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What Delinquent Auto Loans Say About Loose Lending -- WSJ

20 May 2017 6:33 am
By Aaron Back 

Auto loans are getting worse, and while the delinquency rate remains low, the increase is surprising given the strong employment picture. This is weighing on car sales, but more important, is a window into lending standards after the financial crisis.

The percentage of auto loans that were over 90-days delinquent rose to 3.82% in the first quarter from 3.52% a year earlier, the New York Federal Reserve said in its quarterly report on household debt. That was the highest level in four years.

The delinquency rate is well below the previous credit cycle's peak rate of 5.3%, reached in the fourth quarter of 2010. What is worrisome is that unemployment is now 4.4%, in December 2010, the unemployment rate was 9.3%, having peaked at 10% just over a year before. That rise in defaults was caused the old fashioned way, because borrowers lost their jobs and couldn't make the payments.

The other typical reason why defaults increase is a sharp rise in interest rates. The fact that auto delinquencies are rising absent these factors, says Standard Life economist Jeremy Lawson, "is a sign that there a subset of people that shouldn't have gotten loans."

Having realized that they loosened the taps too much, auto lenders are now tightening terms somewhat. The median credit score on auto originations in the first quarter rose to 706 from 695 a year earlier, according to Fed data. This could help explain why auto sales figures have weakened in recent months. In April, U.S. vehicle sales fell by 4.7% from a year earlier, according to Autodata Corp.

The aggressive auto lending is just a blip compared with the collapse in mortgage lending standards that led to the financial crisis. It is worth asking whether a bit of amnesia has crept into lending decisions.

Major banks that engage in auto lending can easily handle the increase in losses. The fallout is likely to hit specialized auto lenders harder, as well as the auto industry itself. Investors should also be concerned about whether lending standards became too easy in credit cards, another area where balances have risen strongly, or whether consumers scale back spending as they shy away from debt.

The good news is that consumer balance sheets are in good shape. At $12.73 trillion, total household debt has finally surpassed its 2008 peak, according to the Federal Reserve data, but as a percentage of household incomes or gross domestic product it is much smaller.

The new debt cycle bears watching.

Write to Aaron Back at aaron.back@wsj.com

(END) Dow Jones Newswires

May 20, 2017 02:33 ET (06:33 GMT)

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