Subprime is no runaway train

Jim Henry is a special correspondent for Automotive News.

There it goes again, as Ronald Reagan might have said.

The New York Times is still hammering a theme that subprime auto loans will endanger the U.S. economy in the way that subprime mortgages helped bring about the Great Recession.

In an article last week -- the latest of several on subprime auto loans -- the paper said “some of the same dynamics” that led to the subprime mortgage crisis “are now playing out” in the auto loan market. An earlier article featured shady used-car dealers deceiving consumers into signing up for loans they couldn’t afford.

Last week’s article, dated Oct. 1, zeroed in on bank fraud, in which dealerships inflate customers’ income on credit applications.

The article used a catchy name for the documents, “liar loans,” and came to the scary conclusion that it’s “unknown” how many applications containing phony information were approved.

Assume for the sake of argument that’s true -- despite the best effort of honest dealerships and lenders to verify customer information by checking pay stubs and the like.

The fact remains that even if some phony applications get approved, it’s known to the nth decimal place how many auto loans go bad, and that number is really, really low by historical standards despite a recent uptick.

For instance, Experian Automotive said the 30-day delinquency rate for independent finance companies, which cater mostly to subprime borrowers, was 5.08 percent in the second quarter of 2014, up only marginally from 4.95 percent a year earlier. For the industry as a whole, the 30-day delinquency rate in the second quarter was as close to flat as it gets: 2.39 percent vs. 2.38 percent a year earlier.

Thirty-day delinquencies accounted for 2.24 percent of outstanding auto loans in the first quarter of 2014, the lowest point since Experian starting publicly reporting its data in 2006.

It’s impossible to deny there are abuses in the industry, and those abuses are devastating to the people involved. But the numbers don’t support the premise that subprime auto loans are a runaway train bearing down on the U.S. economy.

You can reach Jim Henry at autonews@crain.com

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