Over 7 million Americans with Auto Loans Are 90+ Days Delinquent; Not All Americans Benefiting from Strong Labor Market

There were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018, according to a report from the Federal Reserve Bank of New York. That is more than a million more troubled borrowers than there were at the end of 2010. The overall delinquency rates remain below 2010 peak levels; however, the substantial and growing number of distressed borrowers suggests that not all Americans have benefitted from the strong labor market, according to the New York Fed.

The latest Quarterly Report on Household Debt and Credit from the Center for Microeconomic Data (CMD) reveals that total household debt rose by $32 billion, or 0.2 percent, in the fourth quarter of 2018 to reach $13.54 trillion. The total is now $869 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008 and 21.4 percent above the post-financial-crisis trough reached in the second quarter of 2013.

Auto loans, which have been climbing at a steady clip since 2011, increased by $9 billion, boosted by historically strong levels of newly originated loans. In fact, 2018 marked the highest level in the nineteen-year history of the loan origination data, with $584 billion in new auto loans and leases appearing on credit reports, up in nominal terms from 2017’s $569 billion.

The overall performance of auto loans has been slowly worsening — mostly dragged down by borrowers with lower credit scores. The flow into serious delinquency (defined as the share of balances that were current or in early delinquency that became 90+ days delinquent) in the fourth quarter of 2018 increased to 2.4 percent — substantially above the low of 1.5 percent reported in 2012.

Eight percent of borrowers with credit scores less than 620 suffered transitions into delinquency in the fourth quarter of 2018, a development that is surprising during a strong economy and labor market.

The overall worsening situation of auto loans was observed while there is an increasing share of prime loans in the stock. The delinquency transitions among automobile debtors with the highest credit scores have remained stable and very low. In aggregate, the increasing share of prime loans has partially offset from the deteriorating performance of the subprime sector, according to the New York Fed.

The largest share of auto loans is from banks, followed by credit unions. Debt issued by captive finance companies, which the New York Fed classifies as dealer-based loans that are associated with car manufacturers (such as Ford or Honda), is predominantly owed by prime borrowers and shows relatively strong performance. But auto finance companies are showing 50 percent of outstanding loans from auto finance companies involving borrowers with credit scores less than 620.

The New York Fed reports a sharp decline in the performance of loans held by borrowers under 30 years old between 2014 and 2016. Delinquencies on auto loans held by borrowers over 30 have increased slowly over time.

Federal Reserve Bank of New York/Liberty Street Economics | Just Released: Auto Loans in High Gear



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