Moody’s Analytics senior director Cristian deRitis chimed in this week, refuting the notion that rising auto lending volume is creating a bubble similar to the one that burst in the mortgage space and sent the U.S. economy into recession.
deRitis insisted that credit quality is better today than prior to the recession, or at any time since the American Bankers Association began tracking delinquency rates for auto loans in 1980.
“Borrowers of all credit profiles are taking out larger loans than they did in 2009,” deRitis wrote in a blog post on Moody’s website. “Improved consumer balance sheets and confidence offer one possible explanation. Consumers owe less now than they did during the recession, so they can afford to take on more debt. Another reason is supply: More lenders are more willing to provide credit than they were in 2009.”
The total amount outstanding in finance companies’ auto portfolios climbed above $900 billion earlier this year, according to Equifax. deRitis cited many other Equifax figures in his analysis, touching on the rise of contracts to subprime borrowers and acknowledging how that typically generates industry apprehension.
“The critics’ concerns notwithstanding, it is difficult to view the increased availability of credit as a negative,” deRitis said. “The steady availability of credit is a major reason for the auto industry’s growth over the past few years, while other sectors such as housing and retail sales have struggled.
“Nonetheless, if the Great Recession taught us anything, it is the danger of complacency,” he continued. “Just because consumers can afford to take on more debt does not mean they should. Today's record low delinquency rates can quickly accelerate.”
But again referencing Equifax data, deRitis pointed out payment performance has improved with each passing month since delinquency rates peaked in 2009.
“The fact that this is true across all stages of delinquency (30, 60, 90 and 120 days past due) is particularly encouraging,” he said.
The Moody’s analysts emphasized that instances of fraud and questionable financing practices that’s been highlighted in media reports this summer need to be addressed before they become systemic issues.
“Yet in some respects, auto lending is a victim of its own success,” deRitis said. “While auto credit contracted during the Great Recession, it was the first consumer credit sector to fully recover.
“Unlike private label mortgage-backed securities, the market for securities backed by auto loans did not collapse, continuing to function throughout the recession,” he continued. “Although significant, the losses suffered by auto finance companies and banks were tolerable and did not alter the shape of the financial system.”
deRitis reiterated the point made by dealers and finance companies to regulators — that access to reliable transportation is critical to securing and retaining employment to generate steady income.
“For some, the ability to purchase a vehicle meant the difference between keeping a job and unemployment,” deRitis said. “Tightening compliance and increased education are important to insure that borrowers are qualified and understand their loans, as is punishing unscrupulous dealers and lenders.
“But restricting credit too severely has its own consequences and will ultimately push consumers into the shadow banking system with little if any regulatory protection,” he continued.
“Without financing to support sales, the industry's recovery would have been far slower with more severe job losses,” deRitis went on to say. “The market may have overshot in the opposite direction recently, providing too liberally. But to borrow an automotive metaphor, it is easier to tap the brakes and correct imbalances than to try and move the industry out of a ditch with the parking brake of credit fully engaged.”