Exposing the car loan crisis “crisis”
OBSERVATIONS FROM THE FINTECH SNARK TANK
You need a driver’s license, an operation license, an anesthesia license … I guess because lying with statistics is as American as motherhood and apple pie.
And lying (or twisting the truth) is exactly what some people are doing with the Fed’s recently released data on auto loan defaults.
The headline: Overdue auto loans have reached record highs. Seven million people are now over 90 days in arrears with their car loans.
This has become the fodder for people who want to prove that the economy is unhealthy and that countless people are suffering.
Here’s what these people won’t tell you: The proportion of car borrowers whose payments were three months in arrears peaked at 5.3% at the end of 2010. The proportion is actually lower now – 4.5% – because the total number of borrowers has grown so much in recent years.
The numbers are wrong
A recent article on the Knowledge @ Wharton site entitled Is a Subprime Auto Loan Crisis Brewing? includes an interview with Wharton finance professor David Musto and Christopher Peterson, a former advisor to the Consumer Financial Protection Bureau and law professor at the University of Utah. In response to the question: “Are we possibly observing a small crisis in the future?” Peterson replies:
We’re talking about seven million people who are faced with the loss of their vehicle. These are families, so they live in households with an average of 2.5 people per household. So you expect around 17 to 18 million people to be affected. When you put yourself in the shoes of all of these families, losing a car is very traumatic for a family. Imagine you are a single mom or dad and you need to take your kids to soccer practice this week. But you can’t tell them whether to leave or not because you don’t know if the car will be there or if it will be repossessed. “
My opinion: Not correct. Take a look at the graphic below. Crime rates are far higher among 18 to 29 year olds than among older consumers. This would also mean that delinquency rates are higher among 18 to 24 year olds than among 25 to 29 year olds.
According to Flowing Data, only 1% of 18-year-old men and 2% of 18-year-old women are married. Of the 25-year-old men and women, 21% and 32%, respectively, are married. And according to the Urban Institute:
Millennials have babies at the lowest rate of any generation in American history. The birth rate of women in their twenties fell 15 percent between 2007 and 2012. “
That said, it is impossible for a significant number of 18-25 year olds to live in households of 2.5 people and have children old enough to attend soccer practice!
In the age groups that are more likely to have children playing soccer, crime rates are much lower. More importantly, these crime rates have not increased significantly in the past two years.
And even among the 18 to 29 year olds the increase in default rates occurred between 2014 and 2016 – and not in the last two years.
Who is to blame
Here is another quote from Mr. Peterson:
Car finance company [are] the lenders who really drive these high default rates. We have many auto finance companies that I believe are aware that they provide loans that have a high probability of default. “
My opinion: Wrong again. While it’s true that 50% of loans from auto finance companies go to subprime borrowers (who have higher default rates), overall these lenders account for only 12% of all outstanding auto loan balances and only 26% of outstanding loans to subprime borrowers. It is simply impossible for these lenders to experience “high default rates” when three-quarters of the outstanding subprime loans have been made by other lenders.
The second part of the statement also makes no sense. If the loans have a “high” probability of default, then why are only 6.5% of car finance company loans over 90 days in arrears?
What is it? real Problem here?
According to Peterson:
It is clear that the public must have access to car finance in order to buy cars. But they have to buy affordable cars. “
My opinion: I agree with Peterson on this point, although I would have worded it differently. I would have said, “You have to buy cars that you can afford.”
The bottom line anyway: The absolute number of defaulting car loan borrowers is not the crisis some would come out as. As the Fed itself wrote:
In the fourth quarter of 2018, 30% of the outstanding debt of $ 1.27 trillion was loaned to borrowers with a credit score greater than 760. The proportion of total outstanding auto loans given to subprime borrowers dropped to 22%. TThese percentages would suggest that the total auto loan inventory is the highest quality we’ve observed since our data began in 2000. “
Added bold and italic for emphasis. 🙂