Auto Delinquency Rates Near 2008 Highs (F, KMX)
A growing number of U.S. consumers have fallen behind on their car loan payments, bringing auto delinquency rates to their highest level since 2009 and raising speculation that we could be slowly edging toward another subprime lending crisis.
According to data from the Federal Reserve Bank of New York, the number of car loans delinquent by at least 30 days grew to $23.3 billion in the fourth quarter, falling just short of the previous high posted in the third quarter of 2008.
The data also showed that U.S. household debt rose at its fastest level since 2007 last year. This came after increases in all of the other main categories, including mortgages and student loans, pushed the total amount of debt up $460 billion to $12.6 trillion — just 0.8 percent less than the peak reached during the height of the financial crisis.
Should We Be Concerned?
These findings have raised questions about underwriting practices in the car loans sector. Given today’s environment of low borrowing costs and falling unemployment rates, it would appear that lenders are enabling consumers to buy bigger and better vehicles than they can realistically afford. These observations mirror what happened in the run up to the financial crisis, when unaffordable loans eventually triggered an unmanageably high default rate in the subprime mortgage sector. (See also: Subprime Meltdown.)
Which Companies Are at Risk?
Should U.S. consumers continue to fall behind on their car payments, the automotive industry will definitely be affected. Last month, Ford (F) warned that it expects loan losses to spike following a rise in delinquencies and car repossessions. As we mentioned last year, concerns over subprime auto delinquency rates may be one of the reasons why share prices in the likes of Ford and other car manufacturers are currently so low. (See also: Subprime Auto Delinquency Rates on the Rise.)
Used car dealers, such as CarMax (KMX), might also come under pressure from rising delinquency rates, as could several of the banks that specialize in subprime auto lending. BB&T (BBT), Huntington Bancshares (HBAN) and Wells Fargo (WFC) are just some of the banks that provide consumers with loans to buy cars.