Cars and Drivers
Are Higher Auto Loan Defaults and Weaker Credit Metrics Reason to Worry Yet?
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It was not that long ago that some cracks started to appear in the foundation of the endlessly growing U.S. auto market. On top of some trends showing peak-auto earlier this year, there have been some concerns about the quality of car loans and loan delinquencies.
This might not sound bad in terms of overall percentages, but it is important to remember that low rates (or no interest) and car loans going out well beyond just five years were helping to drive the strength of the car sales. So if they were trying to give the cars away with low rates or spur long loan terms, what does it tell you if people are late on car payments and if car repo numbers start climbing?
Now there are two issues showing more weak trends in autos. One such risk was shown by the S&P/Experian Auto Default Index. The default index for auto loans rose to 0.93 in July from 0.91 in June. Still, it was 0.92 in May — versus 0.97 in April and 1.02 in March and 1.05 in February. So this is an uptick again, but it is after four months of declines.
A Moody’s report issued on Monday, August 15, showed that U.S. auto loan asset-backed securities in the second quarter of 2016 were showing lower credit metrics after loan underwriters loosened their loan approval standards. This was deemed to be marginally weaker performance continuing in the Moody’s report, but the issue here is in the warning that weakness may persist if new car sales were to remain flat and lenders become more aggressive to increase their loan volume.
Back on August 8, Fitch Ratings said that U.S. auto asset-backed securities are poised to withstand challenges posed by increased competition and anticipated declines in wholesale vehicle values. Fitch’s view was that wholesale markets are expected to weaken, and that inevitably will lead to a decline in ABS performance metrics ahead.
The good news is that we are nowhere close to panic levels on auto loans delinquencies and loan defaults. The bad news is that any uptick in trends will have to be watched closely. If those numbers were to spike higher then there might be more areas for concern.
The Dow Jones Industrial Average and the S&P 500 Index may be up for the year at all-time record highs. Here is a look at the major auto players with gains or losses year to date:
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