Subprime Auto Loan Crisis Looming

Several weeks ago, I wrote on the possibility of another subprime mortgage crisis. Now, it appears that subprime auto loan defaults are nearing crisis levels. According to a Morgan Stanley research booklet, finance providers and the consumer debt market as a whole should take note that auto delinquency and default rates are on the rise. Specifically, 60+ day delinquencies in subprime loan pools—4.51%—are nearing crisis levels. While not at crisis-era peak levels yet, if that delinquency rate holds up, it will pass the peak level of 4.69% by year’s end.

And what about default rates for subprime auto loan pools? 11.96%. That rate is just below the crisis-era peak of 14.6%. Still, there may be a silver lining to the bad news. Even though those rates suggest the auto market is facing some of the same conditions as it did in 2008 and 2009, consumers may be in a better financial condition as general consumer debt-to-income levels are near 30-year lows.

If consumers (according to the statistics) are in a better financial condition generally, there must be some explanation for the increase in delinquency and default rates. As reported by ValueWalk’s Rupert Hargreaves, there are two main factors: (1) failing creditworthiness of borrowers and (2) deep subprime borrowing. To the first factor, Hargreaves points to median FICO score decline. Those scores have fallen from 720 immediately after the crisis, to the low of 680 in 2015. That 680 median FICO score is just slightly above the low of 670 from 2004 to 2006. Concerning the second factor, Hargreaves cites the Morgan Stanley research booklet that suggests that the auto loan securitization market is more burdened with subprime auto loans that contain an average FICO score below 550.

Simply stated: the delinquency and default rate trends should not be taken lightly. I meet with people every day who are faced with increasing debt, delinquencies, and defaults. If you are struggling, you don’t just have to sit on the sidelines and hope your situation improves. Should you find yourself needing debt relief or in need of legal advice concerning debts you owe, please call one of our offices nearest you to set up a free consultation with one of our experienced attorneys.