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Auto Lending Naysayers Are Neglecting Key Facts – Part 2

This is the second of a two part blog about the state of auto lending in the U.S.

In the U.S, auto lendinghas been surging. This is the second of a two part blog regarding this subject. The previous bloglooked at origination trends aswell as noting the attention that auto lending has received from banking regulators and in the media.

Those critical of auto lending have noted that, since 2009,non-prime originations have posted a larger growth rate than prime originations. This is not unexpected. In the trough of a recession, lending to non-prime customers is drastically curtailed. Therefore, out of a recession, non-prime origination tends to grow quickly.

Credit card trends are an excellent example of this tendency. From 2009 to today, the number of non-prime accounts originated has grown almost twice as fast as prime accounts –123% versus 65%.

When comparing growth of auto loan originations, we believe that 2006 is a more appropriate point to consider. Prime and super-prime origination amounts have grown faster since this period than non-prime originations. Today, auto originations have a lower proportion of non-prime commitments than the period prior to the recession.

In this blog, we again examine auto loan and lease trends using Experian IntelliView data to investigate auto lending outstanding balances and performance. IntelliView is a quarterly update of U.S. lending trends based on credit bureau data, including originations, outstanding loans and lines, credit performance trends, segmented by product and other characteristics.

Auto Loans and Lease Outstandings and Performance

Growth of outstanding balances are based on a number of factors, such as acquisition volume, maturity term (for loans), utilization (for lines), account attrition and prepayment. Slide 3 shows that presently auto loans/lease outstandings are 25% above 2006 amounts. First mortgages are 14% above their 2006 amount, and bankcard balances have only just recovered their 2006 total.

As shown in Slide 4, at the present rate of growth, auto loans and leases now at $900 million will cross $1 trillion in outstandings. Auto balances already exceeded second mortgage line and loan balances more than a year ago. Only mortgages, exceeding $8 trillion in outstandings (and student lending) have outstanding balances higher than auto loans and leases.

With the shift of GMAC to Ally Bank, Captive Auto companies lost their top share of outstandings to Banks in 2009. Since 2006, Finance company balances have more than doubled and Credit Unions have grown nearly 49%.

Outstandings for all type of credit grades have increased since 2006. Slide 5 shows super-prime paper oustandings are up 31.3% and prime is up 28.0%. Near-prime oustandings are up 20.8% and subprime outstandings are up 24.6%. Deep-subprime outstandings are up 34.0%, and almost all of the growth in deep-subprime can be attributed to Finance companies.

Obviously, there is movement among credit grades. A customer acquired as a super-prime customer may eventually encounter hardship, stop paying their obligations and reach a deep-subprime grade. This would be infrequent, and even rarer to move from deep-subprime to super-prime during the course of a loan. Slide 6 shows a distribution of outstanding balances by credit grades for each type of financial institution as of 2014-Q2. (APRs of each segment are also shown.)

Slide 7 shows the distribution of Bank outstanding balances over time. The proportion of prime and super-prime of all balances have increased. Subprime and deep-subprime balances have declined, and near-prime oustandings have remained steady. The risk profile of Bank auto loan/lease portfolios is actually much better than prior to the recession.

Slide 8 shows a distribution of outstanding balances for Finance companies. Super-prime balances are twice the size they were in 2006. Prime balances are 33% higher. The proportion of subprime and near-prime outstandings is lower, and deep-subprime balances are about the same. Once again, the quality of the portfolio among Finance companies is better than they were heading into the recession.

Slide 9 shows the auto loan/lease delinquency rate trend. All levels of delinquency peaked in 2008-Q4. After a long decline, delinquency rates have remained fairly steady for the last two years. The 30-59 day rate (and therefore the 30+ day delinquency rate) appears to be volatile, but all levels of delinquency (the 30-59 day rate in particular) have a seasonal pattern. Delinquency is higher in the 3rd and 4th quarter of the year and is lower in the 1st quarter and the 2nd quarter.

Slide 10, 11, 12 show delinquency rates by financial institution. These charts clearly show Finance company delinquencies have grown in the last year.

As noted earlier, credit grades are dynamic. Nevertheless, they do perform with relative consistency. Accounts classified as super-prime have very little 30-59 day delinquency (average of 0.10%) and deep subprime accounts have a very high rate (average of 39%). This is true across all financial institution types.

The 60-89 day delinquency rates for deep-subprime range from 13.12% to 18.08%, with an average of 15.73%. And 90+ day delinquency range between 5.67% and 9.79%, with an average of 8.20%. However, performance of deep-subprime credit has deteriorated in the last year for Finance companies, particularly 60-89 day and 90+ day rates. They are closer to the higher end of the range than the average. Some of this may be due to vintage as Finance company deep-subprime outstandings tend to be younger accounts. Some of this performance may be due to collection issues at specific companies. Continued examination of these trends is necessary over the next few quarters to see if Finance company delinquencies return to more normal levels.

Concerns over potential problems due to growth in near- and subprime auto lease and loans are overstated. The proportion of originations in these groups is lower today compared to the period before the recession. The risk profile of auto lease and loan portfolios is also much improved. The up-turn in delinquencies among Finance company portfolios is an issue that we will continue to monitor.

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