Experts are worried about another Big Short, this time in the auto loan market. With subprime auto default rates reaching levels that match those we’ve witnessed just before the 2008 collapse, it’s hard to contain the panic.
There are certain markers that might say otherwise and deter the doubt. There is the good number of loans lent to high-credit borrowers, and the current economy’s inclined to provide a buffer for a strained lending market. The recent tax refunds may have helped as well, albeit a temporary fix.
The income element
A concern that has been gnawing at experts, highlighted by the current crisis, is the rapidly increasing income gap between different classes of earners. While the gaps are widening, credit availability remains generous to those who can barely afford them.
In December, it was found that around 6 million Americans have already run delinquent in their car loans. The numbers are expected to pump up in the next years.
Another indicator that signals trouble is the lowering of the prices of used vehicles. Of course, the more borrowers fail to pay their cars, the more vehicles are repossessed. The increase in the number of repossessed vehicles creates a surplus that could lower price when it surpasses demand. Those who cannot afford to finance new vehicles, therefore, opt for the cheaper, used vehicle options. To keep payments as low as possible, many borrowers also opt to choose longer loan terms.
Non-bank underwriting practices
The loose underwriting practices among loosely regulated financing institutions are seen as some of the most influential drivers fueling more and more borrowers into the deep subprime market. Many of these companies are non-traditional banks who are less shackled by limitations in regulations. While banks are pulling back from the risk, subprime lenders stepped in to fill the void, knowing there is still money to be had from the demand.
Bonds backed by these troublesome loans are also seeing a rise in delinquency, another tell-tale.
To put things in perspective, subprime auto loans make up about 16 percent of the overall subprime debt (consisted of subprime mortgages, student loans, bankcard, private labels, and personal loans) that totals into a staggering $1.2 trillion. That is around $179 billion debts in auto loans alone.
What’s beyond the bend?
What is being done to mitigate the possible disaster? Is it still salvageable? Will it result into another Big Short, and how would that impact the economy as a whole? Questions are all we have for now, as the answers slowly, terrifyingly unravel.