desperate straights.

    • 0 avatar
      87 Morgan

      I would like the ‘industry’ to define the definition of a sub prime deal/borrower.

      Is it credit score below 650? 580?
      How about deal structure. How do you define a loan to someone with a 750 fico at 4.2% for 70k with a duration of 84 months on a Mercedes/BMW/Lexus that had a MSRP of $66,410 but they put no money down. Is this a sub prime deal? The one described above happens every single day, repeatedly.

      I respectfully submit that what is assumed here on TTAC as a sub prime is not what is driving the loss ratios. It is NOT the 21% borrower on the Dodge Avenger/200/Mitsu product. It is the ones with good credit buying way more than they can afford with little cash investment financed for a loan term that completely skews the depreciation curve.

      • 0 avatar
        deanst

        Subprime largely references a FICO score. As long as unemployment remains low, the majority of the guys putting nothing done on their BMW will not be an issue. The problems ARE with the subprime borrower with the Mitsubishi. As mentioned in the article, loss rates for these guys are already around 10%. But for perspective, ford’s loan pool is only about 5% sub prime, and GM’s about 15%. These firms remain strongly profitable – its the firms who specialize in subprime who will suffer. And yes these guys are hugely profitable when times are good, but can lose a few years profit (or worse) in a downturn.

      • 0 avatar
        Garrett

        Subprime is not about FICO score alone.

        Subprime can mean someone with a FICO score below 620…or it could be someone with a 680 score and some additional risk layering, or it could be someone with a 720 score who has a loan product that is structured in a manner befitting someone with a really low credit score.

        Think back to mortgages: any borrower who got a 2/28 ARM is a subprime borrower, even if they had an 800 FICO score. A borrower who appears prime but who got a mortgage through a subprime lender? Consider them subprime as well.

  • avatar
    orenwolf

    Bark hit this trend dead-on in one of his last op-eds here.

    Well done, sir.

    • 0 avatar
      deanst

      Bark was the idiot who claimed that the banks would somehow demand high prices on used vehicles! He had some useful insights, but was oblivious to basic economics.

      • 0 avatar
        28-Cars-Later

        If banks were in those used vehicles for too high of a price, why would they not be demanding a high price when they go to sell them?

        • 0 avatar
          srh

          It matters not how much the banks are into a car for. Banks aren’t in the business of warehousing cars, and the market will dictate what those cars sell for.

          That was where Bark’s completely misunderstanding of economics shone bright.

        • 0 avatar
          bikegoesbaa

          Because they can’t “demand” that buyers pay above market pricing regardless of how much they have into the vehicle.

  • avatar
    enzl

    This article is confusing, as the stats and the definitions used are unclear.

    As someone who makes a living on this stuff (supervising F&Is and managing banking relationships for retailers), I think we would all be better served by some clarity in exactly what is being discussed.

    Certain lenders, by their very nature (Santander comes to mind), have a business model that oftentimes dispenses with POI (Proof of Income) and provides the back-end to Chrysler Capital new car financing. Is it any wonder with those types of practices, there are higher default rates (as the economy stagnates) and the recovery % is lower (Have you seen the residuals on most FCA products?)

    That type of info would give these articles context. Telling me that former deadbeats (as that’s what most subprime customers usually are) are more likely to exhibit the behaviors associated with credit unworthiness is simply retelling the obvious story when car sales stall and manufacturers and their retailers have #s to hit each month.

    You want good stories, just wait until these upside-down repos go to collection – those anecdotes are precious. I think we’ve exhausted the ‘subprime mortgage lesson not learned for cars’ stories, as they’re simply not comparable or factually similar in any way.

    • 0 avatar
      28-Cars-Later

      “Have you seen the residuals on most FCA products?”

      Yes. If they could have combined decent reliability/quality in most of their products (as opposed to hit or miss), they would be a screaming deal used.

      • 0 avatar
        pdieten

        The residuals are that low BECAUSE of the reliability and quality issues. The market is pretty well aware that, of all the American and Japanese nameplates, FCA is the only one that can’t build reliable vehicles.

    • 0 avatar
      87 Morgan

      enzl…I believe we are in the same profession. I have opined multiple times that a comparison of auto loan defaults to the mortgage defaults of the late 00’s are not congruent in any fashion other than mortgages and car loans both involve dollars lent to someone for a piece of collateral. From there, the similarities cease to exist.

      These articles that reference Santander never seem to mention the acquisition fees they charge and how those funds are then used to offset losses at auction.
      I think the CU’s have a potentially bigger issue on their hands than Santander etal.

    • 0 avatar
      JohnTaurus

      “…have a business model that oftentimes dispenses with POI (Proof of Income)…”

      I had no idea that was possible. Crazy.

  • avatar
    MrGrieves

    My Aunt who has marginal income, crushing debt, and a driving record that has resulted in her car insurance being cancelled on more than one occasion just leased a new Jetta SEL Sedan thru VW Financial Services. She ended up with a fairly low down payment and reasonable lease payments for 36 months. The credit spigots are running full flow right now…

  • avatar
    tomLU86

    We’ve been on the verge of a big mess for my entire adult life.

    Political Ideology has a lot to do with how one defines a mess.

    Taking ideology out, people with college debts owe more than they can pay (I think we are over a $1 trillion in the hole).

    Bad house and car loans (for houses and cars purchased)

    Our govt owes way more than it can pay (for past spending).

    On top of that, the USA was one of the first modern societies. WWII did not destroy our cities. So our water system–older, needs updating. Will cost hundreds of billions. Ditto the electric grid.

    We all see the potholes. They will get worse.

    Where will the money come from? The US of A cannot generate the wealth it needs to provide the lifestyle we as a society want/would like.

    (They used to say) Everyone wants to live an American.

    Today (collectively), Americans can’t afford to live like Americans.

    Still, I enjoy this website :)


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