LAS VEGAS -- The state of today’s auto finance market is very, very positive.
That was the takeaway from an auto finance market overview by a panel of economists and industry leaders at the American Financial Services Association’s annual vehicle finance conference here on Tuesday. There are a few -- but just a few -- reasons to be slightly concerned about this year’s vehicle sales and auto-lending outlook, panelists said.
Indeed, in an informal poll taken during the presentation, 54 percent of the audience said their companies’ originations will increase this year vs. 14 percent who predicted theirs would decrease, 24 percent who said theirs would stay the same and 8 percent who said there were too many uncertainties or they could not predict.
Some media have been quick to report that 60-day delinquency rates on auto loans rose slightly in January, compared with February through December 2015 levels. But Amy Crews Cutts, chief economist at Equifax, dismissed the worries. Even if delinquencies rise, she said, “We’re coming off the best part of the best cycle” in a long time.
In remarks to the media after the presentation, she added, “Yes, I can show you that delinquencies are ticking up. Get out your magnifier and change the scale,” implying that only then would the tiny movements be noticeable.
What’s happening isn’t a dramatic loosening of individual lenders’ credit standards, she told the audience, but rather that “every [lender] opens that credit box a little bit.”
The 60-day delinquency rate for auto loans and leases remained steady at 1.15 percent in January compared with January 2015. In December, however, the rate was 1.09 percent. The low for 2015 was 0.81 percent in April. The peak delinquency rate was 2.84 percent in January 2009, Equifax’s report said.
Matt Carroll, senior director of financial services at Standard & Poor’s, said, “Credit conditions are pretty good in auto finance.” He echoed Cutts’ remarks, saying that the industry is “coming off the best part of the cycle,” so a rise in subprime lending and delinquencies is normal.
The alleged subprime bubble is nonexistent, Cutts said. The number of subprime loan originations has grown with the number of loan originations overall. The share of subprime loans has remained consistent, she said. From January to November 2015, 21.6 percent of auto loans were subprime, compared with 21.4 percent in the 2014 period and 21.7 in the 2013 period, according to Equifax.
And although the Federal Reserve may raise its federal funds rate again this year, “Who cares?” she said. Higher interest rates mean the economy is healthy.
Moreover, what affects auto-lenders’ funding costs isn’t the federal funds rate, but long-term bond rates. Those rates are not going up, in part because central banks around the world are directing major banks to boost their capital by buying countries’ sovereign debt, which pushes long-term bond rates down.
Among the few clouds on the auto-lending horizon, as cited by panelists:
- Overall liquidity is tightening, as evidenced most visibly by the decline in the stock market.
- Some private-equity players, who entered auto financing around 2011-12 in the early stages of the recovery, may be looking to exit in line with their typical four- to six-year investment horizon.
- Some lenders have pulled out of auto lending and, as Tom Murphy, head of Wells Fargo Preferred Capital, said, “There are just fewer banks.”
On the other hand, new entrants to the market continue to pop up. Murphy’s unit within Wells Fargo Bank lends to independent auto lenders, and he assured the audience that if anyone wanted to tap his bank for wholesale funds to boost their automotive lending, “We’re open for business.”
The panel’s conclusion, as stated by Cutts: “Car financing will continue to be accommodative to sales.”