Auto Loans the Next Subprime: Jamie Dimon (JPM)
Following news earlier this week that U.S. auto industry sales fell by 6% in May, JP Morgan Pursue & Co (JPM) CEO Jamie Dimon, in a meeting with investors on Thursday, warned that the market for auto lending looked “a little stressed.” While reassuring investors that JP Morgan Pursue was safe, Dimon projected that rivaling banks would likely see enhanced losses.
Auto Boom
The latest drop in sales for the month of May comes on the high-heeled shoes of the best year on record for auto sales. U.S. auto sales reached 17.47 million vehicles for all of 2015, a number which cracks the previous record of 17.41 million set in 2000. (To read more, see: Ford’s May Auto Sales Disappoint.)
While low fuel prices and moderate economic growth have been cited as reasons for the boom, effortless credit, especially for subprime borrowers, cannot be overlooked.
In 2015, average financing for a fresh car loan rose to almost $28,000, the highest level since March 2008, when the Federal Reserve very first began collecting such data. Much of the growth in auto financing is being led by subprime auto loans, which, as of March, made up a record 20.8% of the fresh auto loan market.
Enlargening Defaults
The “stress” in the auto loan market that Dimon mentioned is no doubt in reference to the uptick in defaults amongst subprime borrowers. According to Fitch Ratings, while the rate of defaults on subprime auto loans experienced a slight reprieve in March falling to Four.15%, this drop comes after the rate reached a 20-year high in February of Five.16%.
The rate of annualized net losses in March, while also down from the previous month, were still 30.4% higher over the same period from the previous year. Fitch cited lax underwriting standards as one of the causes for the increase in subprime auto loans, and this increase in subprime lending is expected to thrust delinquency and loss levels higher. (To read more, see: Subprime Auto Loans: What Borrowers Should Know. )
The Bottom Line
The spike in subprime auto loans coupled with enlargening delinquency rates and now falling auto sales sounds reminiscent of an scene that began almost ten years ago.
While some believe that differences inbetween the automobile market and housing market make worries of a fresh financial crisis overblown, the situation could become problematic if large-scale defaults begin having downward pressure on automobile prices making it difficult for repossessed vehicles to be resold by lenders attempting to recoup losses.
While noting that JP Morgan is safe, Dimon was quoted as telling, “Someone will get hurt in auto lending.”