Many people are sharing concerns about threats to the auto lending industry, but dailyreckoning.com has actually placed a predicted date for the “big event” – July 2017. In a recent article on the site, Amanda Stiltner updates her reporting on the what seems to be a building crisis by first quoting The Wall Street Journal‘s March 21 story which stated, “The auto finance sector has taken a bad turn.”
Stiltner’s rephrasing of that statement? “The auto finance sector just ran a red light and is about to T-bone a minivan.”
Stiltner says Ally Financial’s mounting defaults on auto loans for low-credit borrowers confirms what she reported in December, when Experian’s market tracking showed that up to 40 percent of all auto debt in America was “nonprime” or worse. She says that more nonprime auto debt in the market is a harbinger of more defaults and car repossessions. That, of course, means that there is even more used car inventory showing up on dealer lots. This, in turn, cuts into automaker sales and profits, in part because the ramped up supply results in lower prices for used car shoppers.
The problem, Stiltner says, is that auto lenders seem to be mirroring home lenders in advance of the 2008 housing collapse. She says that lenders seem to be making loans as if a crisis isn’t in their future. For example, she cites Ally’s data that shows that close to a third of its auto loans were made to buyers with FICO scores below 660.
She also quotes a recent note from Morgan Stanley that says, “We believe a decline in used car values may occur a bit later than consensus, but could also prove to be far more severe.”
Stiltner says that Daily Reckoning is sticking with its prediction that a “combination of subprime auto finance, rising defaults, falling used car prices and cratering new car sales will threaten not only the entire auto industry but the broad economy as well.”
Let us know! What concerns do you have about the auto lending industry?