By Ray Birch
IRVINE, Calif.—Rising new car prices should not be a major factor in ramping up delinquencies that are expected to climb later this year, according to an automotive industry analyst who said rock-bottom rates and longer terms will help keep payments level for borrowers.
Consumers have also been jumping on 0% deals at a record pace, pointed out Melinda Zabritski, senior director of automotive financial solutions at Experian. Zabritski’s comments came during a recent Origence State of the Automotive Finance Market webinar, covering second quarter data.
Zabritski emphasized what lies ahead for the automotive industry, and lenders alike, remains unpredictable due to COVID-19, and she cautioned that lenders looking back to the Great Recession for some guidance will likely not find the direction they are seeking.
“Trying to draw similarities between the current recession and the Great Recession is hard,” said Zabritski. “These two recessions are different animals.”
Zabriski said one of the biggest differences between the two economic downturns is the risk lenders were taking prior to each economic downturn. For instance, subprime made up 5%-7% of auto loan originations just before the Great Recession.
“And most delinquencies that occurred from the Great Recession happened 22 months post origination,” she said.
A Dramatic Change
Zabritski stressed the risk picture had dramatically changed for lenders leading up to the pandemic, as lessons learned post-Great Recession led to cutbacks in suprime loans.
“In Q2, 2020, we were under 3% for subprime originations, and before that we’ve never been under 3% since we have been tracking that data,” said Zabritski, noting the reflection in underwrtiting standards as the health crisis hit.
Zabritski said it’s challenging to forecast the kinds of of delinquencies lenders will see as well as any timeframe for any uptick in problem loans, noting forbearances are skewing current delinquency data.
“We won’t see the full impact until this accommodation period for borrowers ends,” she said. “In the second quarter delinquencies were reported at .46%, and no change from Q1. Year over year we are down, but again this is somewhat of a false down, as the data is really not telling us anything at this time.”
The Other Direction
Moving in an opposite direction from the decline in delinquencies has been new car prices, with the average new car retailing for $36,000. The average new vehicle price is being driven higher by increased sales of new trucks, said Zabritski, and decreased sales of economy cars, which represented the largest segment of sales after the Great Recession.
Melinda Zabritski
As CUToday.info has reported, the higher prices have come with longer loan terms, with the average now 71.5 months.
“But the average monthly payment has hardly moved,” said Zabritski. “And it’s clear to see why—terms have extended, and very significantly since the first quarter, and rates have come down.”
Zabritski said loans in the 73-84 month range now comprise 26% of all loans, with and 40% of that figure around 75 months and the rest at 84 months. She explained what has bolstered the already growing trend to longer-term loans are the automaker deals during the health crisis pushing longer terms.
‘The Only Thing Certain’
Leasing has fallen off during the pandemic, Zabritski pointed out—down to 25% of all new car deals during Q2, compared with a high of 36% in 2016. As CUToday.info has reported, leasing demand has been slowing in the last two years, down to about 30% of all new deals prior to the pandemic.
Phil DuPree, chief revenue officer at CU Direct/Origence, echoed Zabritski’s sentiment that a great deal of what the future holds remains unknown when it comes to the auto market.
Noting Origence/CU Direct has deep data on the industry, with more than seven million auto loan applications a year leading to more than two million funded loans annually, he said, “The only thing certain now is uncertainty given the COVID-19 pandemic. In general we had strong auto sales in the last five years and were expecting another strong year in 2020, but COVID arrived.”
DuPree said Origence’s current forecast is for new car sales to be down 23% this year and for used car sales to be down 16%.
“The consensus on SARS is 13.6 million new units,” he said.
Dealers Are Resilient
DuPree emphasized dealers have been “resilient,” and that automaker deals have certainly opened up consumers’ eyes during the health crisis.
“The impact of 0%, about 5% (of all new buyers) historically take advantage 0%,” he said. “But when COVID hit, participation in the automaker deals went all the way up to 20%.”
DuPree pointed out the mix of new and used business for CUs has changed during the pandemic, from the normal mix of 70% used and 30% new to 75% used.
He added CUs have tightened lending standards when the crisis hit.
“That is natural, as all of the unknowns with COVID and uncertainty of paybacks,” DuPree said.