Auto finance helps to push total consumer debt to new high


Even as TransUnion noted that auto finance origination volume appears to be losing a little steam, the Federal Reserve Bank of New York’s Household Debt and Credit Report released on Wednesday showed how the balances consumers are absorbing for their vehicles helped to push total consumer debt above the highest level ever recorded.

The report indicated that total household debt reached $12.73 trillion in the first quarter, surpassing the peak of $12.68 trillion reached during the recession in 2008.

“Almost nine years later, household debt has finally exceeded its 2008 peak but the debt and its borrowers look quite different today. This record debt level is neither a reason to celebrate nor a cause for alarm. But it does provide an opportune moment to consider debt performance,” said Donghoon Lee, research officer at the New York Fed.

“While most delinquency flows have improved markedly since the Great Recession and remain low overall, there are divergent trends among debt types,” Lee continued. “Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high.”

TransUnion put the latest delinquency rate at 1.30 percent, up from 1.16 percent in Q1 of last year, driven in part by poorer payment performance in the subprime and near-prime segments.

The New York Fed noted that the outstanding auto finance balance stood at $1.17 trillion, up by $96 billion compared to the first quarter of last year and $10 billion higher on a sequential basis.

However, Brian Landau, senior vice president for financial services and automotive business leader for TransUnion, didn’t make any projections about the auto finance industry approaching $2 trillion any time soon during a phone conversation with SubPrime Auto Finance News. After TransUnion’s Industry Insights Report offered clear evidence that auto finance originations are slowing, especially in the subprime space, Landau mentioned that he’s been answering lots of questions filled with ominous tones.

“I don’t think we feel like the sky is falling. In other conversations I’ve had with other reporters, that’s what they think. But I think and many of us at (TransUnion) think this is just a reset of the market,” Landau said.

The credit bureau’s report, powered by Prama analytics, indicated that auto finance originations, viewed one quarter in arrears, declined to 6.66 million to end 2016, down 0.2 percent relative to fourth quarter of 2015. This movement marks the second consecutive quarter in which total originations were down year-over-year.

Analysts found that subprime originations posted the steepest decline in originations, dropping by 5 percent.

“You have to take things in the proper context. We’ve had seven consecutive years of growth,” Landau said. “We have not witnessed that probably since the dawn of the auto industry. A lot of that was due is there was a great buildup of pent-up demand stemming from the financial crisis.

“You’re seeing right now that the industry is resetting and recalibrating to account for the slight uptick in subprime and near-prime delinquencies,” he continued.

In a separate blog post, Lee described how analysts are reviewing the financial crisis from a different perspective in light of what the recent data is showing.

“The Great Recession led to a household borrowing situation in America that was very different from what we’d seen historically, but in 2007 when the financial crisis began to unfold, there was much less data available to economists on the state of household balance sheets,” Lee wrote.

“With better information now, we will continue to share new developments and analysis in the area of household debt,” he continued.

And the team over at TransUnion is watching the credit world closely, too, especially in the auto finance space, where Landau considered what strategy providers could leverage as part of a pullback in originations.

“One of the levers that can pull immediately is a pullback on extended terms,” Landau said. “We’ve seen terms on average ticking up over the last several years; 84 months was never something you heard about in the normal state of auto lending. Now, it’s becoming more of a common term used.

“Another lever is asking customers to put down a higher down payment on their vehicle purchase. That would improve loan-to-value ratios going forward,” he went on to say.