Extended terms and low rates may be artificially inflating demand for automobiles, according to analysts.
Interest rates on home mortgages have risen slightly since 2013 and a corresponding increase in auto finance rates could slow sales growth for the remainder of 2014, according to a September 8 report from Standard & Poor’s corporate ratings group.
That makes sense, since the group also says in the same report that they believe low financing rates and extended financing terms have played a key role in the higher transaction prices over the past year or two.
Rate increases have not yet occurred in auto, but are predicted.
S&P said longer term loans, specifically those over 72 months, continue to dominate the market. Nonetheless, loan delinquencies are near historical lows. Still, S&P believes there are some emerging signs of risk in auto lending, based on lenders’ willingness to stretch terms over 72 months and use higher residual value assumptions to attract borrowers with lower credit scores, and offering loans that exceed the value of the car.
That said, at an S&P event in New York on Sept. 9th, analysts reiterated that all sectors of the auto finance space were seeing growth in both prime and subprime lending and in the auto ABS market.
Amy Martin, senior director at S&P Ratings auto ABS group said subprime lenders have also been utilizing their own proprietary credit scoring models and Fico scores are not the only gauge of borrower creditworthiness. S&P is seeing losses rise, Martin said, but those are climbing up from historically low levels. In fact, she stressed that 2012 and 2013 subprime auto loan securitization vintages have lower losses than those from 2006 -2008. In other words, the ABS space is seeing good collateral loss performance despite some degradation in pool credit quality.
But Martin also raised some concern over lengthening loan terms.
“This year marks the first time we’ve seen loan terms of 73 to 75 months represent 10% or more of a subprime pool,” she said, “and this concerns us because we believe that longer term loans, have higher severity of loss upon a repossession. And we’re also looking to see if those higher losses associated with longer term loans would be exacerbated by higher LTVs too, and that gets to layering of risks, if these longer term loans are also coming with higher LTVs.”
Despite those historically low delinquencies, the S&P corporate group said in its Sept. 8th report that there could be some emerging signs of risk based on lender’s willingness to offer longer loan terms based on an assumption of higher residual value.
And therein comes a word of caution.
The Sept. 8 report says that if the longer terms trend does continue, it could be pulling ahead of future demand, and as a result, S&P does not expect a meaningful rise in auto sales in 2015. S&P believes the recent subpoena served to GM’s captive, GM Financial, indicates regulators’ concerns and potential risks related to the quality of subprime loans, according to the report.
Over the long term, the potential for rising interest rates, relatively weak job growth, improved life of cars, declining used car prices, and a decline in driving patterns among millennials, remain risks, according to S&P forecasts.
RE: “Still, S&P believes there are some emerging signs of risk in auto lending, based on lenders’ willingness to stretch terms over 72 months and use higher residual value assumptions to attract borrowers with lower credit scores, and offering loans that exceed the value of the car.”
Not to quibble with S&P, who granted junk mortgage backed securities the coveted AAA rating BUT…. Lenders have been stretching terms beyond 72 months for years. They have been aggressive on LTV for good credit borrowers for years. And residual values are relatively high because we are still in period of pre-owned vehicle shortage…. lost new vehicle sales, Cash for Clunkers, etc.
There is still tremendous pent up demand in the market and MILLIONS of credit scores that have to be rebuilt before those consumers can even think about buying a new vehicle. BHPH and sub prime are helping to accomplish that.
In the not so recent recent past, a 690 credit score customer would be “auto decisioned” and “fast tracked.” Even at 720 scores lenders are more cautious.
IMHO we have a LONG way to go before there is any concern about overly aggressive lending, although a SUDDEN spike in fuel prices could trigger a chain reaction. Even the inevitable interest rate rise is mostly accounted for on the new vehicle side Pre-owned is a different story.
There are MANY factors goosing new vehicle sales. Ricky Beggs considers 15 million to be the natural un-incentivized SAAR. I think he’s right on. We’d live in a safer environment if we could adapt to 15 million …… less “feast or famine.” The OEM initiatives to conquest market share and keep lines running provide the discounts and rebates that generate the “false volume.” Its been going on for so long its become “normal.” Dealer gross profit now comes mostly from “trunk money.” The banks have looked the other way and treat rebates like real cash down, which it ain’t. It is the fad to talk about transparency these days. Things were MUCH more transparent when there is little trunk money and invoice was invoice. But then, transparency isn’t the objective. Gross profit is.