Subprime Auto Loans

The Next Subprime Crisis Is Here: 12 Signs That A Day Of Reckoning Has Arrived For The U.S. Auto Industry

In 2008, subprime mortgages almost single-handedly took down the entire financial system, and now a new subprime crisis is here.  In recent years, the auto industry has been able to boost sales by aggressively pushing people into auto loans that they cannot afford.  In particular, auto loans made to consumers with subprime credit have been accounting for an increasingly larger percentage of the market.  Unfortunately, when you make loans to people that should not be getting them, eventually a lot of those loans are going to start to go bad, and that is precisely what is happening now.  Meanwhile, automakers and dealers are starting to panic as sales have begun to fall and used car prices have started to crash.  If you work in the auto industry, you might remember how horrible the last recession was, and this new downturn could eventually turn out to be even worse.  The following are 12 signs that a day of reckoning has arrived for the U.S. auto industry…

#1 Seven out of the eight largest automakers in the United States fell short of their sales projections in March.

#2 Overall, U.S. auto sales so far in 2017 have been described as a “disaster” despite record spending on consumer incentives by automakers.

#3 Dealer inventories are now at the highest level that we have seen since the last financial crisis.  Why this is so troubling is because there are a whole lot of unsold vehicles just sitting there doing nothing, and this is becoming a major financial problem for many dealers.

#4 It now takes an average of 74 days before a dealer is able to sell a new vehicle.  This number is also the highest that it has been since the last financial crisis.

#5 Not only is Ford projecting that sales will fall this year, they are also projecting that sales will fall in 2018 as well.

#6 Used vehicle prices are already starting to decline dramatically…

The used-vehicle price index from the National Automobile Dealers Association posted a 3.8% decline in February compared to the prior month. NADA also said wholesale prices fell 1.6%.

#7 As I discussed yesterday, Morgan Stanley is projecting that used car prices “could crash by up to 50%” over the next four or five years.

#8 Right now, more than a million Americans are behind on their payments on their auto loans.  This is something that has not happened since the last financial crisis.

#9 In 2017, U.S. consumers are more “underwater” on their auto loans than they have ever been before.

#10 Subprime auto loan losses have soared to their highest level since the last financial crisis, and the delinquency rate on those loans has risen to the highest level that we have seen since the last financial crisis.  By now, I am sure that you are starting to notice a pattern in these data points.

#11 At this moment, approximately $200,000,000,000 has been loaned out by auto lenders to consumers with subprime credit.

#12 Just like with subprime mortgages in the run up to the last financial crisis, subprime auto loans have been bundled together and sold as “securities” to investors.  And just like last time around, this has turned out to be a recipe for disaster…

Many auto loans, including those considered subprime, are securitized and sold to investors. But Morgan Stanley recently reported that the share of auto securities tied to “deep subprime” loans – those given to borrowers with a FICO credit score below 550 — has risen from 5.1 percent in 2010 to 32.5 percent today. It said defaults on those bonds have risen significantly in the past five years.

Almost a quarter of the more than $1.1 trillion in U.S. auto loan debt is owed by subprime borrowers, and delinquency rates have hit their highest point in seven years.

In the old days, you could always count on the U.S. auto industry to bounce back eventually because of the economic strength of average U.S. consumers.

Unfortunately, the middle class in America is being systematically hollowed out by long-term economic trends that our leaders in Washington D.C. have consistently ignored.

We have become a nation of economic extremes.  There are more millionaires in this country than ever before, but meanwhile poverty is exploding in communities all over the country.

If you live in a prosperous area, things may be going great where you live for the moment.  But as Gallup has discovered, an all-time record high percentage of Americans are worrying “a great deal” about hunger and homelessness these days…

Over the past two years, an average of 67% of lower-income U.S. adults, up from 51% from 2010-2011, have worried “a great deal” about the problem of hunger and homelessness in the country. Concern has also increased among middle- and upper-income Americans, but they still worry far less than do lower-income Americans.

You may have plenty of money in your bank account, and so for you hunger and homelessness are not very big issues.  But for those that are just scraping by from month to month, having enough food and a place to sleep at night are top priorities.  Here is more from Gallup…

Americans at all income levels are expressing greater concern about hunger and homelessness, and it is the top worry among lower-income Americans, who are most likely to struggle to pay for adequate food and housing.

In addition to the woes of the auto industry, the retail industry is going through the worst wave of store closings in modern American history, pension funds are melting down all over the nation, and stocks are primed for a crash of epic proportions.  Things are lining up just right for the kind of scenario that I laid out in The Beginning Of The End, but unfortunately most people are not listening to the warnings.

The same thing happened just before the great financial crisis of 2008.  All of the warning signs were there well in advance, and many of the experts were warning about what was coming as early as 2005.  But because it did not happen immediately, a lot of people greatly mocked the warnings.

But then the fall of 2008 arrived and all of the mockers suddenly went silent.

As you can see from the numbers that I shared above, a new crisis has already arrived.

The only question now is how bad it will ultimately turn out to be.

As always, let us hope for the best, but let us also get prepared for the worst.

The One Trillion Dollar Consumer Auto Loan Bubble Is Beginning To Burst

Soap Bubble - Public DomainDo you remember the subprime mortgage meltdown from the last financial crisis?  Well, this time around we are facing a subprime auto loan meltdown.  In recent years, auto lenders have become more and more aggressive, and they have been increasingly willing to lend money to people that should not be borrowing money to buy a new vehicle under any circumstances.  Just like with subprime mortgages, this strategy seemed to pay off at first, but now economic reality is beginning to be felt in a major way.  Delinquency rates are up by double digit percentages, and major auto lenders are bracing for hundreds of millions of dollars of losses.  We are a nation that is absolutely drowning in debt, and we are most definitely going to reap what we have sown.

The size of this market is larger than you may imagine.  Earlier this year, the auto loan bubble surpassed the one trillion dollar mark for the first time ever…

Americans are borrowing more than ever for new and used vehicles, and 30- and 60-day delinquency rates rose in the second quarter, according to the automotive arm of one of the nation’s largest credit bureaus.

The total balance of all outstanding auto loans reached $1.027 trillion between April 1 and June 30, the second consecutive quarter that it surpassed the $1-trillion mark, reports Experian Automotive.

The average size of an auto loan is also at a record high.  At $29,880, it is now just a shade under $30,000.

In order to try to help people afford the payments, auto lenders are now stretching loans out for six or even seven years.  At this point it is almost like getting a mortgage.

But even with those stretched out loans, the average monthly auto loan payment is now up to a record 499 dollars.

That is the average loan size.  To me, this is absolutely infuriating, because only a very small percentage of wealthy Americans are able to afford a $499 monthly payment on a single vehicle.

Many middle class American families are only bringing in three or four thousand dollars a month (before taxes).  How in the world do they think that they can afford a five hundred dollar monthly auto loan payment on just one vehicle?

Just like with subprime mortgages, people are being taken advantage of severely, and the end result is going to be catastrophic for the U.S. financial system.

Already, auto loan delinquencies are rising to very frightening levels.  In July, 60 day subprime loan delinquencies were up 13 percent on a month-over-month basis and were up 17 percent compared to the same month last year.

Prime delinquencies were up 12 percent on a month-over-month basis and were up 21 percent compared to the same month last year.

We have a huge crisis on our hands, and major auto lenders are setting aside massive amounts of cash in order to try to cover these losses.  The following comes from USA Today…

In a quarterly filing with the Securities and Exchange Commission, Ford reported in the first half of this year it allowed $449 million for credit losses, a 34% increase from the first half of 2015.

General Motors reported in a similar filing that it set aside $864 million for credit losses in that same period of 2016, up 14% from a year earlier.

Meanwhile, other big corporations are also alarmed about the economic health of average U.S. consumers.  Just check out what Dollar General CEO Todd Vasos had to say about this just the other day…

I know that when we look at globally the overall U.S. population, it seems like things are getting better. But when you really start breaking it down and you look at that core consumer that we serve on the lower economic scale that’s out there, that demographic, things have not gotten any better for her, and arguably, they’re worse. And they’re worse, because rents are accelerating, healthcare is accelerating on her at a very, very rapid clip.

The stock market may seem to be saying that everything is fine (for the moment), but the hard economic numbers are telling a completely different story.  What we are experiencing right now looks so similar to 2008, and this includes big institutions just dropping dead seemingly out of the blue.  On Tuesday, we learned that ITT Technical Institute is immediately shutting down and permanently closing all locations.  This is from a Los Angeles Times report…

The company that operates the for-profit chain, one of the country’s largest, announced that it was permanently closing all its campuses nationwide. It blamed the shutdown on the recent move by the U.S. Education Department to ban ITT from enrolling new students who use federal financial aid.

“Two quarters ago there were rumors about the school having problems, but they told us that anyone who was already a student would be allowed to finish,” said Wiggins, who works as the assistant manager for a family-run auto parts business and went to ITT to open new opportunities.

“Am I angry?” he said. “I’m like angry times 10 million.”

As a result of this shutdown, 35,000 students are suddenly left out in the cold and approximately 8,000 employees have lost their jobs.

This is what happens during a major economic downturn.  Large institutions that may have been struggling under the surface for quite a while suddenly give up and drop a bomb on those that were depending on them.  In the months ahead, there will be a lot more examples of this.

Already, some of the biggest corporate names in America have been laying off thousands of workers in 2016.  Mass layoffs are usually an early warning sign that big trouble is ahead, so keep a close eye on those companies.

The pace of the economic decline has been a bit slower than many (including myself) originally anticipated, but without a doubt it has continued.

And it is undeniable that the stage is set for a crisis that will absolutely dwarf 2008.  Our national debt has nearly doubled since the beginning of the last crisis, corporate debt has doubled, student loan debt has crossed the trillion dollar mark, auto loan debt has crossed the trillion dollar mark, and total household debt has crossed the 12 trillion dollar mark.

We are living in the greatest debt bubble in world history, and there are signs that this giant bubble is now starting to burst.  And when it does, the pain is going to be greater than most people would dare to imagine.

The Subprime Auto Loan Meltdown Is Here

Debt Loans Auto Loans - Public DomainUh oh – here we go again.  Do you remember the subprime mortgage meltdown during the last financial crisis?  Well, now a similar thing is happening with auto loans.  The auto industry has been doing better than many other areas of the economy in recent years, but this “mini-boom” was fueled in large part by customers with subprime credit.  According to Equifax, an astounding 23.5 percent of all new auto loans were made to subprime borrowers in 2015.  At this point, there is a total of somewhere around $200 billion in subprime auto loans floating around out there, and many of these loans have been “repackaged” and sold to investors.  I know – all of this sounds a little too close for comfort to what happened with subprime mortgages the last time around.  We never seem to learn from our mistakes, and a lot of investors are going to end up paying the price.

Everything would be fine if the number of subprime borrowers not making their payments was extremely low.  And that was true for a while, but now delinquency rates and default rates are rising to levels that we haven’t seen since the last recession.  The following comes from Time Magazine…

People, especially those with shaky credit, are having a tougher time than usual making their car payments.

According to Bloomberg, almost 5% of subprime car loans that were bundled into securities and sold to investors are delinquent, and the default rate is even higher than that. (Depending on who’s counting, delinquency is up to three or four months behind in payments; default is what happens after that). At just over 12% in January, the default rate jumped one entire percentage point in just a month. Both delinquency and default rates are now the highest they’ve been since 2010, when the ripple effects of the recession still weighed heavily on many Americans’ finances.

The chart below was posted by David Stockman, and it shows how the delinquency rate for subprime borrowers has hit the highest level since 2009.  In fact, we are not too far away from totally smashing through the previous highs that were set during the last crisis…

Subprime Auto Loans

It is quite foolish to try to sell expensive cars to people with bad credit.  This is especially true now that the economy is slowing down significantly in many areas.  But people are greedy and they are going to do what they are going to do.

The most disturbing thing to me is that many of these loans are being “repackaged” and sold off to investors as “solid investments”.  The following description of what has been happening comes from Wolf Richter…

The business of “repackaging” these loans, including subprime and deep-subprime loans, into asset backed securities has also been booming. These ABS are structured with different tranches, so that the highest tranches – the last ones to absorb any losses – can be stamped with high credit ratings and offloaded to bond mutual funds designed for retail investors.

Deep-subprime borrowers are high-risk. Typically they have credit scores below 550. To make it worth everyone’s while, they get stuffed into loans often with interest rates above 20%. To make payments even remotely possible at these rates, terms are often stretched to 84 months. Borrowers are typically upside down in their vehicle: the negative equity of their trade-in, along with title, taxes, and license fees, and a hefty dealer profit are rolled into the loan. When the lender repossesses the vehicle, losses add up in a hurry.

It almost makes you want to tear your hair out.

This is exactly the kind of thing that caused so much chaos with subprime mortgages.

When will we ever learn?

Meanwhile, we continue to get even more numbers that indicate that a substantial economic slowdown has already begun…

We just got the clearest sign yet that something is wrong with the US economy.

Markit Economics’ monthly flash services purchasing manager’s index, a preliminary reading on the sector, fell into contraction for the first time in over two years.

The tentative February index was reported Wednesday at 49.8.

Statistic after statistic is telling us that a new recession is already here.  And of course some would argue that the last recession never actually ended.  According to John Williams of shadowstats.com, the U.S. economy has continually been in contraction mode since 2005.

If we do not learn from history, we are doomed to repeat it.  All over the world, “non-performing loans” are starting to become a major problem, and already some financial institutions are starting to get tighter with credit.

As credit conditions tighten up, this is going to cause economic activity to slow down even more.  And as economic activity slows down, it is going to become even harder for ordinary people to make their debt payments.

Deflationary forces are on the rise, and most global central banks are just about out of ammunition at this point.

Everyone knew that the global debt bubble could not keep expanding much faster than the overall rate of economic growth forever.

It was only a matter of time until the bubble burst.

Now we can see signs of crisis popping up all around us, and things are only going to get worse in the months ahead…