By Ray Birch
ONTARIO, Calif.—Expect a steady economy in 2020 with little threat of recession, according to one economist who says the biggest concern for credit unions next year will be rising auto loan delinquencies and defaults.
During a CU Direct webcast, Elliot Eisenberg, chief economist for economic consultancy GraphsandLaughs, warned credit unions to pay attention to rising delinquencies within auto lending, driven by higher vehicle prices, longer terms and mounting negative equity.
“The economy is fine, especially if we get the trade deal with China,” said Eisenberg, who thinks that may happen soon. “There is nothing really wrong with the economy, we’ll just be going back to the same growth we had from 2010 through 2017—2018 and 2019 were aberrant years, and 2018 was wonderfully aberrant. So next year will just be normal growth.”
What to be Watching
But credit unions, cautioned Eisenberg, should be watching their auto loan portfolios closely.
“There is no real problem in the economy other than auto loans,” he said, noting delinquencies are rising, approaching levels seen around 2010. “Keep your loan quality high and have a plan for what to do if defaults go up.”
Eisenberg said the plan should include how to address used car prices if a surge of repos hit the market and just add to the large number of off-lease vehicles coming back, driving down used values.
“Think about what you might have to do if you have to repo more cars and the value of those cars declines more quickly than expected,” he said.
Eisenberg said auto loan delinquencies are the biggest concern among rising delinquencies. He pointed out credit card delinquencies have bottomed out and have started to rise, but added the economy has grown and there simply are more card dollars in play, and that credit unions should not be too concerned here.
“But the auto loan issue is serious,” he said.
Dr. Eliot Eisenberg
The Upside Down Situation
Eisenberg is concerned for car prices rising and consumers going back to wanting, big, more expensive vehicles. As CUToday.info has extensively reported, rising prices has led to much longer terms to keep payments affordable, and that is driving up a great deal of negative equity in cars.
“You trade in the old car and still owe $5,000, so that gets rolled into the loan for the $35,000 car. That is where about one-third of car buyers are right now,” Eisenberg explained. “That’s a conundrum. A lot of consumers are going well beyond 72-month terms now, some to eight years. Terms are just getting too long—you're creating impediments to success.”
The biggest culprits are the finance companies, experts have stated, who are originating the large percentage of subprime auto loans. Eisenberg said the delinquency issue is centered among subprime borrowers.
“The originators of the subprime debt are causing this problem,” he said.
While credit unions are not the cause of the issue, they need to prepare for problems, especially if rates begin to rise again, Eisenberg said. “Look for ways to insulate yourself from this problem.”
Eisenberg said the mortgage market is fine and delinquencies here are not an issue.
“Mortgage debt has fallen since the Great Recession, there is no problem here and there is no mortgage bubble looming,” he said.
Another Issue of Concern
Eisenberg does have concerns around an issue that is much discussed but for which there have been few solutions offered—burgeoning student loans.
“The other problem is student loans,” said Eisenberg, who said perhaps the biggest issue is not the delinquencies, it’s how massive student debt is affecting behavior of younger consumers.
“What this debt is doing is delaying behavior,” Eisenberg explained. “Take a 30-year-old woman who would have wanted to be married by now but waits until she’s 34 because she wants to pay off her student loans. That same couple then waits four or five years longer to have kids. So, they’re not buying their first home as soon, and instead the live in an apartment longer, the population declines … This student loan problem is leading to all kinds of nefarious things we don’t readily think about. The younger households are struggling.”