Auto Loan Delinquencies Rise

This chart that appeared on my timeline reminded me of the travails of one of the victims of the 2008 crisis. For the uninitiated, the auto loan business remains the last bastion of Wild West lending, unlike the mortgage industry, which train wrecked the economy, and got itself re-regulated. The proof of the pudding for housing is how little the sector wobbled during the pandemic. Stronger underwriting mandated for the mortgage lending industry prevented a meltdown, along with some support from Steve Mnuchin, who doesn't get enough credit for his actions during this period.

And so, auto loan delinquencies are tacking up, as per the chart:

But, even today, those radio ads you hear for car dealers ("Everyone drives!") are no joke. So, when the cold winds blow, these risky loans are the first to go sour, although they have a higher delinquency rate even when the economy is strong. The lender offsets this risk by charging a higher rate to this credit basket, which limits their exposure. Chances are, over 90% of the delinquent loans on this chart started out as shaky to begin with. Worst of all, there's usually little in the way of a down payment on most of these.

Which brings us to a story about a credit trained analyst/trader I was following on Twitter, back in the day when market pros could exchange ideas and talk shop unmolested. When the crisis hit, he was out of a job. And there were no liferafts for anyone. The employment pool had shrunk almost overnight with mass layoffs on a scale not seen since the 1930s. Citigroup laid off about 80,000 employees in 2008 alone. During this time, there is really no hope for anyone on the Street. People were desperate.

So, our hapless professional credit analyst winds up as the loan finance man at an auto dealership, for which he is supremely overqualified, but he has a family to support. Prospects come in after negotiating their purchases, he takes a look at the credit reports of the borrowers with their 520 FICO scores, and he starts rejecting them. After all, the man knows how to assess risk.

He gets called into the sales manager's office and gets his ears pinned back. All of these loans have to be approved and the 12% interest rate should cover the losses. (You will recall the Fed immediately dropped rates to zero in the aftermath of the bank crisis.) Since he's anonymous on social media, he reports what he sees, and it is indeed scandalous to the uninitiated. He can't believe the banks are funding these loans and there's one particular Spanish bank that shall not be named that apparently is writing most of the business. They will pay a price for this: $550 million in fines, for underwriting loans they knew would blow up. You would think the recent experience of the home lenders would give them pause. No chance.

But the lending industry appears to have been chastened this time around, with all types of credit applications being rejected at higher levels than before. And this time around, even the auto lenders are getting more selective. That might be because the rate spread isn't nearly as generous as it was during ZIRP.