We haven’t minced words when it comes to our take on the US auto market. What’s abundantly clear from the numbers is that lenders are relaxing their standards and that this is in part driven by the same dynamic that steered the US housing market to dizzying heights in the lead up to the financial crisis. Here’s a recap [7] (complete with bad puns):
The much maligned "originate to sell" model - which was instrumental in making the American homeownership dream a reality for underqualified borrowers in the lead up to the crisis - is alive and well and is 'in the driver’s seat' so to speak when it comes to auto sales in America.
As we noted last month, in the consumer ABS space (which encompasses paper backed by student loans, credit cards, equipment, auto loans, and other, more esoteric types of consumer credit) auto loan-backed issuance accounts for half of the market and a quarter of auto ABS is backed by loans to subprime borrowers.
The push to feed the securitization machine begets more competition among lenders for a shrinking pool of creditworthy borrowers and when that pool dries up, well, the definition of "creditworthy" must necessarily be relaxed, otherwise the securitization machine stalls for lack of fuel.
By the numbers (Q1 data from Experian [8]):
- Average loan term for new cars is now 67 months — a record.
- Average loan term for used cars is now 62 months — a record.
- Loans with terms from 74 to 84 months made up 30% of all new vehicle financing — a record.
- Loans with terms from 74 to 84 months made up 16% of all used vehicle financing — a record.
- The average amount financed for a new vehicle was $28,711 — a record.
- The average payment for new vehicles was $488 — a record.
- The percentage of all new vehicles financed accounted for by leases was 31.46% — a record.
In light of the above, consider the following charts from Experian [9] which demonstrate, beyond a shadow of a doubt, that despite the fact that delinquency rates are largely flat, an enormous amount of risk is building behind the scenes in the automotive finance market.
The percentage of vehicles financed (both used and new) has risen steadily...
...while the percentage of used models without loans has declined markedly...
...and the non-prime segment is gaining share...
...while average payments and average total amount financed rise...
...and the total loan balance for the market nears $1 trillion...
* * *
But don't worry, because as we noted last week [10], someone you can trust has now been appointed chairman at one of the market's major players...
[11]
(Note: this chart was slightly modified from its original version)