The word subprime continues to send shivers down the spine of many institutions and shareholders and is likely to do so for many years to come, with a significant number of households having yet to recover from the Global Financial Crisis, which was attributed to the subprime crisis that began to muddy the waters back in 2007, a decade ago.
We have been hearing the chatter on the car-loan performance lately and the rise of the subprime in the industry, with the number of nonperforming loans on the rise. The increase is being seen across a range of credit scores which currently runs at the lower ranges.
The increase in the number of the subprime loans has been attributed to a deterioration in underwriting standards from new players in the markets trying to tap into the auto car loan business.
While we will continue to be mindful of the adverse effects of subprime and increased delinquencies, the silver lining will be the fact that monolines and dealer-financing accounted for less than 5% of new originations in the 2nd quarter. The market continues to contract, with subprime loans in the first half of this year sliding 12% year-on-year.
Late payment rates, where late payments exceeded 60 days, has seen little movement over the last 12-months for the auto loan sector and remains at under 1% as the majority of loans extended from well-established auto finance companies and banks. The increase of subprime credit has led to a tightening of underwriting standards amongst the more established lenders, though this may well have contributed to monolines and dealer-financing companies entering the market to bridge the gap.
Car manufacturers would certainly flinch at the prospect of an auto loan crisis akin to the subprime mortgage rate crisis that led to the Global Financial Crisis. Car sales have been on the rise going into 2017, with an estimated 85% being financed in some way, with total car loan debt at record levels and reportedly exceeding $1tn.
Adding to the issue is auto loan refinancing, which is becoming easier for those in the lower credit score categories, who are able to make significant savings, not to mention extend repayment periods. To put it into perspective, refinancing rates offered can be in the 3-5% range compared with a subprime rate in excess of 10% within the auto sector.
While there had been reports earlier in the summer of falling autos sales, as car owners hold on to their vehicles for longer, likely not only due to greater financing terms, but also hurricanes Harvey and Irma drove car sales to more than a decade high in September, as those affected looked to replace cars written off or lost because of the hurricanes, which are estimated to have totaled as many as one million vehicles.
Auto lenders have had to increase loan-loss reserves with the expectation of an increase in delinquency rates in the aftermath of the storms, with insurance cover unlikely to be enough when factoring in funding costs, particularly within the subprime market.
A silver lining for the market and subprime in particular will be an anticipated rise in demand for used cars in the wake of the hurricanes, which would see used car prices begin to rise, increasing the equity portion for the car owner and the collateral for the lender, which is a common trend following natural disasters.
The subprime loan market trend is downwards, however, with loans to subprime and deep subprime credit reportedly down 1% to 21.86% year-on-year in the 3rd quarter and likely to continue falling. The question is how subprime borrowers will be able to obtain affordable financing for vehicles that are becoming more and more expensive each year.