Auto delinquency rates up for 34th month in row

Auto delinquency rates rose again in July, marking 34 consecutive year-over-year increases as inflationary pressures and elevated interest rates have delayed the turning point analysts expected this year. However, while past-due rates are up, credit performance has largely stabilized, Michael Brisson , director of economic research with Moody’s Analytics , told Auto Finance News “ Delinquency rates are rising, but they're not rising as quickly as they were before, and charge-off rates have stabilized over the past quarter as well,” he said. “We're not expecting it to get much worse.” Higher monthly payments, declining vehicle values and credit score migration are contributing to the increase in delinquencies this year, Brisson said. Total delinquencies hit the highest July level since 2009, at 3.7% of all auto loan balances, according to Moody’s August 2024 credit analysis. . Auto accounts 30-plus days past due were 10% higher compared with July 2023. Auto delinquency rate YoY percent change [caption id="attachment_58344218" align="aligncenter" width="1024"] Source: CreditForecast, Moody’s Analytics[/caption] “There's a high inflation environment going on,” Brisson said. “However, it's not falling off the rails because the labor market remains strong, so you can still get jobs out there, which means that people are still paying their bills, in general.” DQ increases by lender type Banks and credit unions saw the largest increase in delinquencies compared with finance institutions that do not accept deposits. . Bank and credit union delinquencies rose 22% YoY in July while finance groups posted a 2.9% YoY increase in July, according to the report. Delinquency rates for borrowers carrying credit scores between 700 and 740 at origination were 85% higher compared with July 2019, prior to the pandemic, according to the report. “Usually, when delinquencies increase, it's happening in your subprime bands , and it's expected,” Brisson said. “There's a pain that's going to happen to lenders’ books if they didn't reserve for these expected delinquencies and charge-offs that come from the delinquencies.” Auto delinquencies by credit score YoY percent change [caption id="attachment_58344221" align="aligncenter" width="1024"] Source: CreditForecast, Moody’s Analytics[/caption] Lenders are likely to “adjust their origination models to account for the fact that there's much worse performance in these prime bands than prior to the pandemic,” Brisson said. Credit score migration adds lending risk By comparison, the increase in delinquencies this year comes after stimulus checks and a pause on student loan payments during the pandemic pushed delinquencies to their lowest level on record, Brisson said. Those resources allowed consumers to pay off their loans, which caused more lenders to loosen credit, he said. . More consumers were then pushed into higher credit tiers. Credit score migration poses a risk for lenders given that some borrowers might have jumped credit tiers but are still performing in the credit tier they originally were in, Brisson said. . Lenders “are going to see that increased delinquency rate for that group,” he said. Charge-offs increase Charge-offs, though elevated, jumped less than expected on a YoY basis in July despite the continued increase in delinquencies, according to Moody’s. . July charge-offs, including defaults and bankruptcies, were up 36% YoY, according to the report. Charge-offs “haven't risen as quickly as they did during the [2007 to 2009] financial crisis in relation to the delinquencies” as more lenders seem to be working with consumers to avoid late-stage past-due balances, Brisson said. Auto charge-offs YoY percent change [caption id="attachment_58344217" align="aligncenter" width="1024"] Source: CreditForecast, Moody’s Analytics[/caption] During the financial crisis, delinquent consumers would climb from 30 days past due, to 60 days, to 90 days, and the charge-off would follow, Brisson said. . Now, consumer accounts are hitting 30 days past due and then staying between 60 and 90 days past due instead of immediately rolling into a charge-off, he said. Charge-offs have “gone up less than expected, and we're hoping that they, for the economy's sake, remain lower than expected,” he said. “There is a chance that they continue to rise, even if delinquencies start to come down.” Auto lending outlook Credit tightening in the auto market is likely to persist in the coming months given current delinquency levels, rising charge-offs and risk factors, according to the report. “We're seeing that lending managers are saying that credit conditions are getting better,” he said. "There’s a seasonality” with delinquencies, he said, adding that the rate of past-due loans is likely to increase through the remainder of the year due to the holiday season before dipping in the spring. “In seasonally adjusted terms, going into the first quarter of next year is when the turning point could happen,” he said. Auto Finance Summit, the premier industry event for auto lending and leasing, returns Oct. 7-9 at Wynn Las Vegas. . To learn more about the 2024 event and register, visit www. .AutoFinanceSummit.com.

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