There’s no question about it, Experian’s senior director of automotive finance Melinda Zabritski is an optimist.
Back in March, Zabritski chided the subprime Chicken Littles of the world, noting that “whenever there is an uptick in the number of loans to subprime and deep subprime customers, there is the potential for a 'sky is falling' type of reaction, [but] the reality is we are looking at a remarkably stable automotive-loan market, in part because consumers are continuing to stay on top of their payments.”
Fast forward to Monday and Zabritski was back at it, this time defending the proliferation of longer average terms for auto loans in the US. “While longer-term loans are growing, they do not necessarily represent an ominous sign for the market," Zabritski said, before explaining that extending the loan term is simply the most logical way for borrowers to buy cars they can’t really afford: "Most longer-term loans help consumers keep monthly payments manageable while allowing them to purchase the vehicles they need without having to break the bank.”
In other words, either car buyers are overreaching as homebuyers did in the McMansion era, or the American consumer is in bad shape courtesy of a sputtering economy and barely existent wage growth. To be clear, neither of those alternatives is a good thing.
Consider the following out Monday from Experian:
The average loan term for new and used vehicles increased by one month, reaching new all-time highs of 67 and 62 months, respectively.
Findings from the report also showed that longer loans, those with terms lasting 73 to 84 months, accounted for a record-setting 29.5 percent of all new vehicles financed, an 18.6 percent rise over Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.
Long-term used-vehicle loans also broke records, with loan terms of 73 to 84 months, reaching 16 percent in Q1 2015, rising from 12.94 percent the previous year — also the highest on record…
The average amount financed and the average monthly payment for a new vehicle also increased to record heights. The average new vehicle loan was $28,711 in Q1 2015, compared to $27,612 in Q1 2014. The average monthly payment for new vehicles also rose, moving from $474 in Q1 2014 to $488 in Q1 2015.
Additionally, leasing continued to increase in popularity during the quarter, jumping from 30.22 percent of all new vehicles financed in Q1 2014 to a record high of 31.46 percent in Q1 2015.
So let’s break that Q1 data down:
- 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.
You get the idea.
Given the above, it certainly comes as no surprise that auto sales for May came in quite strong. In fact, May saw the largest MoM increase since November 2013:
Put simply, people are buying more cars because they're allowed to take out long-term loans at extremely low rates, and the fact that monthly payments are still hitting all-time highs suggests that borrowers are not taking advantage of these conditions to make prudent decisions in terms of what they're buying (or leasing). While all of the above might seem like a recipe for disaster, Zabritski thinks otherwise:
"Increases in vehicle financing are signs of a strong automotive market. By gaining a deeper understanding of current financing trends, lenders are able to stay competitive and better meet the needs of the marketplace, while consumers can use the data to become more educated on the different vehicle financing options and make a more informed purchasing decision."
Yes, "more informed purchasing decisions", like taking out an 84-month loan to buy a used car.
All of the above notwithstanding, Experian would likely point to the fact that the average FICO score for borrowers financing new cars fell only slight from 714 to 713 Y/Y while the same Y/Y scores for those financing used vehicles actually rose from 641 in Q1 2014 to 643 in Q1 2015. While that's all well and good, there's every indication that those figures are likely to deteriorate significantly going forward. Why? Because Wall Street's securitization machine is involved. Let's look at some numbers for consumer ABS issuance via Deutsche Bank:
The consumer ABS sector saw $16.6 billion of new issue supply in April. This reflects a modest slowdown from Q1, when the average monthly issuance amount reached $18.9 billion. Nonetheless, year-to-date issuance, at $73.4 billion, remains flat year-over-year. Auto ABS saw $7.9 billion of new paper in April, bringing year-to-date new issue supply to $38 billion; nonprime auto ABS issuance totals $10 billion year-to-date.
So, 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. Put simply, those subprime borrowers are getting subprimey-er. Here's FT with the latest example of the deep subprime deal from Santander Consumer (which we have profiled on a number occasions, most notably here):
When Santander Consumer USA sold a $1bn pool of subprime auto-loans this week, it made no pretence that the loans would be paid back in full. So confident was SCUSA that a big chunk of the money would not be coming back that it said it would shield investors in the lowest-rated tranche of the deal from the first 19 per cent of losses.
That is a lower level of protection than the Spanish bank’s US securitisation vehicle provided in its first trip to the lower reaches of subprime auto lending in March, when it offered “credit enhancement” of 25 per cent on the worst-ranked bonds.
(details of the above mentioned March deep subprime deal)
And Santander Consumer is hardly the worst. Recall Skopos Financial, to which we introduced readers in April. Skopos is run by a team of Santander veterans and the stats on their latest ABS offering look even worse. Note that a fifth of all loans in the collateral pool are made to borrowers with a FICO of between 350 and 500:
The implication here is clear. The auto ABS market is alive and well with total issuance expected to reach around $100 billion this year and as the competition for borrowers heats up, lenders are reducing their underwriting standards in order to make the loans needed to feed the securitization machine.
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But perhaps the best bubble indicator of all is the rise of the "cash out auto loan":
"Use your car as collateral — our equity loans can help put your car to work for you."
Ladies and gentlemen, the "cash out auto loan" is the new home equity loan. Welcome to the great American car bubble.