Subprime auto defaults reached $1.8 billion as of June, making up about 80% of all defaults in the market, Michael Vogan, automobile economist in the credit analytics department at Moody’s Analytics, said during Episode 2 of The Auto Finance Roadmap.
Last month, The Center for Auto Finance Excellence — sister site to Auto Finance News — launched The Roadmap, a new monthly podcast series that covers best practices and trending topics in auto finance.
In this episode of The Roadmap, Vogan details a presentation he developed on subprime auto credit, including why deep-subprime auto defaults are on the rise and what his outlook is for the future of subprime auto.
“It’s really the deep-subprime categories where we see the most performance deterioration — and by deep-subprime, I mean consumers with credit scores between 300 and 529,” Vogan said. “That’s where we are seeing default rates of about 16% annualized, and that’s comparable to recession level highs for that segment.”
Most of the stress of default rates come from loans originated by nonbank lenders — meaning independent financial institutions or buy-here, pay-here dealerships, he said. The rise in defaults is partially driven by heightened nonbank competition and better analytical capabilities for risk modeling and repossession activity. Lenders with better analytical capabilities and techniques seem to be more confident about “lending down the risk-score ladder,” Vogan said.
“Overall, the auto lending industry is turning a corner right now; we are coming down on the other side of that expansion, so we should see some of that subprime growth slow and performance start to moderate,” he added.
In The Roadmap, Vogan also discusses where subprime loans are most concentrated geographically, how the recent hurricanes are expected to affect the auto finance market, and why he thinks payment problems are a function of underwriting policy.
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.