Credit bureau Experian released a report recently about auto finance trends, and I wonder if it was equivalent to watching a horror movie when the camera follows the teenage babysitter as she tries to figure out what’s making that scratching noise in the attic. Everyone watching the movie knows that the serial killer is up there, but up she goes, completely oblivious to what’s waiting for her.
Monthly payments, on average, are higher. The average credit scores on newly originated new- and used-car loans are lower (at their lowest point since mid-2008). Loan terms are getting longer. And the amount financed is growing, not decreasing.
In all cases, these indicators are proof of the anecdotal evidence that credit standards among auto lenders are loosening. Taken individually, they might not be a big cause for concern. Monthly payments, for example, are $2 higher than they were a year ago.
But analyzed in aggregate, is this a huge red flag that the auto lending industry — and the banking sector, in general — are heading down an all-too familiar path of economic disaster?
It was widely reported recently that auto loan delinquency rates are at all-time lows. This is great news and could have been taken as a sign that the cycles of the past were just that — in the past. But the data released by Experian indicates that maybe the harsh lessons of economic cycles past are going to be repeated in a year or two, when the likely byproduct of looser underwriting standards — higher delinquency and default rates — start making scratching noises in the attic.
Credit bureau Experian released a report recently about auto finance trends, and I wonder if it was equivalent to watching a horror movie when the camera follows the teenage babysitter as she tries to figure out what’s making that scratching noise in the attic. Everyone watching the movie knows that the serial killer is up there, but up she goes, completely oblivious to what’s waiting for her.
Monthly payments, on average, are higher. The average credit scores on newly originated new- and used-car loans are lower (at their lowest point since mid-2008). Loan terms are getting longer. And the amount financed is growing, not decreasing.
In all cases, these indicators are proof of the anecdotal evidence that credit standards among auto lenders are loosening. Taken individually, they might not be a big cause for concern. Monthly payments, for example, are $2 higher than they were a year ago.
But analyzed in aggregate, is this a huge red flag that the auto lending industry — and the banking sector, in general — are heading down an all-too familiar path of economic disaster?
It was widely reported recently that auto loan delinquency rates are at all-time lows. This is great news and could have been taken as a sign that the cycles of the past were just that — in the past. But the data released by Experian indicates that maybe the harsh lessons of economic cycles past are going to be repeated in a year or two, when the likely byproduct of looser underwriting standards — higher delinquency and default rates — start making scratching noises in the attic.
After the recent meltdown of the world financial system brought about as a result of shoddy regulation, I don’t think Republicans are who I would look to for advice on the subject. On the other hand, perhaps they have learned from their mistakes?
Yes, we can see this potential train wreck coming, as I’ve written in my occasional column for AFN. But I’m not “in the market” so I was arguing from theory and historical knowledge. It’s good (though sad) to see that the symptoms of excess credit are showing up, even if as yet there are no real signs of illness.
In the mid-2000s easy monetary policy enabled the bubble; it never made good sense to think that easy monetary policy was a cure for the collapse of the bubble. In 2008, with an election campaign under way, it was the only politically feasible response. Subsequent political stalemate has prevented any other response, except for a modest fiscal package in early 2009 that has already expired. So we’re stuck with lackluster growth, and the possibility that we’ll end up again with big financial imbalances.
So spot on: creating a new bubble is not a good response to the bursting of a bubble.
Addendum: Given the exit of lots of players in 2008-9, how many of the staff at those who have reentered the industry are “green”? If those making lending policy don’t remember recent history, because they are new to the game, that makes it all the more likely we’ll see a replay.
Great points, especially about the experience of the current underwriters and analysts. However, many of the new and re-entering players are now utilizing today’s wealth of business analysis products and sophisticated scoring models. I have all hopes that the companies that are doing things based on good historical data will maintain loss ratios that allow them to sustain the “bumps and bubbles” in the market.
The sooner we get “normalcy” the greater the likelihood that competitive forces won’t spread the lowest common denominator, and then lower it further. However imperfect ‘easy money’ may be, it certainly beats the alternative right now. And debt levels are down — I’m a case in point, assiduous repayment of mortgages aided by a renter for my unsold former primary dwelling. I’m even shopping for a new car (the price differential I’m finding for used isn’t big enough).
The direction of change — improvement — is clear right now, though the magnitude of headwinds from the pending collapse of the euro is uncertain. With luck we won’t be pulled back into recession, and as more and more people work off debt and excess housing gets soaked up, well … we may see a return to more normal interest rates before finance spirals back down to disastrous levels.
However, I view business analysis products as only fingers in the dyke; after all, the industry had decades (if not a century) of experience with basic cash flow credit analysis, yet at the peak (depths!) of the previous cycle offered liar loans.
The sooner we get “normalcy” the greater the likelihood that competitive forces won’t spread the lowest common denominator, and then lower it further. However imperfect ‘easy money’ may be, it certainly beats the alternative right now. And debt levels are down — I’m a case in point, assiduous repayment of mortgages aided by a renter for my unsold former primary dwelling. I’m even shopping for a new car (the price differential I’m finding for used isn’t big enough).
The direction of change — improvement — is clear right now, though the magnitude of headwinds from the pending collapse of the euro is uncertain. With luck we won’t be pulled back into recession, and as more and more people work off debt and excess housing gets soaked up, well … we may see a return to more normal interest rates before finance spirals back down to disastrous levels.
However, I view business analysis products as only fingers in the dyke; after all, the industry had decades (if not a century) of experience with basic cash flow credit analysis, yet at the peak (depths!) of the previous cycle offered liar loans.