This week, the auto industry is eyeing potential increases in delinquency rates as long-term deferrals come to an end. Since the COVID-19 pandemic hit the country in March, lenders have made it a priority to help consumers with two to three-month long payment assistance programs.
The industry now is seeing payment extensions on securitized auto loans decline, along with the percentage of auto accounts in financial hardship status — accounts with deferred payments, that are in a forbearance program or are frozen or have a frozen past due payment.
The answer to softening the delinquency blow sure to come could lie in loan refinance as lenders tout refi offers amid low interest rates. Refi could be a win-win: lenders get new loans on the books and consumers lower their car payments.
In this edition of the Weekly Wrap, Amanda Harris, JJ Hornblass and Joey Pizzolato discuss how potential delinquency increases could impact the industry for the week ending Aug. 28.
Hi everyone, and this is the roadmap from auto finance news since 1996, the nation’s leading newsletter on automotive lending and leasing on JJ Hornblass. Welcome to the podcast. This is our weekly wrap on what’s happening in auto finance for the week of august 2004. Before beginning I want to thank auto finance news to advertisers for their ongoing support. And they are alpha CCC Information Services and gas tech, defy solutions Westlake and LexisNexis. So thank you very much to our sponsors for their support. I am here with Joey Pizzolato. Hi, Joey, the deputy editor of auto finance news and Amanda Harris, our associate editor. Welcome to both of you. It is Friday. August 2008. This week was marked by Donald Trump’s acceptance of the Republican nomination for president social unrest in Wisconsin, an increase in consumer spending by 1.9% in July, a slower pace than in the previous two months. And the Federal Reserve marking a major shift in how it guides the economy, but in job growth preeminent when considering monetary policy, and not guarding against inflation as it has for I don’t know how many decades, I believe three, and that means low interest rates for a very, very long time. The market probably needs low interest rates for a very, very long time. Because the theme of our podcast today is clearly Credit performance and credit deterioration. A one story from this week’s site relates to payment extensions, which have been predominating in auto finance since the start of the pandemic. Payment extensions on auto loans securitized declined for the second straight month in June. But this was a 77 basis point decline on the prime side for Prime credits and a 124 basis point decline on the subprime side leaving still 1.4% of outstanding or at least those that were securitized in deals rated by SNP 1.4% of prime deals that are on extension. 7.7% of subprime deals on extension, that’s a prime number is a big number representing 1.6 billion in outstandings. Against that particular pool, the SNP rating pool so this is these numbers are emblematic of the market as a whole. Joey, would you consider these declines significant, insignificant, or are you uncertain as to what how how significant they are?Joey Pizzolato 03:38
Great question. Um, I would say they’re, they’re significant in the sense that they are declining, whether that decline is very meaningful, I think, remains to be seen though. Like you said, Those numbers are still pretty high, um, in in kind of comparison to what they normally are. However, you know, I think the industry is sort of at a point where you have to just take what you can get and hope that the trend continues.JJ Hornblass 04:12
But I do think that that these numbers are still unreasonably high. So it’s, it’s interesting that these numb, you know that we talk about extensions, whether you call them extensions, deferrals, whatever credit performance generally, it seems like we are really heading for a major milestone on these at some point in September. Why is that the case? Joey?04:46
Well, um,Joey Pizzolato 04:49
it’s when you look towards the forward to September, um, you know, a lot of these deferrals are multi month. So so we have deferrals that are two months, three months. A couple months ago, they were averaging four months on extension. Now we’re down to two. But that number is slowly going down. So, you know, as we just talked about, these numbers are high and and eventually they’re going to have to come off extension lenders only, even now, still can only allow a certain number of extensions every year per consumer to, you know, to make to continue to, excuse me, I can’t speak this morning to keep to keep these loans in like a performing status. You can, you can’t extend it for you know, six to eight months, it’s just not reasonable. Um, so, so, come September, I think a lot of these loans are really, they’re gonna have to go back into either active status or they’re gonna have to start being accelerated.
JJ Hornblass 05:52
So when you know I look and then this kind of for both of you when you look at these numbers, And then and then put them next to the consumer financial hardship number. So first of all, there’s this notion that has been presented by TransUnion. Measuring auto accounts in financial hardship. So first of all, let’s just define what that means because that’s not necessarily a delinquency number or a deferral number first, so, Amanda, tell us what that is. Um, first,
Amanda Harris 06:36
definitely, yeah. So I talked about is, like you said, it’s not the same thing as a delinquency or deferral. It’s actually kind of the opposite. So they that means that they’ve been it can be accounts that have defer payments, but can also be accounts that are in a forbearance program. It can be accounts that have been frozen, or have a past due payment that’s been frozen. Basically any you need those types of topics or accounts could fall under financial hardship status, and when they’re in that status, obviously not being, you know, pushed to the next level into delinquency into, you know, charge offs or anything like that they’re kind of just held where they are. And so some of those accounts, people might still be making payments, even if they have that financial hardship status applied to them, but that’s pretty much what it means.
JJ Hornblass 07:26
But this, these are stressed accounts. Right. And this is stressed accounts over and above existing, you know, delinquency delinquent accounts. So the number the percentage of that of those accounts on the auto side right now rests at 6.16%. So, what it seems to me is is that whatever is the current mean, is this fair? Whatever is the current delinquency rate out there for a lender? Um, TransUnion is implying that you should probably bump it up by another 6%. Is that is that is that one? What How is that a fair way to look at it? Is that how we should be thinking about current credit performances? When you look at the delinquency numbers, you know, they’re remarkably tame, historically tame, um, versus, you know, currently.
Amanda Harris 08:35
Right. So definitely, you know, they don’t know exactly how much just yet. So in talking with TransUnion, no, they definitely have a feeling that those numbers are going to go up because obviously, as referral programs and we talked a few minutes ago that you know, a lot of them were three, four months long. So those started, you know, back in March, so they’re going to start coming off pretty soon. And while lenders are still offering some programs on a case by case basis, like Joey mentioned, they can’t do that forever. So we aren’t going to start seeing those numbers come up. It’s just right now, we don’t really know exactly how much that will go up. Because we don’t know, in some of those accounts, people are still making payments. So it could be that they come out of that, you know, financial hardship status, and they’re back in active status. They’re making payments again. But it really stimulus plays part of that, and whether or whether we’re going to get another round of help on the federal government, you know, those kind of things play into this as well. So there’s a lot of unknown factors. But I think it is fair to say that those rates are going to go up in the next couple of months because of all those programs kind of ending and as a council obviously have to switch over.
JJ Hornblass 09:42
Yeah. Joe, do you want to add something about this?
Joey Pizzolato 09:45
Oh, you know, I was I was just gonna say, you know, just to tack on to what you both have said, you know, another piece of this puzzle is partial payments, and that’s something that we’re going to be looking into a little bit more in depth next week. And to see how how consumers are What the volume is for partial payments on accounts and on accounts in deferrals, because that’s also going to give us a better understanding, not necessarily a clearer view, but at least a better understanding of, you know, expectations as to how high you know, delinquencies will rise, as you said, kind of come September.
JJ Hornblass 10:21
Joey, how do they account for partial payments, Visa v overall credit performance.
Joey Pizzolato 10:27
So my understanding and this is just a pre pre emptive understanding is that a partial payment is considered or a payment plan, consider partial partial payment if it’s been in deferral, and they’ve made I believe, I don’t know the percentage of the payment but at least that the lender has received a small amount of money at least once during the deferral period.
JJ Hornblass 10:55
And then their their account that’s that account is his account. To add that account would be active, that’s still considered, that’s considered the default in deferral. In deferral, excuse me, but as long but if there’s a partial payment, then you’re saying that’s a mitigating factor on the deferral versus a consumer that has zero payment whatsoever.
Joey Pizzolato 11:19
So So I think the reason that they, they monitor this figure is is it kind of points to, you know, the health of the consumer, you know, maybe they can’t make the full payment, but they can make a partial payment, you know, that indicates that there still is some income, you know, rolling in, and they’re, they’re not completely, you know, cut off from, you know, without benefits without an employment, employment and that they are willing to make their payment on their auto loan. Yeah, I
JJ Hornblass 11:50
think that’s why this consumer spending number is kind of important because if the growth rate on that is slowing, and you know, as as ever As you know, is sort of known the American American consumer and the American consumers spending is the greatest driver of economic growth in this country, you know, Americans know how to spend. So, if that pace has slowed, then that implies you know, some of the return of the coronavirus infections across the country are starting to once again depress economic activity. And, and so therefore, you know, like that this is all going to be a timing issue. And, and, and one of the factors, one of the sort of considerations on timing is potentially or the, the, the, the exit doors for that is reifies. So, refund activity in the auto space has historically been nominal, um, what might make? Why am I reifies? Fix this situation?
Joey Pizzolato 13:15
Um, well, to start from a, from a consumers perspective, you know, that’s a great way to lower your payment. And, you know, one of the only ways to lower your payment is to, you know, get your interest rate change, you can’t really do anything about the principal, but you can lower your interest rate. So that helps with affordability concerns, especially under you know, stress economic environments, from a lender’s perspective. Right, it does two things, it allows them to get a new loan on the books, because, you know, technically they are originating alone, and they get a fee for that. refi. And then it also a lot of credit unions that we found are and other lenders are offering, you know, 98 for all deferrals, payment deferrals on the first payment which is essentially extending this deferral period that we’ve been talking about. So it could work to get a new loan on the books, the first payment, help the customer out, and then you know, in the old loans wouldn’t be extended through, you know, excessive rain.
JJ Hornblass 14:19
But this falls another level of risk into the credit, right, because you You now have consumers. I mean, you said, right, that you’ve got extensions that have been up to four months. So you’ve got consumers if they refi. They have made a payment in seven months. And there is certainly the potential that spending change over the course of seven months and to reincorporate auto payments into the household budget when you’re under stress. Maybe Somebody’s unemployed, you’ve lost the federal unemployment, you know, boom, extra pain and, you know, maybe even the person who’s employed, their earnings have have come down. I mean, I just don’t see how this doesn’t become an amplification of credit that, you know, maybe this market hasn’t really seen before because you’ve got the firls on a on a basis that you’ve never seen. And you’ve got the potential. It seems like, you know, our colleague, Marcy Bellis wrote about this, that there is sort of this renewed interest in refinancing. And, you know, maybe refi will be at a level that you’ve never seen before. And so, you know, this is like a compounding risk factor that maybe the market hasn’t had that has never been in the market before. I mean, is that a fair assessment or do you look at this, you know, do you see this And then both of you, do you see this as just kind of a positive bridge to financial solvency for the American, you know, auto finance consumer?
Joey Pizzolato 16:14
Yeah. Well, I mean, I would say it’s absolutely a fair concern. And it’s one that, you know, I think all lenders have to be very cognizant of, you know, if they are going to step into this refi space, you know, you look historically, refinance loans performed better than, you know, the original loan that they came from, just historically, but, you know, we’re in very, on historic times, right? This is new, new, like a New Forest, for lack of a better analogy, right. So, so it’s really, really hard to say, but I do think that you know, there is, there is risk involved. And you know, quite a bit and I think that, you know, we know that lenders are more prudent and you know, their credit box I would think that that would that would, you know, bleed into their refinance operation and strategy as well.
JJ Hornblass 17:07
What kind of what kind of, you know, what kind of sentiments are you getting from, like the smps and the trans unions and of the autofunnel ISIS that are that are tasked with monitoring and disclosing risk.
Joey Pizzolato 17:27
I would say the best phrase to describe it is cautious optimism. Right? Like, we’re following the data, you know, the data, delete, or deferrals. Excuse me, um, you know, they’re, they’re the volume is going down. So that’s a good thing. delinquencies are still down. Obviously, they’re kind of, you know, bad number is is affected by, you know, deferrals. But you know, Bo, all of them especially SMP, when we talk to You know, then they’re very cognizant of the fact that there is still a lot unknown and really, you know, is for as long as the Coronavirus is around, you know, that unknown is really going to be very prevalent. So, I would say, you know, following the beta, or they’re following the data, but, you know, with the understanding that this could turn, take a turn for the worst at any moment, still,
JJ Hornblass 18:26
you know, I will say this, Joey, that, um, you know, there’s this general sentiment that following the credit crisis, you know, oh, the auto, the auto assets performed so well. And, and they really were, and it’s true, and it’s true on a relative basis, they really did not suffer from the kind of credit erosion, underwriting erosion that really plagued the mortgage market. But you know, that’s the type of thing and then there’s that similar There’s that similar conventional wisdom now oh, you know it sure it’s it’s it’s it’s, uh, you know, the recession is, is severe but we’ve underrated Well, in the past, and we were underwriting well now. I’m not sure that that logic holds. And I wonder whether there’s a false sense of security in the short duration of the auto loan that says, Yeah, wow, what’s the worst thing that can happen? You know, well, you’ve got $1.6 billion of outstandings that couldn’t, you know, on the subprime side with you know, so essentially you’re talking about $2.5 billion outstanding so we can just, you know, erode in this current scenario that that I’m not sure that lenders today think is gonna let you know is going to a road and with her up
Joey Pizzolato 20:02
You know, billion in subprime loans. That’s you have to remember that only securitized assets. I mean, think of how many, you know, subprime loans outstandings, you know, are across all lenders that aren’t, you know, securitized, which, which is a large amount. So, you know, these are there are a lot of unaccounted for loans that aren’t represented in the data still. Yeah,
Amanda Harris 20:31
I just add, like a side thought to that. So, you know, I think some of the optimism is coming from, you know, historically, people, at least in the US, and in places where cars tend to be, you know, almost crucial. Like, I can’t get anywhere without a car. We don’t really have great to like potentiation where I am, you know, so I think I’m the optimism comes from historically people have always kind of put in certain areas that auto loan kind of at the top, making sure they make at least those payments. If something else has to kind of be held off or, or they have to get it for over something else, they’re going to keep their car. So I think that’s some of the optimism but I think what we have to think about is this unique situation with the shelter at home and a lot of people working from home now that maybe wouldn’t have been working from home before. So it’s going to be interesting, I think to see how that plays out. And if that’s still remains a priority, if the whole work from home thing becomes more of a long term, you know, years situation rather than a few months that everyone kind of thought then that priority might shift a little bit. Neither cars much so I think that’s just another fact that that is on their minds, but I think they’re still kind of keeping that optimism of they’re gonna keep paying their car payment.
JJ Hornblass 21:44
Yeah, I think that’s a great point. I think also, you know, to couple the work from home, it’s also the boom in e commerce sales, which, you know, Lee has, I mean, the numbers are crazy, you know, just significant and so, you know, Maybe also what you’re talking about is kind of like a second card dynamic. Well, I’ve got two, maybe I don’t need that second one. So I, you know, I agree with you, I think that I think that there’s more going on here than just, this is the same scenario that we had posted post, um, you know, great recession. So let’s not be Debbie downers only and look forward to next week. So in addition to the partial payments, what is in store for our readers next week.
Amanda Harris 22:40
So next week, we do have two updates coming from subprime lenders. So we’ll be doing some updates on that. And I think we’ll, we’ll kind of hold off on sharing what that is just yet. Okay.
JJ Hornblass 22:55
Yeah. I can’t believe I can’t even find out what that is. just not fair. You know, we work together again. Okay. I will I do want to mention to everyone that we are, we’re really pleased to have relaunched auto finance news dotnet this week with more multimedia content. So very exciting. And I urge you to check out the site and see how we’ve even we’ve improved auto finance news dotnet even more. And of course, don’t forget to join us October 20 to 22 for the auto finance summit, and you can get details at auto finance summit.com. I want to thank everyone for joining us on this edition of the roadmap. We will see you online and here next time. Thank you all so much.