It would appear that the exuberance over today's better-than-expected car sales data should be tempered significantly. Confirming our warnings, as the Office of the Comptroller of the Currency (OCC) explains [6], across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. With average loan-to-value rates above 100%, they have an ominous warning: "risk in auto-lending is beginning to emerge." We are sure this will be dismissed (just as the BIS' warning has been), but with surging charge-offs and increased repackaging (CLOs), and banks holding a lot of this debt, this 'bubble-financing' has all the ingredients for subprime 2.0 contagion.
Auto-loans are surging... Subprime auto-loans were up 10-fold in 2013...
As OCC reports, [6]
Auto lending remained a highly competitive product segment, as strong growth continued through the end of 2013.
[7]
Banks reported year-over-year growth of 11.3 percent in the third quarter of 2013 and 12.9 percent in the fourth quarter of 2013 (see figure 18). Banks continue to hold a sizable market share of outstanding loans of $250 billion, or 31 percent of the total auto lending market.
But risks are rising... Signs of Risk in Auto Lending Beginning to Emerge
Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident. Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance, and aftermarket accessories into the financing (see figure 26).
[8]
The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender types over the last year (see figure 27). These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently.
[9]
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Close your eyes and keep buying... the water is warm... Risk is "contained"
