December 6, 2023

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Weekly Wrap discusses subprime market

Higher interest rates are just one challenge facing consumers and affecting their ability to make their car payments.  

Auto lenders are tightening credit and the whole industry is keeping a close eye on delinquencies and rising defaults.  

With car costs for insurance and gas, rent, groceries and other necessities having risen, and federal student loan payments resuming, consumer budgets are squeezed. These elevated expenses contribute to an uptick in losses across subprime auto loans and have led subprime auto lenders to adopt stricter loan-to-value and debt-to-income requirements. 

At the same time, credit access remains tighter year over year, vehicles are still expensive and the cost of capital remains a barrier for some subprime lenders.  

The Auto Finance News team took a deep dive into the subprime auto finance market. In this episode of the “Weekly Wrap,” Deputy Editor Amanda Harris and Senior Associate Editor Riley Wolfbauer discuss the top stories for the week ended Nov. 17, and what to expect in the week ahead.  

Subscribe to “The Roadmap Podcast” on iTunes or Spotify, or download the episode.


Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain.   

Riley Wolfbauer 0:08 Hello everyone and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter on automotive lending and leasing. It is Monday November 20, and I’m Riley Wolfbauer joined by Amanda Harris. This is our weekly wrap on what happened in auto finance for the week ending November 17 2023. This episode is sponsored by software solutions provider Inovatec. In economic news US inflation slowed in October with the core consumer price index excluding food and energy costs up 0.2% From September as inflation comes down from a 40 year high last year. Wages also rose for the first time in three months. student loan payments have also resumed putting about 1.4 million Americans at risk of defaulting on their debt, and a market defined by already rising delinquencies. About 3% of outstanding debt was in some stage of delinquency at the end of September, up point four percentage points from three months earlier. According to the Federal Reserve Bank of New York. Almost 5% of consumers also have some debt on their credit report that is with a third party collector. Student loans carries the highest likelihood of default as consumers prioritize other types of debt, including credit card personal loans and car loans. In fact, fewer than one in 10 consumers continue to make their full student payments during the freeze according to TransUnion data. In auto finance news Bank of America launched auto loan pre qualification last week, as the number of auto sales completed digitally at the bank reached 88% in the third quarter. The pre qualification process allows consumers to see information on how they can borrow money. Payments and re its without penalties for digital car shopping platform, which allows consumers to shop vehicles through the bank’s website. Customers can filter for the make model and specifications they want, as well as apply for financing before heading to the dealership. Ie contracting is also still strong in auto finance with the number of digitally originated auto loan contracts up 2% sequentially in the third quarter, but down 8% year over year to 2.2 million contracts. According to Wolters Kluwer ‘s latest digital transformation index, the dip is largely due to mixed origination volume in tandem with fluctuating vehicle sales. Also, last week, we published our latest feature, an in depth overview of the subprime auto finance market, tackling affordability concerns, credit performance and compliance considerations. Amanda has the details. Yes, Amanda Harris 2:55 so he hinted on some of it in the intro with the student loan repayment data. So that’s definitely part of this. But essentially, our team took a really in depth look at what’s happening in the subprime auto finance market. So some of the things you just mentioned, affordability, credit, performance, compliance, all the costs of everything being up and how that is impacting the entire market from origination volume from credit access from, you know, delinquencies to false consumers willingness and ability to pay their auto loans or even get a car in the first place vehicle affordability. So all those things kind of come together in our large feature that we just published. So we’re kind of give you a little bit of a teaser. So one of the things that we looked at was this idea of affordability beyond higher interest rates. We know that that is something that everyone’s following, you know, it’s been in the news a lot. Yes, higher interest rates are definitely a concern. But that’s not the only concern. There’s also higher insurance costs, rent has gone up, groceries have gone up, gas has gone up. So it’s a lot more than just looking at your higher interest rate and your monthly payments. So we looked into that and saw you know, unemployment is definitely still a concern that inched up in October. There’s challenging market conditions, you know, we’ve got lenders, even lenders whose mandate is to help low FICO score consumers on the road lending is one of them, there are nonprofit, even they had to tighten their credit standards this time around. So that shows you just how how kind of bad the market is and how much of risk lenders are willing to take and how even the lenders who really arguably take the most risk are having to tighten their standards as well. So that is something else that is really, you know, kind of hitting these consumers and maybe, you know, making it difficult for them to even get financing or to continue paying, you know, they’re Ireland in the first place. There’s that rarely Riley Wolfbauer 4:45 Yeah, and and like to what you said we covered CPS earnings last week, and we also had Michael Lavin on our subprime panel at AFS and their originations were down on a year over year basis. I believe it was a 30% Then drop just a ride around there. And at the conference, he was talking about how they can over expose themselves, they have to limit their risk. Yes, they serve the subprime consumer, but it’s all about profitability at the end of the day. So you can’t over expose yourself and put yourself in a position to take too many losses. Amanda Harris 5:19 Right, definitely. And, you know, along those same lines, we saw approval rates also fall in October. And that goes right in line with, you know, origination activity slowing with lenders pulling back, tightening credit, I mean, that makes that makes perfect sense that our approval rates would also be down with all that going on. And lower originations, obviously tied to that as well. You know, we are also still seeing us vehicle prices are still pretty high. So that’s playing a role in this, you know, inventories coming back a little bit, but there’s still not a lot of incentives, we’re still seeing, you know, sticker prices, pretty much if you guys get the sticker price engineering, that’s pretty much the deal at this point. So, you know, there’s definitely some things happening there in the making them struggle. And then, you know, we’ve also seen, you know, lenders having to kind of get a little bit creative, right, like they’re putting guardrails in place, making sure that, you know, they’re using AI, they’re using machine learning, they’re better predicting consumers income, ability to pay, they’re really focusing a lot more on the whole story, not just you know, a FICO score as well, right, because part of this is understanding that, you know, discretionary income plays a role in this, we have consumers leaning on, you know, rideshare, and other type of side jobs to kind of help supplement their income, while things are so tight. So that’s definitely playing in this as well as their resilience or willingness to keep paying, you know, their auto loan, as well. And we’re also going to talk a little bit about, you know, what’s happening at the lender side as well with capital funds. Rally. Any thoughts on like, the consumer side? Before we dive into that? Yeah, well, Riley Wolfbauer 6:55 one thing you said is, obviously, prices are still high, and a way that some consumers are able to see a little bit lower prices, incentives, but incentives are still low. And then the issue pass that as well, as most of the incentives are for those high credit score consumers to get that 2.99%. Or that 3.99%, I think the lowest that I’ve seen so far is 2.99. But when you read the fine print, it’s for consumers with a super prime FICO score. So there’s that doesn’t get passed off to the subprime consumer, and they’re just kind of stuck with that original sticker price. Amanda Harris 7:32 Yeah, absolutely. So that’s the consumers, you know, balance sheet. There’s a lot, there’s a lot going on there. And then on the flip side of that, you know, auto lenders themselves are also facing higher borrowing costs that’s affecting, you know, their ability to get capital. We know nonprime. Lenders and subprime lenders really heavily rely on the securities market for funding and nonprime ABS volume actually fell. Year over year, as of November 3, it was about 22 point 9 billion it was 32 point billion a year before that. So this shows you that that’s also falling, as the costs are just ballooning. And so they’re having to be careful too, about, you know, how they’re getting their capital. There’s still some volatility too, in the capital markets, you know, that’s also a challenge facing lenders as well, you know, on top of them having to be careful about where you’re putting capital, they’re being careful about their risk, appetites, those have tightened as well with with everything that we mentioned, you know, and they’re keeping a close eye on performance across securitize auto loans, because those are also going up. So that kind of performance challenge that we’ve been seeing on the origination side is hitting issuances as well. So they keep going up here, we went up even again in September, and they started to like net losses on subprime securities, auto loans. I just got this data, but they are surpassing, you know, pre nine, like 2019, pre COVID levels, as far as the loss of the subprime go prime is a different story. There’s kind of a divergence happening across the whole industry with performance on Prime versus subprime. But on the subprime space, there’s definitely some concern there. Rating agencies are also concerned about performance. We have seen, you know, certain issuers be put on credit, watch negative and some other actions by rating agencies to kind of highlight some of these things happening. We know there’s some deals that aren’t where they need to be on their own vocalization target. So that’s just another piece of this as well. That goes along with credit performance. Riley Wolfbauer 9:33 Yeah, and I haven’t gotten the chance to look at the new October data yet, but I covered the September data from Fitch and I believe it was the August wall that came out in September for the August numbers. The 60 Day delinquency rate for subprime was up to 5.81%. But on the prime side, it was down at point two 9% and so Fitch expects that delinquency, the 60 day delinquency rate to get up to about 6% By the end of the year, and the highest that we’ve seen their data track back to 1994, the highest that we saw prior to that was 5.96% in October 1996. So they were very well may see unprecedented levels of 60 day delinquencies in the subprime ABS market. Yeah, Amanda Harris 10:24 definitely. And you know, the other piece of this that we touch on our feature, and a big part of this is compliance. So as delinquencies go up, repossessions are also going up, regulators are keeping a very, very close eye on repossession practices, you know, they’re looking more at the full process of auto Where’s before they were really, you know, they were always focused on the repo side, whether those were done correctly and at the right time, but they’re also looking at practices across across the underlining lifecycle. So that’s definitely happening as well. There’s more information or feature on kind of what’s going on there. But I think at the end of the day, there’s just so much happening in the subprime market, as far as you know, there’s challenges but there’s also resilience as well. I mean, credit performance is worsening, but in a lot of ways, it’s not where people thought it would be, you know, there’s there’s definitely still originations happening. There’s still capital to be had, you know, non prime lenders are still active in the market, you know, people are still buying vehicles used vehicle sales are still doing really well. You know, there’s, there’s definitely origination volume is still doing pretty well. So given everything that we talked about, I think, you know, everyone’s pretty much still, you know, still still pretty positive on the market itself. It’s just, you know, doing doing your due diligence and making sure your risk is where it needs to be. And I think everyone’s just kind of waiting for rates to stabilize and, you know, kind of get back to normal before, you know, before things really even out but we’re already starting to see on vintages and everything starting to do a little bit better. So I think lenders kind of put things in place to to really make sure they can weather this and come out the other side. You know, still still on track to still doing well. Riley Wolfbauer 12:00 Yeah. And then and that’s another thing that came up during the subprime panel at AFS is now that the market has gone through this change over the last couple of years. Everyone knows how to adjust and as you already said, the early although it’s only six to nine months into it, the early 2023 vintages are performing better and are more promising compared to those 2021 2022 vintages one. Honestly, no one was really expecting it to go the way that it did so. Yeah, exactly. Alright, so that about does it for today’s episode. We also invite our subscribers to participate in a survey measuring the current state of lending practices, credit availability and demand for loans. The big wheels originators sentiment survey measures the industry’s appetite for auto originations. More details on how to participate are available on our website. Thanks for joining us on the roadmap and be sure to follow us on X formerly known as Twitter and LinkedIn. We will see you online at auto finance and here next time