Subprime Auto Loans – The New Housing Debt Crisis? We Don’t See It

Recent news articles have highlighted that subprime auto loan delinquencies have been ticking up in recent months. Some writers are even comparing this risk to the housing crisis. Everyone is looking for the next debt problem.

Let’s jump to our conclusion – we don’t see it!

Auto loans are only 9% of total household debt compared with 68% for housing and even 11% for student loans according to a recent study by the New York Federal Reserve. Additionally, only a fraction of auto loans are subprime and only a small portion of those loans are newer loans more likely to fall behind and default. And banks are not overexposed; for example, Wells Fargo’s auto lending portfolio is only about $60 billion (compared with total assets of close to $2 trillion), net auto charge-offs were only 1.1% in 1Q17 (compared to 3.3% at the height of the financial crisis) and Wells has already pulled back on originations, which are down 29% from the peak last year. 

U.S. Aggregate Household Debt Balances

As we see, auto loans are just not big enough to be a systemic problem, banks’ auto exposure is relatively small, cars can be easily repossessed (especially when compared with the home evictions) and lending standards are already tightening – it is reasonable to expect that the problem will self-correct over time.

Finally, it is hard to see a consumer auto lending problem with the unemployment rate reaching pre-crisis lows, the economy still creating jobs and upward pressure on wages, especially at the lower end of wage scale. Total household debt may have just recently surpassed levels not seen since 2008, but let’s remember that currently U.S. consumers could even be considered prudent in their use of debt, especially when compared to the U.S. government, whose debt has almost doubled to $20 trillion since the financial crisis.

Conclusion: we don’t see a large auto lending problem impacting the broad U.S. economy!

Source:  The New York Federal Reserve, The Financial Times, Bloomberg