There have been a couple of interesting items discussing auto loans the past few days:
- The situation in car loans may be even worse than in mortgages. Some lenders are offering as much as 200% of a car's value with little to no downpayment, in order to allow people to trade in their already underwater car loans.
And just as the horse disappears over the horizon, the usual suspects have arrived to question the condition of the barn door lock: This month, S&P reviewed its ratings on $113.5 billion in auto loan securities it rated in the last two years out of concerns over growing losses. It didn't make any downgrades but predicted that "rising losses will continue into 2008 across all segments of the auto loan market."
Not only that, but the terms on some of these loans have moved out to as long as seven years, meaning that the loan will quite likely outlast the car.
Those most directly impacted are obvious: Ford (NYSE:F) and General Motors (NYSE:GM), both through the impact on their finance arms and because -- lets face it -- these ridiculous loans are part of the reason they've been able to sell as many cars in the first place. Tightening credit will mean that F = GM = Toast.
This will also impact independent auto loan companies, to different degrees depending on their lending policies.
- Minyanville has a slightly different take on the situation, noting that auto loan performance does not necessarily track mortgage performance. They suggest that the losses in subprime auto lenders like Consumer Portfolio Services (NasdaqGM:CPSS) and Americredit (NYSE:ACF) have been overblown.
From where I'm sitting, I think Andrew's opinion expressed on MV is missing two critical points. He states that "Although auto loans may experience a similar rise in loss frequency as the American consumer comes under pressure from burdensome debt and rising unemployment, the loss severity is unlikely to increase significantly since car prices are largely insulated from economic downturns."
The two points he's missing are that the loss severity may well increase from historical averages, because historically you couldn't roll the cost of your previous vehicle into your new auto loan. These new loan products allow some buyers to effectively default on two (or potentially more) vehicles at once, and provide less than normal levels of collateral.
Even without such absurd roll-ups, owners are borrowing more, putting less money down, and end up owing more than the car is worth when it comes time to sell. The average balance is up 40% in a decade.
Second, the terms of these loans have been increasing steadily and are now averaging over five years. Longer term loans tend to experience higher default rates over time.
Thus, both frequency and severity may increase during bad times. I would not want to own anything even remotely close to the auto manufacturing and financing complex.
-btc
