In The News: Auto Loans Could be the Next Consumer Credit Bubble to Burst
More borrowers with spotty credit are failing to make monthly car payments on time, a troubling sign for investors who have snapped up billions of dollars of securities backed by risky auto debt.
Delinquencies on subprime auto loans packaged into bonds rose in January to 4.7 percent, a level not seen since 2010, according to data from Wells Fargo & Co.
Rising delinquencies come as a warning sign that more loans may end up in default down the road, said John McElravey, an analyst at the bank. What may be most troubling, however, is that the default rate is already climbing, up to 12.3 percent in January from 11.3 the prior month. That is the highest rate since 2010, the data show.
Securities backed by auto loans are structured to absorb a portion of anticipated defaults, but concerns have mounted over the last year that cumulative losses on auto loan securitizations may end up exceeding initial estimates, thanks to declining underwriting standards.
Loan performance may be worsening because of a number of factors, including a rise in initial jobless claims, said McElravey.
He identified an auto finance company in Texas, for example, that began experiencing a noticeable increase in net losses six months ago. The increase coincided with a rise in unemployment in Texas, where the oil industry has been hit hard by prolonged low prices, he said.
The data are worth watching closely, he added, “especially against the backdrop of sub-par economic growth.”