Subprime Auto-Loan Delinquencies, Loan Deferrals & Stimulus Curdle into Curious Phenomenon
In the bizarre machinery of an economy that depends on consumer spending funded by stimulus and “extend and pretend.”
OK, get this: At a time when there are 29.6 million people claiming state or federal unemployment insurance because they lost their work in the worst economy of a lifetime, subprime auto-loan delinquencies, which in the past had spiked during much smaller labor market downturns, are doing the opposite: they’re dropping.
Meaning, since April, people with subprime credit ratings are defaulting a lot less on their auto loans than they did during the Good Times.
In August, delinquencies of 60 days and over of subprime auto loans that have been securitized into auto-loan Asset-Backed Securities dropped to 3.49% of total auto loans (prime and subprime), the lowest delinquency rate for any August in seven years, according to the Auto Loan Delinquency Index by Fitch Ratings.
That was down 2.44 percentage points from August 2019, when the delinquency rate was 5.93%:
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The 60-day-plus delinquencies started dropping in May. And given that May’s 60-day delinquencies were 30-day delinquencies in April, when tens of millions of people lost their jobs, it makes for a curious phenomenon.
This is particularly curious because from 2014 on, private-equity firms piled into the subprime auto-loan space, the lending became very aggressive, underwriting standards went to heck, and delinquencies surged as a result.
But interest rates charged on those loans were so high – well into the double digits – that the game could go on, with defaults ballooning to levels far higher than during the peak of the Great Recession, and those were the Good Times.
Then we get the biggest unemployment crisis in a lifetime, and the delinquency rates should have spiked from these highs into the sky. But the opposite happened – as shown by the three red columns in the chart below, marking the change in percentage points of the delinquency rate compared to the same month in a year earlier:
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So what’s going on here?