by Umar Farooq
Vehicle ownership increased steadily during the 20th century to the point where, by 2001, there were more than 1.2 registered motor vehicles for every American who was licensed to drive. By then, it was reasonably safe to argue, almost everyone who wanted and could reasonably afford the costs of a motor vehicle probably had one – there was little meaningful room for further growth (aside from population increases). The ratio of vehicles to drivers declined slightly in the years that followed, rose to a secondary peak in 2006, and declined again during the recession years. Beginning in 2011, however, and accelerating in 2015, the ratio of vehicles to drivers surged to a new peak.
“Over the last several years, the auto credit market has been extremely loose, with low interest rates, lengthening repayment terms (translating into lower monthly payments), and a heightened acceptance of risk on the part of lenders. This has contributed to a surge in auto credit – collectively, Americans owed 9 percent more on auto loans at the end of 2016 than they did just 12 months earlier, and the amount of auto credit outstanding now exceeds the previous peak of 2005 by 13 percent when adjusted for inflation. If this increase in outstanding credit was built on market fundamentals, it might not be worrisome. (And, indeed, there is an argument that one of the most important changes in auto lending in recent years – the lengthening of loan repayment terms – could be justified by the greater durability of cars.) But there are plenty of reasons to be concerned that the surge in auto loans has the makings of a bubble. For several years now, stories have emerged out of the subprime auto market of loans being made with little apparent attention to consumers’ ability to repay – stories that sound familiar to anyone acquainted with the conditions that led up to the housing crisis.” usa.streetsblog
Along with all this the borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers. As many as 1% of U.S. car loan applications include some sort of material misrepresentation, according to Point Predictive, which expects lender losses from fraud to hit $6B this year – double the amount from 2015. Point Predictive’s Frank McKenna draws a parallel to the housing bubble, in which fraud rates ticked to more than 1% in 2009. It may have been higher prior to that, but that sort of information wasn’t as well-kept during the salad years.
Source: value walk
Trouble is growing in auto loans. The total amount of the debt outstanding has risen more than 50 percent since the end of 2010, a rapid increase. Delinquencies among subprime auto loan borrowers are jumping, and in the fourth quarter of 2016, there was over $1.1 billion of consumer car debt that lenders could not collect, Point Predictive said. In a Federal Reserve survey released Monday, banks said they had tightened their underwriting standards for car loans.
Auto lenders including banks and finance companies are concerned about consumer fraud, and they’re often even more concerned about fraud among dealers, said Kimberly Sutherland, senior director for fraud and identity management strategy at LexisNexis Risk Solutions in Alpharetta, Georgia. Dealers have an incentive to complete sales, and may better know how to tweak paperwork to get bad loans funded than a regular consumer, said Sutherland, whose firm helps lenders identify risks in their portfolios.
About 3 percent of dealers can be responsible for all of a lender’s fraudulent applications, Point Predictive said in a February report. Losses from auto loan fraud this year will likely be $4 billion to $6 billion, up from $2 billion to $3 billion in 2015, the firm said.
Due to all this, there is a growing consensus among auto industry watchers that the growing auto loan bubble won’t be sustainable. It is as yet unclear, however, whether the auto bubble will deflate with a hiss or a pop, and how much collateral damage it might cause to the rest of the economy in the process.
by Umar Farooq