December 1, 2016
Michael Corkery
The New York Times
Regulators are airing "significant concern" about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace.
Regulators are airing "significant concern" about the millions of Americans who are falling behind on their car loans, even as auto lending continues to boom at a near record pace.
On Wednesday, the Federal Reserve Bank of New York noted increasing distress among auto borrowers with shaky credit, as subprime delinquencies rose in the third quarter.
In the third quarter, 2 percent of subprime auto loan balances became at least 90 days delinquent, up from 1.6 percent in the third quarter of 2014.
In the depths of the recession, in the second quarter of 2009, that rate peaked at 2.4 percent.
"The increased level of distress associated with subprime loan delinquencies is of significant concern," researchers for the New York Fed wrote in a blog post on Wednesday.
The report is the most strident warning yet from the New York Fed about stresses in subprime auto lending. The New York Fed analyzes trends in borrowing by American households each quarter.
The swelling delinquencies come at a time when unemployment is low and borrowers typically should be able to make their payments.
That such serious trouble is emerging in a relatively good economy suggests that lenders have been loosening their standards and letting borrowers take on more debt than they can afford.
Violette Morin, of Pulaski, N.Y., a 74-year-old grandmother, said she did not need or particularly want to buy a car. But after receiving a mailing from a local dealership promising a prize of a pearl necklace and a fishing rod, she visited the used car lot in May 2015.
The dealer qualified her for a $20,350 loan, according to her lawyer, to purchase a 2011 Ford Fusion. Earlier this year, she stopped making the payments. "I eventually had them come and get the car because I couldn't pay for it," said Ms. Morin, who lives on Social Security, receives food stamps and lives in subsidized housing.
Economists fear that if the economy dips into another recession, the already large number of Americans on the verge of losing their cars to repossession — about six million — will swell to record levels.
Although the subprime delinquency rate may be lower today than it was in the immediate aftermath of the financial crisis, economists are concerned about the sheer number of Americans who are behind on their car payments because so many more have subprime auto loans than in 2009.
But industry experts have dismissed comparisons between subprime auto loans and the mortgage bubble that led to the global financial crisis. Back in 2008, trillions of dollars of investments were correlated to the American housing market. The auto loan market is huge — with $1.1 trillion in outstanding loans — but defaults are not very likely to have the cascading effects on the banking system that home foreclosures did.
If anything, the New York Fed report notes that delinquencies on auto loans originated by banks remained low, while many of the troubled loans were made by finance companies, which are not large enough to harm the broader financial system.
Still, widespread repossessions could deliver a stinging hit to the economy, as Americans struggle to get to work or go about their daily lives in areas with limited public transportation.
Nashua Moore, 28, gets up at 2 a.m., takes two buses, and reaches her office in Las Vegas by the time her shift as a medical dispatcher starts at 5 a.m. She schedules plenty of time to avoid being penalized for being late. By car, her commute takes about 20 minutes, she said.
"I was desperate to get a car," said Ms. Moore, who went back to work this spring after her daughter was born.
She borrowed $6,580 at a 30 percent interest rate to purchase a 2008 Chevrolet Impala. Her car was repossessed this fall, after she got in a dispute with the dealership. She is now working with a legal aid lawyer to get her down payment back and other damages.
"I see this all the time," said her lawyer, Sophia Medina, of the Legal Aid Center of Southern Nevada.
Auto loans are one of the few types of lending that has not been curtailed after the financial crisis.
Lenders have been willing to take more risks with auto lending based on a belief that Americans — even those who are struggling — will keep making car payments because they need their cars to keep their jobs and to keep their households functioning.
As competition becomes fierce, banks, private equity firms and credit unions have been extending loan terms as long as seven years — longer than many used cars are on the road.
Most of the growth in subprime lending has been driven not by traditional banks but by finance companies that specialize in making loans to borrowers on the financial margins. Subprime lending is more profitable because lenders charge interest rates as high as 30 percent and they often bundle the loans and sell them to investors — much as mortgages were securitized before the financial crisis.
The New York Fed noted in the report that overall delinquencies among prime auto borrowers remained low, despite "notable deterioration in the performance of subprime auto loans."
Analysts at Fitch Ratings said that although losses on subprime loans were rising, they were within the firm's expectations.
Annualized net loss on an index of subprime auto loans hit 9.6 percent in October, up from about 8 percent a year earlier, according to Fitch.
"Subprime auto performance could decline further if there are any stresses to the underlying economy," Kevin Duignan, Fitch's global head of structured finance, said in an interview.
As auto lending has boomed, regulators and investigators have been looking into increased cases of fraud where dealers have misstated borrowers' income to qualify them for loans.
Ms. Morin, the borrower from New York, said that when she asked for a copy of her loan application, she noticed that the document listed her monthly income as more than $3,300, which was false. She collects about $850 a month in Social Security.
Ms. Morin worked with the consumer law clinic at the Syracuse University law school, which contacted the lender, a credit union, on her behalf. Ms. Morin's loan was forgiven and her default was scrubbed from her credit report.
"I wasn't car smart, I was just an average person," Ms. Morin said. "I am car smart now."
