Home Economy Wall Street Hands Automakers Another Problem, in the Loan Market

Wall Street Hands Automakers Another Problem, in the Loan Market

10 min read
0
0
69


                Wall Street Hands Automakers Another Problem, in the Loan Market

On countless occasions in recent years, the U.S. auto industry has relied on cheap and easy credit from Wall Street to get it through rough patches.

Not this time.

With both bad loans and interest rates on the rise, financial institutions are becoming more selective in doling out credit for new-car purchases, adding to the pressure for automakers already up against the wall with sliding sales, swelling inventories and a used-car glut. “We’ve been having a party for a few years and it was fun,” said Maryann Keller, an industry consultant in Stamford, Connecticut. “Now lenders are getting back to basics.”

Many figure they have to. For one thing, subprime borrowers have been falling behind on their car-loan payments at a rate not seen since just after the 2008 financial crisis. Delinquencies for auto debt of all stripes have been climbing, with the value of those behind for at least 30 days swelling to $23.3 billion in December, a 14 percent jump from a year earlier, according to the Federal Reserve.

This helps explain why 10 percent of senior bank-loan officers said they expect to pull back on extending credit to car buyers this year, according to a Fed survey. Expectations are that terms will toughen for loans the vast majority of Americans need to buy new vehicles as the Fed boosts benchmark rates.

‘Have to Reset’

“There are only so many people wanting a new car and only so much capital available,” said Daniel Parry, chief executive officer of Praxis Finance and co-founder of Exeter Finance, a Blackstone Group-backed subprime lender. “Manufacturers and lenders will have to reset to reduced volume levels.”

The reset has already started, with auto sales dipping in each of the first three months of the year. In March, the annualized pace, adjusted for seasonal trends, slowed to 16.6 million from 16.7 million a year earlier, according to Autodata Corp. Analysts had projected it would accelerate to about 17.2 million. Now Goldman Sachs Group Inc. economists figure there’s only demand for about 15 million per year, they said in an April 4 report.

The industry set a record by selling 17.6 million cars and trucks in 2016 and has been on a seven-year growth streak. But General Motors Co., Ford Motor Co. and others had to pile on discounts and incentives to keep the expansion going, with both their finance arms and third-party lenders giving them a boost with easy credit.

“This has come full circle,” Keller, the consultant, said. “We’ve created an auto market of 17.5 million vehicles based on accommodating credit. There will be consequences.”

GM Residuals

GM expects used-car prices will fall 7 percent this year, followed by “more normalized” deflation of 2 to 3 percent per year, Chief Financial Officer Chuck Stevens told analysts during a conference call Thursday. GM will still see lending profits grow this year, he said.

Declining resale values are an issue of particular importance for leasing, which has been relied on to help consumers afford monthly payments on increasingly expensive new vehicles. When lenders lease vehicles to consumers, they make an assumption about what the car will be worth when it’s returned. If vehicles are depreciating more than expected, losses can pile up.

Carmakers and lenders may have to begin offering less-attractive terms on new leases. Loan officers are starting to demand bigger down payments or are raising the bar for income or credit scores they’re willing to accept.

JPMorgan Chase & Co. will “pull back” on auto loans longer than seven years, Chief Financial Officer Marianne Lake said in October. That may help address borrowers owing more on their vehicle than what its worth. Referred to as being “underwater,” those borrowers are rolling over their outstanding balance into an even bigger loans, a problem credit-rating companies have highlighted as a growing risk.

‘More Cautious’

Chris Halmy, CEO of Ally Financial Inc., recently told investors it would be “a bit more cautious on the credit side” in 2017 after warning that sinking used-vehicle prices and losses on consumer loans would weigh on profits. Santander Consumer USA Holdings Inc., a major subprime auto lender, started pulling back after being stung by losses on auto loans made in 2015, executives said in a February investor presentation.

Rising delinquencies have surpassed some credit graders’ initial forecasts, prompting their analysts to revise expectations for bonds backed by the debt. Lenders are in turn asking borrowers to put more money down, or are tightening criteria to approve new loans or leases, analysts have said.

The restraint could cost the industry as many as 175,000 in new-car deliveries this year, according to the National Automobile Dealers Association, or about 1 percent of last year’s total.

That may not sound like much, but auto companies are fighting for every sale as it is. They can sacrifice profits by subsidizing leases and offering below-market interest rates through their in-house financing arms, or they can accept lower volumes, said Steven Szakaly, chief economist for the dealer trade group NADA.

Pricey Cars

For consumers, the question is how many can continue to afford buying new cars. Wages in the U.S. haven’t kept pace with inflation, and the average new-vehicle price, at more than $35,000, is the highest ever.

Car shoppers may downgrade their ambitions and pick cheaper models or defer to the used-car market instead. While that’s a negative for new-vehicle sales, it could help address a supply gut that’s worsening as a record number of leases expire and load up lots with three- or four-year-old cars and trucks.

Lenders will stay busy, said Brian Landau, head of the auto business at credit-scoring company TransUnion. “Now a lot of financing companies are focusing on used-vehicle loans.”

Load More Related Articles
Load More By Shaun Molligan
Load More In Economy

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also

Household Debt Hits Record While Credit Card Delinquencies Inch Higher

US household debt continued its steady rise in the third quarter, breaking the record set …