DALLAS–A new analysis has found that auto loans originated in 2021 and 2022 are starting to show higher delinquency rates relative to loans originated in previous years, even when compared to loans unaffected by pandemic-related stimulus payments.
Brian Turner, president and chief economist with Meridian Economics, noted the rising delinquencies are coming as the increasing cost of automobiles continues to be a major component of inflation, with the CPI for used cars and trucks increasing 40% since January 2021, while the CPI for new cars increased 12%.
“As car prices continue to rise, loan amounts are rising, and loan lengths are extending to make those larger loans seem affordable (although the opposite is true),” Turner stated. “Cars are more expensive than ever, and we see the potential impact in loan structures…The average price consumers paid for new vehicles reached a record high of $48,182 in July of 2022, while the average price of used vehicles is $28,219, just below the record high set in April 2022.”
In examining the rising delinquencies on loans originated in recent years, Turner continued, “For example, auto loans originated in 2021 have a delinquency rate of 0.67% in the sixth quarter after origination, which is 13% higher than the delinquency rate of auto loans originated in 2018,” Turner stated. “This trend is even more pronounced for consumers with subprime and deep subprime credit scores. For example, 2022 vintage auto loans for consumers with deep subprime credit scores were 2.4% delinquent two quarters after origination, which is a 33% increase from the previous five-year high set in 2020.”
Potential Effects on LTVs
As he has stated previously, Turner said the elevated price appreciation in both vehicle and mortgage values over the past two years could potentially impact future LTVs should the depth of the recession deepen and we start to see rising foreclosures and resultant price corrections in both vehicle and real estate collateral.
“This requires lenders to closely monitor its balance between credit risk and market rate risk to minimize it exposure to both economic and market rate volatility,” said Turner. “Lastly, it should monitor its marginal LTV origination limits (based on product add-ons) to further minimize its credit risk exposure.”
Mortgage Delinquencies
Meanwhile, after increasing for two consecutive months, Turner noted the national mortgage delinquency rate fell by 3.6% in August, to just four basis points above the record low set in May of this year.
“However, foreclosure starts rose 14.7% compared with July and by nearly 174% over August 2021,” Turner said. “The improvement in performance might be short-term given that the U.S. economy has been in a recession.”
Turner cited a National Mortgage News report showing August ended with 2.79% of all outstanding loans 30 days or more late on their payments but not yet in foreclosure, representing approximately 1.489 million properties.
“That is 54,000 fewer properties than July and 633,000 less than in August 2021. Of those, 567,000 borrowers were considered to be seriously delinquent, 90 days or more late on their scheduled payment,” said Turner. “That is a month-to-month improvement of 27,000, or 4.5%. On a year-over-year basis, 772,000 fewer borrowers were in seriously delinquent status, a decline of nearly 58%.”
Five States That Lead Way
In addition, as of the end of August, an additional 185,000 properties were in the foreclosure pre-sale inventory, a gain of 1,000 from July and of 43,000 from August 2021, while servicers started 20,300 foreclosures in August, up 14.7% from July and 185.9% from one year ago, he said.
The five states with the highest share of seriously delinquent loans: Mississippi, 2.37%; Louisiana, 2.02%; Alaska, 1.72%; Alabama, 1.68% and Arkansas, 1.55%.
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