While on the surface the US economy has been chugging along from GDP-crashing “snow in the winter” to GDP-cratering “warmer|cooler than expected weather in the spring|summer|fall”, with bouts of GDP-boosting inventory accumulation inbetween, in recent months two very disturbing trends about that all important dynamo behind the economy, the US consumer, have emerged.
On one hand we wrote three weeks ago that a “shocking” 77 million, or one third, of Americans face debt collectiors: a statistic which crushes any suggestion that US household credit is substantially improving based on trends in 30, 60, or 90-day delinquency, as it means that the real pain is not at the near-end of the default/delinquency timetable, but the far end, which incidentally has just as dire an impact on one’s credit score as a plain vanilla default (and explains why none other than Fair Issac has jumped in to “adjust" its credit methodology to artificially boost FICO scores of these millions of Americans).
On the other hand, we have been closely following the ongoing deterioration of the car subprime loan bubble: something that both Bloomberg and the Fed have both also been paying close attention to recently, yet a bubble which nobody wants to burst, because as we wrote several days ago, it is none other than the subprime car loan bubble that allowed car production to surge the most last month since Obama’s Cash for Clunkers capital misallocation program, in the process lifting overall manufacturing and Industrial Production, and thus GDP.
Earlier today Experian released its latest, Q2, metrics that tie these two very worrying trends together, namely the trend in delinquencies, defaults and repossessions.
As NBC summarizes: “The repo man is getting very busy as a growing number of car and truck owners are struggling to make their monthly auto loan payments. Experian, which analyses millions of auto loans, said Wednesday that the percentage of those loans that were delinquent or ended up in default with the vehicle being repossessed surged in the second quarter of this year.”
Hyperbole? Hardly. In fact, the auto loan subprime bubble may be the latest to burst (after student loans) as the rate of car repossessions jumped 70.2 percent in the second quarter, with much of that increase coming from finance companies not run by automakers, banks or credit unions. The good news: the percentage of auto loans that end in default is just 0.62% of all auto loans. However, as everyone but the Fed knows, what matters is the flow, not the stock, and the direction and acceleration in defaults simply means that the maximum saturation point has been reached and going forward lenders will experience ever greater losses, which in turn will limit their willingness to offer subprime loans to US consumers desperate to find a house (because clearly one doesn’t need to home when one can sleep in their Chevy Tahoe).
Experian also reported that the 30-day delinquency rate was up 0.2 percent and the 60-day rate rose 7 percent in the quarter. "We’re starting to see a slight uptick in the number of consumers struggling to make their automotive payments on time; however, we have to keep in mind that these percentages are still extremely low,” said Melinda Zabritski, senior director of automotive finance for Experian Automotive.
A chart of the Y/Y change in 60-day delinquency rates as of Q1:
Zabritski added via CNBC that “The number of delinquencies and repossessions rising is what we would expect as the auto industry sells more vehicles,” “But this slight uptick is one to keep an eye on.” The surge in delinquencies and repossessions is being driven primarily by borrowers with subprime and deep subprime credit scores.
The main reason to keep an eye on this “slight uptick” is that the underlying notional of total auto loan balances just hit a new all time high: in the second quarter climbed 11.7 percent to an all-time high of $839 billion, according to Experian. It doesn’t take much of a deterioration in payment terms and credit quality before bad loans surge when the underlying debt is hitting record notionals quarter after quarter.
Some data: the average charge-off was $8,149 in the second quarter up $932 compared to the same period of 2013, and rapidly rising.
Of course, it wouldn’t be a CNBC report if it didn’t end on a positive note:
Zabritski knows many people are worried the industry is creating a financial storm that will end badly, but she says subprime sales are still far below normal.
"The growth in subprime auto loans looks dramatic because it was so restricted in the last few years," she said. "But this is not mismanaged, rapid growth. We are still well below levels we saw during the recession."
Because somehow one can compare a period in which the Fed has a $4.4 trillion in balance sheet leverage with a period in which… it doesn’t? Good to know then that at least consumer subprime lending is not as bad as it was then, and instead all of the Fed’s proceeds have simply made their way into the bubble of a stock market.
Finally, for the curious, here are some charts from the most recent, Q1, Experian presentation on the matter. We will update these once the latest slides are unveiled by the credit company.
The average credit score on top leased models:
The average loan vs lease payment for the top 10 most popular car models.
The top New loan lenders:
And the top Used loan lenders:
But the one reason we know the subprime auto loan bubble has burst and is about to lead to another round of devastation around the nation is one simple statement: “The New York Fed dove into lending data, and its economists found that the bubble fears may be misplaced.” In other words, it is “contained.”
Hm… where have we heard that before?
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Don’t worry though - it’s not as bas as the peak of the recession!!!