Repossessions of cars and trucks are considered signal of an approaching economic recession.
With the Federal Reserve Board poised to raise interest rates again, there is concern about a new recession overtaking the U.S. economy. However, the level of vehicle repossessions is not exactly flashing red or even yellow.
Default rate on auto loans steady
The default rate on auto leading to the repossessions of cars and trucks remains stable despite the surge in the price of new vehicles, according to analysts.
Ford Motor Co. should release more data from Ford Credit this week when it reports third-quarter earnings. Ford CFO John Lawler said during a recent conference auto loan delinquencies are beginning to rise in what he called a “dynamic” economic environment, but the rise has not set off alarm bells.
“It is not yet a concern for us because it is, as you know, coming out of last year and through the first part of this year, they were very low. It seems like we are reverting back more towards the mean,” Lawler said at the Deutsche Bank Global Auto Industry Conference.
“Severity is still an issue because residuals are so high, but we think those have peaked. But we are looking at it and we are looking for every indication and every data point we can to get a read on where the consumer is, where they are headed, given everything that we see out there, the inflationary pressures, the economic issues, et cetera. So, we are seeing some headwinds there a little bit when it comes to delinquencies as maybe a leading indicator.”
Bucking the trend
Data recently published by the Federal Reserve Bank of New York suggests sales of brand-new vehicles are insulated from a wave of repossessions as the credits scores of recent buyers is growing among affluent buyers in the highest credit tier. This is the reverse of the trend that prevailed prior to the Great Recession of 2008-2009 when lending to buyers with subprime credit was more prevalent.
Cox Automotive reported, “Auto loan performance was mixed in June as severe delinquencies increased but defaults declined.
“Loans that were delinquent by 60 days or more increased 6.1% and were up 30.7% from a year ago,” Cox noted. In June, 1.48% of auto loans were severely delinquent, which was an increase from 1.40% in May. Compared to a year ago, the severe delinquency rate was 36 basis points higher. In June, 5.75% of subprime loans were severely delinquent, which was an increase from 5.36% in May.
The subprime severe delinquency rate was 154 basis points higher from a year ago. Higher delinquencies are still not leading to pre-pandemic levels of defaults, and defaults declined again in June.
Loan date tracked
However, loan defaults, which can lead to repossession by lenders, declined 5.4% from May but were up 9% from a year ago.
Michelle Krebs, Cox Automotive senior analyst, noted, “There is no way to differentiate new versus used in the performance data. You can broadly interpret subprime as mainly used.
The Federal Reserve Bank of New York, which tracks consumer credit, noted in a recent report, “With interest rates climbing Rejection rates for auto loan, home loan, and mortgage refinance applications all increased.
“The share of debt transitioning into delinquency increased modestly for nearly all debt types, except student loans, although they remain very low by historic standards,” the New York Fed noted. “The delinquency transition rate for credit cards increased by 0.2 percentage points, while mortgages, auto loans, and HELOCs all saw 0.1 percentage point increases in their delinquency transition rates.”
The New York Fed also noted some student loan debt has been deferred because of the CARES Act or pandemic relief, which is set to expire in August. The end of the CARES Act relief will increase pressure on borrowers’ other loans.