The good news about rising auto delinquencies
The good news about rising auto delinquencies – if there is any – is that it doesn’t appear to be impacting credit unions.
But there could still be some major speed bumps ahead.
The Federal Reserve Bank of New York recently reported that 90-day delinquencies among all auto loan borrowers reached 2.4 percent at the end of 2018, up from a recent low of 1.5 percent in 2012.
“Growing delinquencies among subprime borrowers are responsible for this deteriorating performance, and younger borrowers are struggling most acutely to afford their auto loans,” the NY Fed stated.
According to Fed data, for Q3 2018, banks with $50 billion or more in assets remain the No. 1 originator of auto loans, with $389 billion in such loans outstanding, with credit unions in second place at $340 billion.
However, while 25 percent of bank loans are held by subprime borrowers (with credit scores below 620), the figure is only 14 percent for credit unions. And as of Q3, only 0.7 percent of loans originated by CUs were 90 days delinquent.
“I am not worried about auto loans at credit unions,” said Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist at the Credit Union National Association. “Credit unions are in pretty good shape in terms of managing and monitoring their auto loan portfolios.”
That’s borne out, he said, by the fact that as of September, delinquencies for all credit union-issued loans were essentially at an all-time low – 0.67 percent, the lowest such level in three decades. For new auto loans, the rate was 0.39 percent, for used auto loans, 0.74 percent.
The fact that CUs also have not gotten as heavily into subprime auto lending as other lenders has also helped keep delinquencies in check, noted Steve Rick, chief economist at CUNA Mutual Group.
Michael Rempel, a consultant at Cornerstone Advisors, pointed out that many of the consumers holding delinquent loans right now are in lower credit tiers that many CUs largely avoid. He noted that even when accounting for the whole auto loan market, todays’ delinquencies remain well below levels seen during the 2007-2009 crisis.
Many credit union CEOs contacted for this story also confirmed low delinquency rates at their institutions.
Luke Labbe, president and CEO of the $203 million-asset PeoplesChoice Credit Union in Saco, Maine, said his CU has seen auto loan delinquencies drop from 3.40 percent in December 2017 to 1.54 percent in December 2018.
Similarly, Jason Lindstrom, president/CEO of the $292 million-asset Evergreen Credit Union of Portland, Maine, noted at his credit union, delinquency rates on auto loans were the lowest they’ve ever seen.
“In our geographic area we have a strong economy with low unemployment rates,” he said. “People are paying their bills because of it.”
Speed bumps ahead?
There could still be problems to come, though.
According to Nagendra Sastry, vice president at EXL Service, an operations management and analytics company, one of the reasons for increased delinquencies is the rapid rise in the cost of cars, which has outpaced wage growth.
Kelley Blue Book reports the average vehicle price in the U.S. has climbed from $27,177 from 2005 to $36,441 in 2018.
Sastry noted that most CUs with assets of $1 billion or more have a stake in indirect lending, and while indirect and direct lending don’t currently have much difference in delinquencies, CUs working the indirect space frequently hold as much as 70 percent of their total auto portfolio in indirect.
“As delinquencies increase, we expect credit unions to refine their ability to deepen the relationships with those new and existing members who get their auto loans through the indirect channel,” he said.
The bigger concern right now, said Rempel, is the decline in auto origination volumes. “We are seeing the auto market level off for a variety of reasons, and it will be difficult for credit unions to grow their auto portfolios at the same rate as they’ve seen the last few years,” he said.
As of October 2018, credit union new auto loan balances were up 0.7 percent, but that was below the 1 percent growth seen one year prior, according to CUNA Mutual’s Credit Union Trends Report. On a seasonally-adjusted annualized basis, new auto loan balances climbed by 8 percent in October, significantly lower than the 11.6 percent pace from October 2017.
Schenk cautioned that loan growth in all categories could slow down in 2019. But, he added, that actually may be a good thing, as this trend will likely ease concerns over very tight liquidity conditions.
While the New York Federal Reserve raised some questions about the strength of the economy, Schenk downplayed suggestions of a weakening economy.
“Jobs are plentiful, incomes of consumers generally…are rising faster than inflation, and both debt-to-income ratios and debt payment burden ratios are near cyclical lows,” he said. “I see few signs of a recession arising anytime soon.”
Curt Long, chief economist and vice president of research at National Association of Federally-Insured Credit Unions, commented that any risks in the broader economy are more likely to be found in areas such as global growth and corporate debt, “but auto loan performance would not be at the top of my list of concerns.”
Protecting your portfolio
But with most analysts predicting some sort of economic slowdown by the end of next year, what should credit unions be doing now to protect themselves?
When it comes to auto lending, Lindstrom offered one basic suggestion: “Always maintain credit standards and do not approve beyond a member’s means to repay,” he said.
Still, he conceded that rising loan delinquencies could cause some credit unions to tighten credit scoring and rates for loans, which in turn could affect demand.
Schenk recommended CUs think twice before relaxing underwriting criteria to defend loan volume growth.
For credit unions that do lend to subprime borrowers, Rempel cautioned that they need to monitor those members closely to avoid any problems in the near future.
“At the end of the day, lenders should be keeping an eye on concentration levels and profitability of their portfolios, and not be afraid to shift when the data warrants it,” he said.