DALLAS—After experiencing record sales in 2015, there are growing signs coming from the auto sector that could possibly raise red flags for 2016 and 2017, one analyst is forecasting.
Brian Turner, executive director with Meridian Alliance, cites several reasons credit unions should be prudent with auto lending this year and avoid the temptation to reach to lower credit scores as new car demand wanes and competition increases. Those reasons include rising auto loan delinquencies—particularly in oil-producing regions, auto terms continuing to extend, more borrowers in a negative equity position, and issues arising in the subprime sector.
“This doesn’t suggest that credit unions should curtail auto lending in 2016. Only that we should not merely seek volume by taking substantially higher levels of credit risk by increasing portfolio holdings in lower-quality auto loans—at least not until we get through the next couple of quarters,” said Turner. “Of course, that might take most of the industry past the peak of expected demand this year.”
According to TransUnion, the national auto loan delinquency rate increased from 1.16% in Q4 2014 to 1.24% in Q4 2015.
“This is the highest level since Q4 2010 when auto delinquency hit 1.22%,” said Turner. “As energy prices took their 50% decline over the past year, auto loan delinquency rates experienced double-digit increases in energy-rich states such as Louisiana, Oklahoma, North Dakota, Texas and West Virginia. Louisiana had the highest rate at 2.57%, while Oregon had the lowest at 0.57%.”
Falling Oil Prices
As average oil prices have dropped, states such as Texas, Oklahoma, Louisiana and New Mexico have experienced between 14.5% to 15.3% increases in auto loan delinquencies, Turner noted.
“The average auto delinquency rate in Texas rose to 1.63% and to 1.84% in Oklahoma. As oil-sector employment continues to be impacted through 2016 and both corporate and government revenues are declining, credit unions must closely monitor not only existing loans on the books but underwriting standards for new issuances in order to protect adverse credit exposure through the spring and summer months,” said Turner.
But with oil prices trending back to $40 per barrel in recent trading, the consolidation within the oil sector should begin to moderate and revenue streams should improve, continued Turner.
“For the immediate future, though, consider the fact that a rising number of lower-credit quality-loans have been turning delinquent within three months of their initial issuance,” he said.
Brian Turner, Meridian Alliance
While auto sales recovered over the past two years, and transaction prices reached all-time highs, buyers have been turning to longer-term financing, a trend CUToday.info has been covering. Data from J.D. Power shows the percentage of 72-month loans issued recently now represents 34% of sales, the sixth consecutive year the average term has extended.
“Not only does this extend average loan life from two to over three years, it comes during a time of relatively low short-term interest rates—something that has held down average asset yields over the past six years,” observed Turner. “It also weighs on consumers’ financial well-being in that it makes it less likely they might buy new vehicles in the future—or at least until their loan expires.”
Negative Equity Heading For Ten-Year High
According to a new IHS Automotive survey, the typical car on the road in the U.S. is a record 11.5 years old. The number of vehicles on the road that are at least 25 years old is about 14 million, up from eight million in 2002. IHS projects the number of vehicles that are older than 12 years old will rise by 15% over the next five years.
According to J.D. Power, the percentage of car owners facing negative equity is projected to hit a 10-year high in 2016.
“At 31.4%, nearly one-third of all car owners are currently underwater with their financing,” said Turner. “This is higher than in 2006 when the percentage of underwater ownership was 19.6% when, as J.D. Powers points out, ‘easy credit temporarily juiced sales before the industry crashed.’ This certainly is a function of longer-term financing and higher transaction prices over the past two years in particular.”
J.D. Power also notes the recent rise in the rates on subprime loans, reaching 17.5% in 2016.
“This would be the highest rate since 19.6% in 2007—just prior to the start of the past recession,” said Turner.
Perilious Path
John Humphrey, J.D. Power’s senior vice president of global automotive, cautions that “automakers must avoid the perilous path of chasing volume and market share with easy credit and heavier incentives.” Moreover, he said, “the industry has to be disciplined in the upcoming period of slower growth."
Auto lenders continue to approve more consumers based on non-traditional ways to determine creditworthiness. The use of “alternative data,” beyond what the credit bureaus typically monitor, have many institutions defending the practice they believe gives lenders a fuller picture of consumers’ credit profiles which may make them reliable loan candidates, noted Turner. Such data includes property and tax records, debit accounts, payday lending information and even magazine subscriptions and cellphone bills.
“Whereas the practice certainly would increase the number of ‘qualified’ borrowers, it doesn’t necessarily improve the credit risk exposure to any existing portfolio,” said Turner.
Back in 2007, the average borrower had a credit score of 711, according to Experian. As delinquencies soared during the economic turndown, lenders made it more difficult to get a loan. By the time the recession ended in 2009, the average score had risen to 738. However, by the end of Q4 2015, it was back down to 711.
“Whereas, these factors vary in how they might contribute independently to current market exposure, collectively they reflect important variables that could affect the outlook on market demand and, more importantly, credit risk exposure in 2016 and 2017,” concluded Turner. “The credit union industry saw its average market share on non-revolving credit increase in 2015 from 10.5% to 11.1%, according the Federal Reserve. This increase in market share stems from the 13.9% increase in industry vehicle loans, led by a 16% increase in new vehicle loans. Industry delinquency rates for new and used vehicle loans were relatively unchanged at 0.42% and 0.83%, respectively. This seems to trail the national average which could either be a sign of strength or a possible lagging indicator for the industry.”