One of the more important data points in today's G.19 (consumer credit release) statement was that the Loan To Value ratio on vehicle financings (at least those reported by the government) in January dropped to 80%, from 81.8% in December, which is a new all time low in the history of the series (chart 1). The recent swing in this ratio has been very perplexing: the plunge from 95.1% in July 2008 just before Lehman to 84.9% in September of 2009 is explainable: after all lending virtually ceased and banks were cautious with lending out any money absent a material depreciation buffer (and yes, at the peak of the credit bubble, the LTV ratio hit 100.4% in September 2006, when banks were willing to finance more than the value of the car, confirming just how much excess credit money was sloshing around courtesy of a cranking securitization ponzi and a humming shadow banking system). Then following the March 2009 lows, LTV ratios once again moved higher and peaked in December 2009/January 2010. They have been in decline ever since, and the decline has accelerated over the past 4 months, when it was 86.5% in September, down to 80% in January. In absolute terms, this means that in January the amount financed was $26,673.4 per car, the lowest since February 2009. Yet this has happened even as the average car prices continues to rise, and the implied January 2011 car price was $33,342. In other words, the average equity check that buyers have to finance is a record $6,668! (chart 2)
Perhaps the unwillingness of banks to fund purchases at a higher LTV is precisely the reason why GM recently launched GMAC 2 by offering zero percent down loans for most of its models. After all the best way to avoid bank scrutiny is through your own captive financing arm. Then the only question remaining is why are banks suddenly, and so dramatically, leery of offering car loans at such a discount to historical LTV (the long term average LTV is 90%): either, this is a confirmation that the bulk of responsible borrowers have already taken advantage of bank lending services, and the only remaining ones are those who have to pledge far more collateral, or, less probable, banks are suddenly concerned about the residual value, accelerated depreciation, and the quality of recent car production. Either way, this trend confirms that more and more "subprime consumer" focused car companies will need to launch their own captive financing companies (and hope to become TBTF in the process) or else see sales plunge as fewer consumers can afford the record money down check of nearly seven thousand.
Historical Loan To Value:
Comparison of Amount Funded, Car Price, And Equity Check: