By Matt Turner
There is a lot of talk out there about the auto-loan market right now.
The default rates for auto loans in oil-producing regions in the US have been jumping, while hedge fund honcho Jim Chanos has said the auto-lending market should "scare the heck out of everybody."
John Oliver has used time on his show, "Last Week Tonight," to highlight the ways some used-car dealerships take advantage of people.
Now, in a presentation Monday at the Barclays Financial Services Conference, Gordon Smith, the chief executive for consumer and community banking at JPMorgan, has set out some eye-opening statistics on the market.
To be clear, JPMorgan decided back in 2013 to pretty much pull out of auto lending to subprime borrowers — that is car buyers with the worst credit profiles — and the presentation slides are at least in part designed to reassure investors that JPMorgan isn't participating in the loose lending that its competitors might be.
With that said, let's dive in:
Close to half of all auto loans are to borrowers with a sub-680 FICO score.
For example, 47% of all auto loans in the first half went to borrowers with a FICO score of less than 680, and 21% of all loans had a loan-to-value (LTV) ratio of more than 120%.
To put this in plain English: Half the loans are going to risky borrowers, and the banks are giving many of them them more money than the car itself is worth.
One in eight loans is to borrowers with a sub-620 FICO score and has a loan-to-value ratio of more than 100%.
The riskiest combination, that is borrowers with weak credit who are also taking on more debt than the value of the car, still isn't the bulk of auto lending.
About 5% of industry auto loans are to people with a FICO score of less than 620 and have an LTV ratio of more than 120%.
A further 8% of loans are going to those with FICO scores of less than 620 and have an LTV of 101% to 120%.
That adds up to 13% of total loans, or about one in eight.
JPMorgan itself isn't noticing a rise in delinquencies.
Smith said JPMorgan's auto-loan delinquencies were pretty stable, standing at about 1.16%, versus 0.79% back in the first quarter of 2012.
But remember that JPMorgan pulled out of the subprime auto-loan market in 2013. So its borrowers are Americans with the greatest ability pay back their debt.
But, as UBS recently noted, auto-loan delinquencies are much higher for loans issued in the past couple of years.
Back in June, UBS ran through the state of the US consumer, and it found that auto-loan delinquencies were much higher for loans issued in the past couple of years.
I should note that not everyone is worried about subprime auto loans. My colleague Matt DeBord made a convincing case back in May that everyone is overthinking an auto loan "bubble."
But this apparent uptick in auto-loan delinquencies comes as US automakers talk about "peak auto," with the American market for new cars and trucks plateauing at a range of about 17 million to 18 million.
At the same time, an extended period of low interest rates has inevitably had an impact on the consumer lending market, with loans most likely extended to relatively risky borrowers as lenders look for ways to fatten up their profits.
Sure, subprime borrowers don't buy new cars. But the used cars they do buy make way for others to buy new cars, and the worry is that two key parties in the market — the people who sell cars and the people who fund those purchases — have a growing incentive to lower standards.