Negative Equity Poses Threat to Lenders in Wake of Hurricane Harvey

More than half a million vehicles in the Houston area are estimated to be a total loss following the flooding damage caused by Hurricane Harvey, and more of those consumers than ever are upside down on their loans, according to Edmunds.com Inc.

Comprehensive auto insurance is the main policy protecting borrowers from this kind of loss and 78% of consumers nationwide opt into this coverage, according to the Insurance Information Institute. However, the policy only covers the current market value of the car, not the full amount remaining on the loan. At the same time, a record number of consumers owe more on their loans than the vehicles are worth.

Through the first three quarters of 2016, nearly a third of all trade-ins were upside down, according to Edmunds. Those consumers held an average of $4,832 of negative equity at the time of trade-in.

Yet, down the line there are also benefits for the auto industry, as the decrease in supply will help the depreciating used-car market.

“Sales of new and used vehicles typically fall during the month of a hurricane in the impacted area, but then spike in months following,” Cox Automotive’s Chief Economist Jonathan Smoke told Auto Finance News in a statement. “We saw wholesale prices strengthen in the three months following Sandy. The vehicle damage in total in Houston is likely to be just as severe, if not worse.”

Still, the immediate damage is front of mind in the industry as auto lenders send aid. Chase Auto Finance, Ford Motor Credit Co., Hyundai Capital America, Santander Consumer USA, Toyota Financial Services, Wells Fargo Dealer Services are all offering financial assistance for consumers impacted by Harvey.

For more content like this, check out the 17th annual Auto Finance Summit, which will take place on Oct. 25-27 at the Wynn Las Vegas. To learn more about this year’s event — or to register — visit the Summit’s homepage here.