More Bad News For Autos: Wells Fargo Car Loan Originations Crash To All Time Low

Joining the Q3 roster of banks that beat yet which all surprised investors with a cautionary red flag (for the other banks this involved a drop in FICC trading revenue and a sharp increase in loan loss reserves), moments ago Wells Fargo also reported better than expected Q3 EPS of $1.04 (exp. $1.03) which however was the result of a material 20 cent litigation accrual addback to a GAAP EPS of $0.84, indicating that management is expecting significant lawsuits in the coming months. Worse, the bank missed badly on the top line (revenue of $21.9bn vs exp. $22.4bn), but the reason why the stock has tanked by over 3% pre market is the unexpected miss in the company's Net Interest Margin, which slumped from 2.90% to 2.87%, well below the 2.92% expected, and resulting in a lower sequential Net Interest Income number of $12.476 billion.

Not helping matters is that the company's mortgage loan pipeline once again took a sharp leg lower. While total originations in Q3 rose to $59 billion sequentially (and down 16% Y/Y), what was more disappointing was the 27% Y/Y drop in Mortgage Applications, which declined to $73 billion in Q3, while the Mortgage Application pipeline, the most informative advance look at the state of the housing market, tumbled 42% to just $29 billion, which was just shy of lowest prints since the financial crisis.

However, while the bank's ongoing mortgage pains - traditionally the bread and butter for the largest US mortgage lender - was disappointing, if not exactly surprising for a bank that has seen scandal after scandal in recent months, there was a flashing red light elsewhere: following the sharp plunge last quarter, Wells reported that the decline in auto loan originations continued, tumbling 47% Y/Y to only $4.3 billion, the lowest print since the bank started disclosing this item back in 2013.

The lack of loan origination hit Wells at the bottom line, with total average loans $951.9 billion, down $5.5BN q/q, as a result of "lower commercial real estate and commercial & industrial loans" offset by "consumer loans up $201 million as growth in real estate 1-4 family first mortgage loans and consumer credit card was largely offset by the continued decline in auto on tighter credit underwriting standards, as well as continued paydowns in junior lien mortgage loans."

As for the ongoing slide in auto loan, Wells blamed "tighter credit underwriting standards", which if accurate is ominous for the broader auto sector which is now facing not only surging delinquencies primarily among subprime borrowers, but according to Wells, is about to get squeezed "bigly" on the supply side. It also means that auto sales in the coming quarters, already poor, are about to suffer an even sharper decline, pressuring not only overall US debt-funded consumer spending but also manufacturing production among the auto suppliers and downstream sectors, with adverse consequences for the broader economy.

Source: Wells Fargo


GunnerySgtHartman Dr. Engali Fri, 10/13/2017 - 10:40 Permalink

Is it really any surprise that car loans are on the decline while at the same time, leases are increasing?  The math favors leasing nowadays.  Example:Ford offers a 36-month lease on a new Focus for $169/month.  The same car, financing $17,525 for 36 months at 0%, has a payment of $486.81/month; at 60 months/0%, the payment is $292.14/month (tax/title/license not included).  Given how people are nearly tapped out, many of them will lease because of the lower payment.

In reply to by Dr. Engali

jerry_theking_lawler Dr. Engali Fri, 10/13/2017 - 10:56 Permalink

The reason is everyone is levered up already...each house has 2+ cars plus mortgage plus toys (boats, vacation houses, etc). There is almost no way to keep increasing borrowing if there is no increase in jobs, wages, and higher taxes (Ocare plus real taxes both state/fed). No, this pig's lipstick is starting to smear. Look at what is happening in the entire market and you will see that the only reason for the stock market's continual melt up is .fed and hope of tax reform. Otherwise, real earnigns are declining, jobs are being lost hand over fist, wages are stagnant,etc. Good luck, but I think we are in 2006-2007 comparable frame now....except the .fed is fully invested in markets now versus just dabbling around.

In reply to by Dr. Engali

cherry picker Fri, 10/13/2017 - 08:58 Permalink

I used to buy a new car every year or so 15 years ago but no more.I don't want a car with a black box in it, one you have to log in to the communications system, one which watches your every move and one they can shut down at will. Nor do I want to play games or have to pay through the nose to repair as a circuit went nuts.I like KISS cars, keep it simple stupid.Keep your new cars, I will drive older ones.

Moving and Grooving HarryKallahan Fri, 10/13/2017 - 12:05 Permalink

All true, but not his point. The reliable fuel injection and ignition systems, the dependable anti-lock braking systems, and other well-developed controllers are now so well understood that they're commodities. They all had their own growing pains, but are now utterly dependable, as you say. What's being discussed are new, unknown, unstandardized systems being shoved into vehicles willy nilly. The are, by and large, totally unnecessary for a functional transportation machine. But when they fail, they often require repair or replacement, sometimes causing a perfectly good vehicle to fail inspection. There are too many of them in some cars, and some are being faulted for unnecessarily distracting drivers. A good example of this is video displays replacing guages, warning lights, and physical system controls for lights, wipers, glass clearing, radios, and the like. The real value of this accrues to the manufacturer in lower build costs, and the owners have to deal with it both in use and in repair costs.  

In reply to by HarryKallahan

HarryKallahan Fri, 10/13/2017 - 09:28 Permalink

If you NEED a car, you're going out to buy one in the next few days, at any cost.It's not like most people can go without a car.This whole notion that the car industry is in wholesale freefall collapse is complete bullshit.Car prices are very firm. As always, the end of year models are heavily discounted to clear them out.  It happens every year, some years the discounts are bigger than others, but the cars are moved out.Now, if you WANT a car, you can wait for the price to go down. And wait. And wait. It's a bit like waiting for the price of beer to go down.

HarryKallahan autofixer Fri, 10/13/2017 - 12:37 Permalink

It is very rare to find a $5,000 car in good shape these days.Most of those have 150,000 miles, need oil seals, tires, brakes, brake lines, starter, alternator, a/c system, O2 sensors, ball joints, shocks, tie rods, and power windows replaced. Plus the seats are usually ripped.You're looking at minimum $2,500 in parts alone, $5-6,000 minimum repair cost if you can't fix them yourself.Then the insurance company will only give you $3,000 after you get T-boned by an unlicensed uninsured illegal.You gotta look at what the insurance will pay on a total loss.  That's the max you can sink into a car.

In reply to by autofixer

venturen Fri, 10/13/2017 - 09:40 Permalink

Wells has a fundmental problem...they aren't located in NYC...and Goldman and JP Morgan...want to destroy anyone not under their control. Another Buffet success story of corruption. Wonder when the rescue comes?

Drater Fri, 10/13/2017 - 09:40 Permalink

Surprised WF hasn't opened fraudulent car loans without telling their customers...kinda like they do with credit and debit cards

autofixer Fri, 10/13/2017 - 09:54 Permalink

Good.  Auto loans are the opiate of the middle class.  Nothing has sucked the wealth from the middle class to the bankster class more effective than car loans. 

GunnerySgtHartman autofixer Fri, 10/13/2017 - 10:49 Permalink

Nothing has sucked the wealth from the middle class to the bankster class more effective than car loans. I don't know about that ... I know a LOT of middle-class people who bought "dream homes" they couldn't afford with those 5-year adjustable rate mortgages in the 2005-2008 timeframe and then got bit really badly when the rates adjusted because all they looked at was the payment for the first five years (they didn't try to understand how the ARM worked).

In reply to by autofixer

Event_Horizon Fri, 10/13/2017 - 10:04 Permalink

I bought an "American made" small SUV thinking I was helping American workers out. Nope. My Equinox was made in Mexico and Canada, had the bumper slapped on at the border and is labelled as "American made" that way.  Ever since that POS has cost me thousands and as a result I'll never buy American again. NAFTA took out our manufacturing work force and gave the wrong incentives to the wrong people so they could make even more money. Now I get swamped by car salespeople telling me the unreliable bells and whistles that make cars "safer" will get me a discount with my insurance. I have the bad transmission and the deadly ignition switch problem - along with a defective engine  AND a wiring schematic from the factory that wasnt' followed by the foreign employees. Tell me how the hell American cars are better again? I have yet to experience this delusion.  What a lie that is, especially when news reporters are claiming the same false benefits. Unless you get the discount in writing from you insurance on that particular faulty "safety feature" in that new(er) vehicle you're just handing over more money with interest. I started looking at foreign automakers and they're actually cheaper now - even the luxury brands - than the combustible Canyon trucks. I have never been more disgusted with an industry than with automanufacturers and lenders right now.

Keystone Event_Horizon Fri, 10/13/2017 - 12:33 Permalink

That sucks.  Probably has more to do with GM than "American made".  My 13 year old Accord with 160K miles on the clock was made in Ohio and has been very good to me.  I'll keep driving it till the body starts rusting away (road salt = death for vehicles) then pickup something else for a cheap dd.  I no longer have any interest in new cars.

In reply to by Event_Horizon

Anarchyteez Fri, 10/13/2017 - 10:06 Permalink

I won't buy a new car till I have $10 million. And of course not financed.

Until then Ill keep driving $5000 cars paid in cash.

There's one born every minute.

Lostinfortwalton Fri, 10/13/2017 - 10:18 Permalink

There is no way the bells and whistles on the new cars can be maintained over time at a reasonable cost even if you gave the vehicles away. I just want a P/U truck with air conditioning, power steering, power brakes, and a radio and that's ALL.

Moving and Grooving Lostinfortwalton Fri, 10/13/2017 - 11:47 Permalink

I couldn't agree more. Everything about new cars screams 'maintenance required'. The car companies hope that their dealers will be kept alive in the future by their service departments, so they add all this stuff that will require repair or replacement repeatedly over the life of the vehicle. MB almost lost the farm with this strategy a decade or two ago. Today owning a MB, BMW, Audi, and virtually any other newish vehicle is an exercise in making appointments for service and writing massive checks to pay for them. I first saw this with the HP color laser printers. They had 5 or 6 assemblies that required periodic replacement, based on pages printed. The damn things would simply stop running until you replaced the otherwise perfectly good parts. Sickening. Now autos are going the same way. The DEF scam is another example of how vehicle ownership has become increasingly expensive above and beyond the astronomical monthly payments. I can't wait to read reports on Tesla maintenance costs. We're seeing the people revolting more and more lately, and not like Antifa and BLM, just individuals who have rediscovered their power to cut off the revenue streams of the entities who piss them off. Our President is showing the way, loudly criticising the worst of the abusers and takers. People can vote with their wallets and their feet too, not just with their ballots.  

In reply to by Lostinfortwalton

XBroker1 Fri, 10/13/2017 - 10:29 Permalink

Sounds like a lot of ppl have reached the end of their ability to get credit or as we say, 'rent a lifestyle'. When the lie of their life hits home... uh... I guess we should start loading up on vice & prision industrial complex stocks.

silverer Fri, 10/13/2017 - 12:15 Permalink

I read recently something like 80% of Americans don't have $600. in cash for emergency money. Seems somewhat imprudent to take out a loan for a $40,000 car. But then again, maybe I'm just being silly.

Bunga Bunga Fri, 10/13/2017 - 13:18 Permalink

Just look on Craigslist. Almost any dealer offers:? We Finance Everyone - No Job, No Credit, Bad Credit, Repos, Bankruptcy, No License - ALL OKLooks like there is no demand? Who could have thought?