January 6, 2020
Let’s talk about risk.
Going back to the 2009 subprime mortgage crisis, it was clear a lot of bad mortgages were packaged as investments and sold off. When the mortgages went bad, so did the investments, causing a disastrous economic ripple effect.
Today, the same thing may be playing out, but instead of mortgages, it’s happening with auto loans.
Vehicle manufacturers clearly want to move their inventories. JD Power said automakers are currently offering the highest level of incentives on record (as of November), and that will increase going forward. Keep in mind, this is also while Daimler (Mercedes Benz) and Audi announced massive layoffs as business dwindles.
The average vehicle incentive is now $4,538, which is a 12 percent increase over 2018. Even more astounding is that figure is 160 percent more than the previous high set in 2017.
This combination of high incentives and low interest rates moved people to buy – to the tune of $40.3 billion in November 2019. But some of these vehicles and their accompany loans are going to people who can’t afford them, just likes houses and mortgages back in 2009.
Case in point – 90-day delinquencies on auto loans (a payment hasn’t been made in three months) hit an all-time high in the third quarter of 2019 at $62 billion, per the Federal Reserve Bank of New York. That will hurt loans packaged as investments.
It’s the continuation of a bad pattern – delinquencies have increased steadily since 2015, jumping 52 percent in that time frame.
If you own any subprime auto debt in any form (e.g., bond funds), consider the future of the investment. These numbers are large enough to cause another economic ripple effect. What sort of collateral damage could occur?