Next Phase Of Carmageddon: The Banks

Tyler Durden's picture

Authored by Wolf Richter via,

Banks have started to tighten lending standards for prime and subprime borrowers, and it shows...

Banks are further tightening their lending standards for prime and subprime auto loans. This process started in Q2 2016, when auto lending had reached the apogee of loosey-goosey underwriting that had boosted sales of new and used vehicles to record levels and had ballooned auto loan-balances outstanding to the $1-trillion mark. It also boosted risks for lenders. Inevitably, subprime auto loans started running into trouble in 2016, and it was time to not throw the last trace of prudence into the wind entirely.

The chart below - based on data from the Fed’s Senior Loan Officer Survey on bank lending practices for the third quarter - shows the net percentage of banks tightening lending standards. The negative percentages below the red line signify net easing. It shows how loan officers have gradually, in fits and starts, dialed back their easing before Q2 2016 and ratcheted up their tightening after Q2 2016:

During Q3 2017, 10% of the banks tightened underwriting conditions, compared to the prior quarter, but 0% loosened underwriting conditions. In other words, the tightening is proceeding gradually, on a bank-by-bank basis, and the easing has stopped entirely.

“Banks reportedly tightened most terms surveyed for auto loans,” the report says. Specifically, here are some of the terms the banks tightened in Q3, which adds to the banks that tightening in prior quarters:

  • 7% net tightened conditions on minimum required down payments.
  • 5% net tightened conditions on credit scores
  • 8% net tightened granting loans to customers that did not meet credit scoring thresholds

In a set of special questions, the October survey asked why banks were changing credit standards or terms for prime and subprime borrowers “this year.” The reasons were nearly the same for both prime and subprime borrowers, but subprime is clearly the bigger concern. Here is what banks said about their reasons for tightening lending standards for subprime borrowers:

  • Less favorable or more uncertain economic outlook: 50% somewhat important; 30% very important.
  • Deterioration or expected deterioration in the quality of your bank’s existing loan portfolio: 30% somewhat important; 40% very important.
  • Reduced tolerance for risk: 30% somewhat important; 50% very important.
  • Less favorable or more uncertain expectations regarding collateral values [used vehicle values]: 40% somewhat important; 40% very important.
  • Lower or more uncertain resale value for these loans in the secondary market: 33% very important; 0% somewhat important.

Some of this tightening is already showing up in the data. For example, the average maturity of new-vehicle loans peaked in Q1 2017 at 67.4 months, according to Federal Reserve data. The data for Q3 is not yet available, but by Q2 the average maturity dropped to 66.5 months, the first major drop since 2011.

Note on the left side of the chart how the average maturity plunged during the Financial Crisis as credit was freezing up and as auto sales collapsed, and it was hard to get anything financed:

But the tightening hasn’t yet shown up in total auto loan balances outstanding, which jumped by $19 billion during the third quarter, likely boosted by the first batch of replacement sales from the hurricanes.

What has shown up is a massive adjustment of the data going back to Q4 2015. Since I keep the old data, I overlaid the prior unadjusted data (red line) and the current adjusted data (blue columns) in the chart below. The adjustment retroactively wiped out $39 billion in auto loan balances in Q4 2015. By Q1 2017, the adjustment had wiped out $41 billion:

Adjustment of data happens all the time. These are estimates that can be off, and occasionally, adjustments are made to try to put them back on track. But it does show that auto loans did not suddenly plunge in Q4 2015, as the chart based on the blue columns alone would have otherwise indicated.

That banks are tightening their auto-lending standards ever so gradually is another headwind the auto industry is facing. The hurricanes, by destroying or damaging a few hundred thousand vehicles, created some temporary replacement demand for new and used vehicles, some of it financed by insurance companies.

This replacement demand is now papering over the underlying problems of the industry that are constraining demand:

  • Too much auto debt
  • Too much “negative equity” in vehicles after years of loosey-goosey lending, which makes trading difficult
  • New vehicle prices that have moved out of reach
  • And incomes that have been stagnating for a large part of the population.

And these headwinds will still be there after the replacement demand from the hurricanes settles down.

Carmageddon for Tesla, Fiat Chrysler, Hyundai, and Kia. But not for all automakers. Read…  Pickup Sales Boom, Cars get crushed, Tesla Deliveries Plunge

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Cognitive Dissonance's picture

So does this mean I won't qualify for that $85,000 BMW with my $25,000 a year income?

Bigly's picture

We all see it.

EBT baby mamas in their 60k+ rides, manicured fake nails, and the latest: false eyelashes.

Hey, they are allowed to do this so can we blame them? Banks need go take a bath on this. The BANKS. The stupid car companies turned a blind eye so partially at fault

But just like housing, banks give away money and do not care if the sub prime loan gets paid in full. 

The Divided Stoopids of DuhMerica's picture

Fucking nappy headed wig racks!!!!!!!!!

Don't forget to mention their fake as hell hair as well.

Nekoti's picture

As long as the tax payer bailouts continue, what do the banks have to worry about?

JRobby's picture

The bailouts come in so many forms.

The rubber never hits the road so to speak as delinquencies rise, where are the regulators?


nmewn's picture

I'm sure the sales weasels can work it out for ya with a 20yr loan, w/zero down. Disregard the fine print of, if you don't pay it off you have to send your niece to Venezuelan bikini modeling school for six months.

Its only a formality ;-)

shizzledizzle's picture

Hell no, how does 120 months at $375 a month sound? Hell, well give you the extended warranty for $500 a month! Lord knows we have plenty of spare parts in unsold inventory.

buttmint's picture


You mean that late 1990s classic video game?

Here's what happens when you hit speed bumps at 200 mph!

JohnGaltUk's picture

Dude I still have my copy complete with the Splat Pack LOL

Manipuflation's picture

Only suckers buy German cars unless it is Volkswagon.  Trust me on this.  I did a deal where the seller was going to throw in a running and driving BMW on top of what I was buying.  I wouldn't even take it for free.  I could have sold it for scrap value I guess but is not worth the hassle.   

koaj's picture

I ran into a lady at the floooring store yesterday. Told me she just got a Nissan Murano below invoice price with no money down, 6 year financing at 0%. Insane! Yeah...they are really tightening things up

Singelguy's picture

Did she mention that the price was $80k?

Normalcy Bias's picture

RV's are still selling almost as fast as they can spit them out of the factories.

20 YEAR Financing makes it possible, and yet most RV's depreciate more rapidly than Autos.

cornflakesdisease's picture

Because folks are living in them.

Cognitive Dissonance's picture

The new home-ownership (on wheels) dream.

On the plus side it's easier to reposes than a traditional house.

RafterManFMJ's picture

...not really. It’s mobile, and with a camouflage paint job hard to find :)

Dukes's picture

Like asphalt black and WALmart parking lot stripes?

RafterManFMJ's picture

You been there. Respect!

Normalcy Bias's picture

Absolutely, that is a significant part of the RV market.

Even techies in CA are living in RV's. Traditional housing costs have become STUPID in many areas.

HRH Feant2's picture

I own a house. I can work anywhere I have internet so I want to go mobile and travel around! Living in the suburbs is boring. Plus? If I don't like my neighbor in an RV? I can move! GOOD.

I am going to keep my house, rent it out. It isn't fun anymore.

XBroker1's picture

Full time RVing gets old fast and isn't all that inexpensive. It's very easy to end up w/ more expenses living that way.

shizzledizzle's picture

Yea, and some guy I work with just traded in his and got a new one. Now he is $75k in debt. Keep in mind this camper would sell for $40k on a good day if he was lucky!  I built cash and waited patiently. Found a 2005 40 ft toy hualer for $10k cash. Knock on wood I haven't had any issues and love it. Neighbor has a 3 year old $40k camper he just had to replace the inverter on. Campers depriciate so fast buying new is a horrible Idea. Unfortunately people can't seem to put back any savings these days and pay 3 times what they are worth to get it on payments. The people I work with all make good money (100k plus) and are perpetually broke with brand new campers and brand new trucks. It's quite saddening actually. 

Normalcy Bias's picture

I work for one of the top dealers in TX.

My advice for 'hedgers is to; do your homework, buy USED, and ONLY after you've had the RV checked out by a reputable, experienced technician.

I know there are a lot of very intelligent people here, but sometimes they can be overconfident in areas where they have no experience.

I've seen people make that mistake in the Real Estate business as well.

XBroker1's picture

If I were to do the camper thing, I'd probably get a  new bare bones Ford Transiit small version and trick it out myself.  Ford dealer near me has a lifetime drivetrain warranty. As it is, I have an xB I can sleep in if I need to when traveling. Buying a camper where you haul around your black and gray water is a waste, IMO. Plenty of ways around that wasteful proposition.

shizzledizzle's picture

To each their own I guess. I think there is value in the fact that a camper and the truck to pull it are separate entities. When I park mine, I can drive my truck to the store, work, etc. You could always tow a car behind but that's going to hit you on the fuel economy as well as wear components on the car when it's not being used. In my particular situation I got a woman and two dogs with me and having the extra space (3 super slide outs) is a godsend. If you plan to live in it full time, the amount of space you have to move around really impacts the quality of life. Also mine has a onoan genset up front. While I don't really ever expect to rely on it it's good to have. I'm always parked at a RV park with hookups.

As for hualing grey and black water... You are aware there are drain valves on them right? No need to hual it around. 

TeethVillage88s's picture

I see tons of brand new RVs at nearby park.

They really seem like happy Vagabonds, they seem to all get along, kind of a nice picture.

HRH Feant2's picture

I am looking for an RV to live in full time. I did a search using Search Tempest (Craig's list aggregator) and emailed three people. None of them emailed me back. Guessing the RV sold. I was looking at used RVs in the $8K to $12K range, Class C, around 15 years old with only one or two owners and good maintenance records.

Yes, I know I will have to buy new tires, replace all the hoses, spark plugs, seal the top. I was hoping to get one with solar installed.

I may just drive down to Quartzite in January for the RTR in my SUV and see what I can find. I have some 100 oz. silver bars that don't take up much space!

HRH Feant2's picture

Ah, tyvm for the gentle reminder! I haven't been there before! I wanted to visit the Big Tent and RTR (rubber tramp Rendevous hosted by Bob Wells from the Utube site CheapRVLiving).

I know this site has a lot of readers and I posted links to Bob's site plus the name. He just went over 100K subscribers! Woo hoo and congrats to Bob Wells on getting the Silver Play button award from Utube!

buttmint's picture


doesn't matter if you approach Quartzite from east or West (Colorado River)--you scale this last hill and lo 'N BEHOLD'----an entire VALLEY filled with RVs as far as the eye can see!

The place begins to fill up now....pre and post Turkey Day. The place is a grey-haired MadMax Convivial Scene. Has several newspapers and great gossip mill. You will find your dream rig, fast. Lotsa RV mechanics  on location as well. No shit, Quartzite is IMPRESSIVE. The place empties out by Easter as the SNOWBIRDS clear out. Arizona get hot by Easter. It is a primo place to hang your hat 6 months. 

Caravaners (Euro trash term) also organize jaunts to watch spring major league baseball games in Phoenix and Tucson.

Suss out "THE SLABS" as well. These are freebie places to camp. The Slabs are old US Military R'nD rocket prep sites. Now RVers use them as a place to circle their wagons. I sure as hell hope you are into dune buggies and/or dirt motorbikes. That is the preferred means of transport!

shizzledizzle's picture

Craigslist and Facebook marketplace. If you find one at a good price be ready to move. I missed two because they sold before I could get there. Just make sure you inspect them well and don't be afraid to walk away from something that wasn't taken care of. 

TeethVillage88s's picture

People around here buy Antique Tractors, because they are sexy, collectable, and must be some symbol of status or intelligence...

Of course they all think they are smarter than me too.

- Dream Car, Money Pit, Hole in the Ocean, Hole in the Sky, Hole in the Garage for your Tractor? I don't have one of those.

NoDebt's picture

Getting a loan to buy a car is a basic human right.  Nobody should be denied access to debt servitude tied to a depreciating asset.  This is wrong and we should petition government to FORCE banks to loan money to people so they can buy things they can't afford (and might not even need).  And if we can hand the bill for this to taxpayers, those fucking assholes who think they can work hard and get ahead in life, so much the better.

I'm a little lit up right now, in case you can't tell.

Go buy a fucking car.  I don't care.  Or steal one.  Hell, I've been driving stolen cars for years now.  I have hundreds of different license plates in my basement.  I steal one, drive it for a month or so with a phony plate on the back and then leave it in the parking lot of an abandoned shopping mall with the keys in the ignition when I'm done with it and steal another one.


Nekoti's picture

Green arrow for the lit up part. On my way myself.

TalkToLind's picture

I like the way you talk.

cherry picker's picture

I love working and giving 99% to .gov to bail out those poor banks and their sub prime customers.

I steal other things that don't require license plates, like tractors, tanks, bulldozers, back hoes.  I like variety.

I'm thinking of stealing a few F-18 and F-35.  With the F-35 no one can see it, so they won't be able to catch me.  I don't think they have ignition keys as it would add another few billion to the price tag. :)

Sy Kloine Bee's picture

Make sure you bring an O2 bottle with you

RafterManFMJ's picture

Steal a tractor before you steal the F-35; you’ll spend more time towing it that you will flying it. A better use would be to steal some and plant potatoes in them.

CRM114's picture

Fast jets do not have ignition keys, or any other keys. On the other hand, the start up sequence is not obvious, and anyway the pilot who left it will have opened one of the many panels and pulled a couple of the hundreds of circuit breakers to disable it. Good luck with working that out. Or rather, bad luck - you'll kill yourself within about 20 seconds of take-off.

falconflight's picture

Already is law, in housing/loans; Community Reinvestment Act.

Even the so called conservative state of Texas has a program giving thousands of dollars to low income ticks who own autos that fail the smog test.  

TimeIsTheFire's picture

You might think that’s funny but I don’t. I worked my arse off for two years, saved money and bought a car (used, no one with accounting skills can afford a new car) to shuttle my family around, fully paid in cash of course. Three weeks ago some arsehole tried to steal it, but only managed to damage it. Now I have to stump up the cash to get it fixed. Fuck thieves, scum of the earth, lowest of the low. Don’t even have the brains to make their crime look legal, just take stuff that isn’t theirs. May they all burn in hell.

TeethVillage88s's picture

Risk On! Risk On!

Mortgage Debt Outstanding, All holders (MDOAH)
$14.590 Trillions of Dollars, Not Seasonally Adjusted, Sep 26, 2017

Total Consumer Credit Owned and Securitized, Outstanding (TOTALNS)
Observation: Aug 2017: 3,749.8390 Billions of Dollars, Not Seasonally Adjusted, Updated: Oct 6, 2017

Manipuflation's picture

That is pretty good right NoDebt.  People ask me "Well how many cars do you have?".  I don't know.  I wish I had kept that 05 Impala though.  Nice car really.  Fuck it, sell it.  I had it for a week.

GoyimUprising's picture

Cars are a money scam much like everything else they try to sell you.  I've been riding a bicycle year round for several years now.  I plan to buy a Yamaha WR250R dual sport motorcycle that gets 70mpg, can go on and off road and costs like $100 a year in insurance. I plan to continue using the bicycle for every day travel (I enjoy riding bicycle) and use the motorcycle for longer distance travel and to get a better job that involves travel.  This motorcycle hasn't changed in 20 years and as long as your change the oil and filters regularly, it runs like a beast for a little 250...  

Other motorcycle riders tell me that I won't be happy with the power, but I don't really think they truly know where the power comes from as they ride their motorcycles that get the same gas mileage as their cars and insurance that costs as much...