The record-breaking $1.3 trillion worth of auto loan debt Americans are collectively shouldering is starting to show some serious cracks. As
of late last year, auto loan delinquencies were at an eight-year high,
and suspiciously, that was right around the same time the number of
rejected auto loan applications jumped. That's despite one of the best
-- and best-paying -- job markets on record.To get more news about
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It's anecdotal evidence of a brewing problem likely to be worsened by the coronavirus pandemic. With millions of people newly out of work and
countless more adversely affected by the economic slowdown, even more
car payments could start to be skipped as incomes and credit scores sink
hand in hand.
That puts all lenders on notice, but could prove particularly problematic for Credit Acceptance (NASDAQ:CACC), Santander Consumer USA
Holdings (NYSE:SC), and Ally Financial (NYSE:ALLY), each of which relies
heavily on auto lending.
A superficial look at the global economy as of last year was
encouraging. In retrospect, though, things may not have been as strong
as they seemed. The American Bankers Association reported in January
that, as of the end of the fourth quarter of last year, 2.43% of auto
loan recipients were at least 30 days late on their payments. That's the
highest rate since 2011 when most consumers were digging their way out
of 2008's economic implosion.
Lenders responded by tightening their purse strings. The New York Federal Reserve noted by the middle of last year that rejection rates
for car loan applications had soared, up from 4.5% in October of 2018 to
8.1% as of October of 2019.
Consumers haven't exactly been helping themselves. Automobile market data outfit Edmunds noted that as of March -- for the first time ever --
the average term of a car loan exceeded 70 months. That's 5.8 years,
and it makes it likely most loans will be "upside-down" for much of that
70-month stretch, meaning the owner will owe more than the then-used
vehicle is worth. They're paying a fortune for those vehicles too, with
more than $34,000 typically being financed to buy a new vehicle last
month. That's another record that has led to record-breaking average
monthly payments.
If all this news rings familiar, there's a reason. Though it's not as dramatic as the real estate frenzy from 2008, the underpinnings of what
turned into the subprime mortgage crisis are the same. The COVID-19
outbreak may be what pops the bubble -- if it hasn't already.
Ally is one of those names. To its credit, Ally is providing relief for customers affected by the coronavirus outbreak. Borrowers can defer
payments for up to 120 days, and it's waving some banking and
stock-trading fees. Still, about 85% of Ally's operating income last
year came from car loans, leaving it highly vulnerable to the prospect
of a job-taking recession. Bolstering that risk is Ally's recent news
that it essentially doubled its loan purchase partnership with
automobile sales chain Carvana (NYSE:CVNA). All told, Ally has committed
up to $2 billion to help Carvana sell cars by letting the lender take
care of those underlying loans.
Ally is hardly the only name that may suddenly be on the hook, however. Santander Consumer USA Holdings is one of the nation's biggest
auto lenders as well, and caters to subprime customers (borrowers with
less-than-great credit).
Like many lenders did back in 2008, Santander will sometimes package a bundle of auto loans into a single bond-like instrument. When one
series of that debt failed to pay its new owners as expected last year,
however, the lender was forced to buy back that bundle of poorly
performing debt just shortly after it was sold. Debt-rating agency
Moody's believes Santander only verified the income for about 3% of the
borrowers lumped into that bundled product, which leaves other
asset-backed securities based on car loans a bit suspect.
Credit Acceptance is another subprime auto lender, but one with a twist. It's also a collection agency on loans it makes that go unpaid.
As of the last quarter of last year, its forecasted collection rate of
all money due -- principal, interest, and any associated fees -- was at a
10-year low of 64.8%, after steadily declining from 77.7% in 2010.
Total loan volume per dealer as well as partnered-dealer growth were all
down during the third fiscal quarter, jibing with CEO Brett Roberts'
comment during the Q&A portion of the Q4 conference call: "We've
been in a very, very competitive period for a long time, really since
late 2011, 2012. It appears that the competitive environment has gotten
more intense recently.
