The dollar value of subprime auto loan originations has nearly
doubled since 2009 to reach $20.6 billion, or 22.2% of total auto
loan originations, in the second quarter of 2014, per the Quarterly
Report on Household Debt and Credit for the quarter released by the
Federal Reserve Bank of New York last week. While the proportion of
subprime loans to total auto loans is significantly lower than
25-30% in the pre-recession period, it is still a concern due to
the fact that auto loans rank third among loan groups, following
mortgages and student loans, in terms of America's outstanding
Moreover, originations of subprime auto loans (loans to
borrowers with credit scores below 620) are increasing at a faster
pace compared to the rest of the auto loans. Originations of loans
to the other credit score groups increased merely 50% since 2009.
In fact, auto loan originations to the super-prime group (borrowers
with credit scores above 759) increased only 43.1% to $27.9 billion
in the second quarter of 2014 from $19.5 billion at the end of
A majority of the subprime auto loan originations can be
attributed to auto finance companies. In fact, these companies
issued three times the dollar value of subprime loans issued by
banks during the second quarter of 2014. Needless to say, this is
helping boost sales of the associated auto companies.
Easy availability of auto loans with lower interest rates and
longer repayment periods is one of the chief reasons for the rising
U.S. auto sales. Auto loan balances (including leases) have been
increasing consistently in the past 13 quarters and auto loan
originations in the second quarter of 2014 climbed to an eight-year
high. Buoyed by this, U.S. auto sales on a seasonally adjusted
annualized rate (SAAR) remained above the 16 million mark in the
last 5 months. In fact, in Jun 2014, the SAAR of sales reached 17
million for the first time since Jul 2006.
As the automobile industry is a major contributor to the U.S.
economic growth, improving auto sales is also benefiting the
overall U.S. economy. However, concerns about the subprime auto
loans are rising.
Recently, federal prosecutors started a civil investigation into
the matter. They are concerned that auto loans are possibly being
issued without adequate background checks and adherence to
standards. They are also looking into possible violations of the
Financial Institutions Reform, Recovery, and Enforcement Act.
Earlier this month, General Motors Co. (
) received a subpoena as a part of this investigation, requesting
documents related to the origination and the securitization of
subprime loan contracts since 2007. The United States attorney for
the Southern District of New York will consider other auto
companies as a part of the investigation as well, per media
reports. Most major auto and truck manufacturers such as General
Motors, Ford Motor Co. (
), Toyota Motor Corp. (
), Honda Motor Co. Ltd. (
), PACCAR Inc. (
) and Tesla Motors Inc. (
) provide financing and leasing to customers.
Should We Be Worried?
While subprime auto loan originations are increasing rapidly, so
are the total auto loan originations. Consequently, the proportion
of subprime auto loan originations to total auto loan originations
has not increased significantly. Moreover, the 90-day delinquency
rates for auto loans is only 3.3%, on par with home equity lines of
credit and lower than all the other loan groups as well as the
average delinquency rate.
In fact, economists from the Federal Reserve Bank of New York
believe that the increase in subprime auto loans is not extreme,
given the rising auto sales. They also reason that since subprime
auto loans witnessed the maximum decline during the recession, the
present rise in this loan group is more pronounced than other
Thus, the increasing subprime auto loans should not pose any
abnormal risk unless their proportion to total auto loans starts
increasing significantly or the civil investigation reveals any
major negligence in conforming to loan standards.
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