This is the first of a two part blog about the state of auto lending in the U.S.
In 2014, auto lending has received increased media attention. Unlike other forms of consumer lending, auto lending has been booming. This lending has powered spending and has been an important driver of the economic recovery.
However, as auto lending has increased, subprime lending has advanced as well. Many analysts now are predicting as a result of the increased volumes, auto delinquencies will eventually rise. Some have even drawn a corollary to the increase in subprime mortgage lending and its resulting impact on the Great Recession.
Regulators and rating agencies have weighed in on the subject too.
The principal banking regulator, Office of the Comptroller of the Currency (OCC) noted recently, “The OCC sees signs that credit risk is now building after a period of improving credit quality and problem loan clean-up.” In particular, the OCC pointed out how its examiners have observed a “loosening of standards and increased layering of risk in the indirect auto market.” (Semiannual Risk Perspective, Spring 2014)
The OCC’s primary points regarding auto lending risk are:
- Longer loan terms,
- Increasing advance rates with resulting higher LTVs,
- Originating loans to borrowers with lower credit scores,
- A larger average loss per vehicle.
Nevertheless, the OCC notes, “The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident.”
Standard and Poor issued a report regarding Finance companies (and bonds created by securitized auto lending) called Subprime Auto Loan Performance: The Best is Behind Us. In that, S&P states that, “In our opinion, we’re at a turning point with respect to subprime auto loan performance, similar to where we were in 2006.”
In order to examine auto lease and loan trends, Experian IntelliView data was reviewed which provides a quarterly update of U.S. lending trends based on credit bureau data including originations, outstanding loans and lines, credit performance trends, segmented by product and other characteristics.
Auto Loans and Lease Originations
Auto lending originations versus other consumer credit products were studied to highlight trends, before and after the recession, by looking at metrics beginning with the first quarter of 2006. The Experian IntelliView data on slide 2 shows quarterly acquisition volumes for auto, bankcards, mortgages, home equity loans, HELOCs and personal loans using an index based on originations during this time. (Student loans were not examined because much of this lending is made by government backed organizations.) Auto lending volume reached its low point much earlier than the other products (at the end of 2008-Q4) and returned to pre-recession levels by the second quarter of 2011. In the 2nd quarter of 2014, auto originations continued to grow, and are now more than 60% over 2006 levels.
Home lending volume has dipped. First mortgages have a volatile origination pattern based on periods of refinance activity, but volume in the most recent quarters has been down at least 40% off the 2006 volumes. Meanwhile, second mortgage (home equity loans and HELOCs) have practically collapsed since 2009, although HELOCs have shown some rebound in the last year. Of the other credit product originations, only bankcards have reached its pre-recession quantity.
The end of 2008 was a critical juncture because auto originations were at their lowest level as seen in slide 3 showing the growth in auto loan and lease acquisition volumes by type of financial institution. All loans and lease volumes have now increased by 140%. Additionally, the end of 2008 saw GMAC- a large Captive Auto finance company form Ally Bank. The data shows that only at Q1 2009 can this shift be reflected confidently. Furthermore, examinations of developments from this time period ensure a consistent position when considering type of financial institution. Finance companies actually have seen the largest increase in volume at 289% since this time, while Banks (135%), Credit Unions (121%) and Captive Auto finance (99%) volumes have also at least doubled.
Near-prime and subprime lending have witnessed substantial origination growth since 2006 as reflected in slide 5 shows the volume trends by credit grade. However, prime and super-prime lending has grown faster. Deep-subprime lending is still at about the same level as 2006. Therefore, originations today have a lower proportion of non-Prime commitments than the period prior to the recession.
Examining volumes since the trough of the recession presents a different (but logical) perspective. For example, subprime lending volumes have increased almost 193% since the end of 2008, and near-prime volumes have grown 175%, a rate higher than the total overall growth (140%). In the recession, auto lending volume slowed, specifically for non-prime credit grades. Lenders restricted access to riskier customers (but not super-prime, which actually held steady). It is logical that the volume of riskier credit grades would grow faster as the economy recovers, and lending returns to normal conditions.
The proportion of volume by lending type for each financial institution in the second quarter of 2014 is represented in slide 6 and finance companies are now writing about 58% of the deep- subprime paper and 37% of near-prime (up from 33% and 23% respectively in 2006-2008).However, at the other end of the credit spectrum, advances were also made. Finance companies now account for 9.5% of super-prime and 8.6% of prime volume whereas they typically accounted for about 3% of either grade prior to the recession.
From 2006 to today, average size of an auto loan or lease is up 8.7%, less than half of the compound rate of inflation. The Captive Auto finance companies had long held the highest average loan amount as seen on slide 7, but Bank averages have grown recently to match them at approximately $21,674 per origination. Finance company origination size is the lowest of all financial institution types ($17,820). Meanwhile, the average size has progressed 18% since 2006.
Since 2006, average loan/line commitments for all types of lending except deep-subprime have grown between 6% and 9%. Deep-subprime paper saw a large decline in average size during the recession and is still about 3% below the 2006 level.
Average terms for new loans and leases also have recently returned to pre-recession levels. Banks have the highest current average term at 62 months. Finance companies and Captive Auto finance companies have the lowest average term (56 and 55 months respectively).
The interest rate trends by type of lending as seen on slide 8 show that rates on super-prime (now 2.89%), prime (now 3.91%) and near-prime (6.92%) have declined significantly since 2009. Subprime (now 12.88%) and particularly deep-subprime (16.74%) have declined less. Consequently, spreads between super-prime and deep-subprime are currently 13.85%. This is because of a long-term widening of spreads between near-prime and subprime paper, and especially subprime and deep-subprime.
Banks generally have higher interest rates, even across similar credit grades. Still, the differences in rates in these categories between Banks and Captive Auto have declined significantly. Where this spread may have been 150 bp or higher in rates five years ago, Bank APRs are currently 35 bp for super-prime and 62 bp for prime over rates for Captive Auto finance companies. Finance companies show much higher rates (at least 600 bp over) than other financial institutions for subprime and deep-subprime paper.
On slide 9 we examine the acquisition volumes by state and you can see that in 2011, Texas bypassed California in quarterly auto volume and is now the leading state in the nation. Together, Texas and California account for 23% of national volume. Florida and New York make up almost 12%. Ten other states account for between 2% (Maryland) and 3.8% (Pennsylvania). The remaining states (and D.C.) account for 36% of volume.
Volume has grown fastest in North Dakota (up 319% since 2008) and slowest in Connecticut and New Jersey (110% and 100% respectively).
In the second part of this blog, we will look at trends in auto lending outstandings and performance.
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