Delinquencies and losses should be the canary in the coal mine for performance trends, but they can also wag the dog, drawing attention away from looming issues. In subprime lending, borrowers could demonstrate the first indications of trouble for the economy at large, as economic issues tend to impact them first.

Now, as auto loan forbearance programs and extended unemployment benefits and stimulus checks have run out, one would expect the subprime auto sector (more than the prime) to start to show some cracks. Yet losses and delinquencies remain modest.

Still, 2022 remains a wait-and-see game with inflation rising, creating challenges to subprime consumers’ wallets, and the uncertainty of just how long it will be before new car supply improves enough to ease stratospheric used vehicle prices.

Let’s look at the numbers to close out the year.

Originations and issuances, by the numbers

Even if vehicles are hard to come by, the cost of acquiring one has been on the rise. New car prices are up 8.9% but used car prices have risen 39.8% since March 2020. Even at the time of year when things quiet down, this market is still hot. Prices rose for the first time in 25 years between September and October.

It’s no wonder then that total auto loan debt increased to $1.44 trillion in Q3 2021, up from last year’s $1.36 trillion in Q3 2020. It accounted for 9.4% of the $15.24 trillion in national household debt.

While new auto loan originations decreased slightly from $202 billion in Q2 to $199 billion in Q3 as the NY Fed reported, this was the result of higher origination amounts in Q2 rather than more loans originated. $33.8 billion of that total by volume represents subprime auto loan originations (credit score <620). The share of subprime loans remained steadily around 17% of the total dollar amount in Q2 and Q3.

Subprime auto originations retreated greatly in 2020, but 2021 has shown a rebound, although still not yet at pre-pandemic levels. In Q2 2020, this sector was hit the hardest, so comparing the growth rate year-over-year for subprime auto originations to Q2 2021 shows a large boost of 32.8% according to TransUnion. But that was working back from a deficit. The subprime growth rate in Q2 2020 was -16.7%. The growth rate for Q2 2021 is 5.9%.

Subprime auto ABS has been active as well. Overall auto ABS issuance is at a 10-year high with $92 billion. Focusing on subprime auto ABS, FINSIGHT tracked $42 billion in new subprime auto ABS issuance in 2021, which trounces 2020’s $27.6 billion in issuance.

With 64 deals already complete in 2021, that is well above the pre-pandemic level of 57 deals in 2019 and reflects a 10-year high in FINSIGHT data.

Performance and practice

As expected, with government aid ending in 2021, we are starting to see delinquencies rise again. Subprime 60+ day delinquencies peaked at 4.17% in January 2021, declining to a low in 2021 of 2.58% in May only to increase again to 3.76% in October 2021.

But comparing subprime 60+ day delinquency rates year-over-year, they remain below the pre-pandemic rates. Looking at September 2021, the delinquency rate increased to 3.69% in September from 3.59% in August, but this was still lower than 5.23% for September 2019.

Losses too are on the rise. Subprime auto annualized net loss rates for deals tracked by Fitch reached 5.59% at the start of the year, down from 9.47% the previous year. Falling to a yearly low of 1.84% in May, they are climbing back up to 4.20% in October 2021.

S&P saw similar trends with net loss rates at 4.11% in September 2021, but this again remains well below pre-pandemic losses, which were 8.55% in September 2019.

S&P even sees some positives in the future to keep these numbers in check, noting improvements in employment, the child tax credit payments that families have begun to receive, and the strength in used car prices. However, as KBRA suggests, the usual holiday spending plus the end of government-sponsored pandemic benefits will create headwinds for the sector in the coming months.

Looking ahead

The market’s fate in 2022 may be resting on the slim edge of a microchip. If chip supply comes back on line, new vehicles enter the market without outpacing demand, used vehicle prices may remain steady at their relatively high levels, continuing to buoy collateral values and perhaps consumer optimism (as owner of a high value assets).

But there is the potential for a much darker alternative reality. New vehicle supply comes back strong, subprime consumers feel the sting of being upside down as used vehicle prices drop (in some cases off of record prices they’ve paid), the prospect of negative equity dampens new vehicle sales, competition increases for fewer financings, in turn causing changes in underwriting standards and conduct at dealers. In short, carpocalypse. 2022 might not be the year for it, but it may be up ahead.

Joseph Cioffi is a partner at Davis+Gilbert in New York City where he is Chair of the Insolvency + Finance Practice Group, a multidisciplinary practice spanning corporate, insolvency and litigation. He has a unique perspective afforded by his experience in all stages of credit and market cycles, including in subprime lending investments, operations and litigation. Joseph and his group have been deeply involved in disputes and litigation resulting from the last financial crisis. Nicole Serratore, an attorney in the Insolvency + Finance Practice Group of Davis+Gilbert, assisted with this post that originally appeared on this website.