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There are worrying signs in a $200 billion corner of the auto loan market

Business Insider | Nov 14, 2017, 09.56PM IST

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  • Wall Street has been worried about the subprime auto loan market for some time.
  • According to new research from the New York Federal Reserve, the delinquency rate for subprime loans originated by auto finance companies is spiking.
  • "Although the impact on the larger financial sector may be muted, there are over 23 million consumers who hold subprime auto loans," the report said.


The New York Federal Reserve is flagging some concern over a $200 billion auto loan market.

In a post out Tuesday, researchers led by Andrew Haughwout highlighted the nearly doubling of the rate of delinquencies in subprime auto loans originated by auto finance companies since 2011.

"Since 2011, the overall delinquency rate of loans originated by auto finance companies has significantly deteriorated," the report said.

The 90+ days delinquent rate for subprime auto loans originated by auto finance companies is up more than two percentage points since 2014, and now stands at close to 10%, according to the report. That's higher than the highest rate following the dotcom crash, and close to the highs in 2009 after the financial crisis.

In contrast, the delinquency rate on bank auto loans has been steadily improving.

"The overall delinquency rate for auto loans-published in our Quarterly Report-shows only a very slow increase masking the sharp rise in subprime delinquency, which is diluted by the increase in prime loans with better performance," he said.

The Fed isn't the first to express alarm over the subprime auto loan market. In early 2017, it was the topic du jour on Wall Street, with a cluster of firms expressing concern about the direction the market was headed in.

At the time, Fitch highlighted the impact auto finance companies were having on the market. It said that "deteriorating credit performance will be more acute in the subprime segment, driven to some extent by the expansion of less-tenured independent auto finance companies that have demonstrated higher-risk appetites and less underwriting discipline."

While these auto finance companies pose less of a risk than banks might, the impact on consumers is still significant. The Fed in its latest report said:

"Although the impact on the larger financial sector may be muted, there are over 23 million consumers who hold subprime auto loans. These consumers may find their credit reports further damaged after a default or encounter further financial difficulties after experiencing a car repossession."

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