Strong credit fundamentals have compressed auto loan delinquency and loss rates for the past few years. Today TransUnion announced that the national 60-day auto delinquency rate in the first quarter fell to 0.49% ― the lowest level since the company started tracking the variable in 1999. And though bank card and second mortgages default rates have started to tick up according to the S&P/Experian Consumer Credit Default Indices, auto loan defaults fell 2 basis points to 1.45% in April.
The question is: Which way are delinquencies and losses headed for the remainder of the year?
Peter Turek, automotive vice president in TransUnion’s financial services group, expects continued improvement. “Because of improving employment and consumer confidence our forecast for the last quarter of 2011 suggests that the auto delinquency rate will continue to improve, declining 15% to 20% from today’s rate,” he said.
But some industry analysts predict slower car sales through summer. And with lenders loosening underwriting guidelines, it seems natural that consumers might become less diligent with on-time payments.
What’s your take? Are we headed for worsening loan performance by yearend or will auto finance stay strong?
No rocket science here!
Delinquncy rates should be down because underwriting has been very tight for the last few years. the sub-prime market is minimal and slow payers with jobs may be able to get re-financed because their car values are much higher than would be expected.
Losses would be lower for the same reasons. Additionally, the unemployed need a car to attempt to get a job so they will pay their car payment before anything else.
As for improving employment, the numbers are still anemic. I would want to see some real numbers as to how many are gaining employment with a salary even close to within 20% of the salary that they had in 2008.
While automated loan approval systems have many different approaches, the bottom line is that car sales that require financing will only increase if the underwriting starts to loosen and the financing company can justify the risk-based premiums for the loosened underwriting – in other words – they would have to not be abusing the potential buyer with unjustified rates. Ever watch those TV ads touting low rates? The disclaimer is in fine print (you can read it if you have a DVR and freeze it) and it basically says you can get the low rate if you do not need the money.
You can fill in the numbers:
Gross yield charged on auto loans
minus Cost of money (should be very low)
minus operations cost (should be at historical consistency)
minus Return Expected on Assets (Oh what could this be that would be considered “fair”) by the public
equals Actual Loss Experience expectation.
You can reverse the last two entries but my point is that there does not appear to be any lender that is telling the public what those numbers would be and competition does not appear to be at work. (I have actually seen some banks present to financial analysts that the industry ROA target on credit cards is 2% which is about 20-24% net to them. Tears anyone?
The big banks are paying out huge bonuses because of profits provided by an absurdly low cost of money so why should they care about helping to finance the needy. Anybody disagree?
So my prediction is that auto sales will muddle along for the rest of the year.
I tried adjustable rate auto loans in the mid 1980’s as a protection from the disasterous rate changes of 1980. Offered as an option, and no-one took it up. Most folks only want the front end low teaser rates on adjustable products, they don’t want the higher rates as time goes by. Often they can’t afford those rates – they maxed out their purchase based on the low rate. Adjustable rates make sense, but the market place won’t move there unless they know they are on the high end, or unless there are no other options. Maybe the times have changed – but I don’t see evidence of it.