Subprime Mortgages: Are Auto Loan Delinquencies Waving A Yellow Caution Flag!

By | February 25, 2016

As mortgage loans originated to subprime borrowers are once again on the rise, so too is the delinquency rate for subprime auto loans!

So for the buyers of securities backed by either subprime mortgages or auto loans as well as for the banks originating these loans, is there a cause for concern?

In other words are we facing a post-financial crisis scenario similar to the pre-financial crisis environment or, as George Santayana has been credited with saying, “Those who do not learn history are doomed to repeat it.

Subprime Mortgages

Flashback to the January 2016 article: ‘Subprime Mortgages – They’re Ba-ack!

Summary: With an eight-year easy money policy from the Federal Reserve (ZIRP) and real estate prices in some regions above pre-financial crisis highs, subprime mortgages are making a comeback!

‘According to data from the latest Equifax National Consumer Credit Trends Report, first mortgage originations for subprime borrowers (consumers with an Equifax Risk Score™ of 620 or below) have shown steady growth from January to October 2015, with more than 312,000 new mortgages originated, totaling $50.7 billion. This represents an increase of 28 percent in number of first mortgage originations and a 45 percent increase in the total balances from the same time a year ago.

“While there are many characteristics that define a subprime loan, such as the specific terms of the loan and the lender who issues it, credit standards are becoming more accommodating to meet market demand…‘ (Source)

Subprime Auto Loan Delinquency Data

Now spring ahead to evidence out of the subprime auto loan market suggesting that delinquencies are moving higher at a fairly rapid pace.

From Wells Fargo…

subprime auto loans,subprime mortgages

Chart Source

And this from a February 23, 2016 article at Money.com

People, especially those with shaky credit, are having a tougher time than usual making their car payments.

According to Bloomberg, almost 5% of subprime car loans that were bundled into securities and sold to investors are delinquent, and the default rate is even higher than that. (Depending on who’s counting, delinquency is up to three or four months behind in payments; default is what happens after that). At just over 12% in January, the default rate jumped one entire percentage point in just a month. Both delinquency and default rates are now the highest they’ve been since 2010, when the ripple effects of the recession still weighed heavily on many Americans’ finances…

Conclusion?

So therefore the question is this…Can repayment issues in one sector of the subprime market occur without also occurring in other sectors that are originating loans to the same type of borrower?

And what does this fiscal stress being experienced by vulnerable borrowers say about the overall strength of our ‘economic recovery’?

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.

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