Are The Wheels Coming Off Of Auto Loans?

Bad loans – they’re everywhere!

Well, not really. Mostly in the energy sector. Oh, and by the way, autos too, it looks like. The Wall Street Journal reported Monday (Feb. 29) that the banks have got a new sector to worry about, which comes on four wheels.

With the caveat that problem loans on banks’ books tied to auto lending are thus far “at an early stage and manageable,” the warning signs are there that trouble may be in the offing. As has been seen in so many sectors, so many times over the past decade, and then some, increased demand in tandem with relatively lax lending standards makes for tough sledding down the road.

The numbers tell a tale as so often they do, as the 2015 fourth quarter saw net chargeoffs grow, year over year, for the first time in five years. That’s according to data from the Federal Deposit Insurance Corp., and it is an aggregate figure, with total commercial, and industrial, debt in charge off status to grow by as much as 43 percent year over year. To be sure, a lot of that is tied to the oil patch, and JPMorgan fired a salvo recently, stating that it would boost its energy sector write-off provisions by up to $500 million this quarter.

Looking at auto loans, the write-offs in the sector have started to gain traction like an eighteen-wheeler going downhill. The Journal noted that the boost in write-offs is on the order of 16 percent year over year, as measured in the latest completed quarter. The most startling stat is the fact that auto loans that have been overdue to the tune of 30 days to 89 days overdue are as much as 1.8 percent of total loans outstanding, which is the highest level in five years.

Of a little hair-raising food for thought – as The Journal stated, these are the loans, that, by dint of being kept explicitly on the books, are among the higher quality designations of debt the banks hold. So once that starts to go south, there’s trouble ahead for the lesser quality loans.

As has often been the case the loans themselves may be a bit harder to track, with the riskier ones having been bundled into securities and then sold off in rather untraceable lots to investors. Smacks a bit of the mortgage securitizations of days past. The data show that the banks had as much as $384 billion of auto loans on the books, but the U.S. households have as much as $1 trillion in auto loans. Obviously there’s a wide gulf out there. None other than Fitch Ratings has warned that delinquencies on securitized packages of auto loans has hit 5 percent as of the beginning of this year, the worst since the darkest days of the financial crisis – hinting at some fender benders up and down the auto lending chain.