Next Phase Of Carmageddon: The Banks

Authored by Wolf Richter via WolfStreet.com,

Banks have started to tighten lending standards for prime and subprime borrowers, and it shows...

Banks are further tightening their lending standards for prime and subprime auto loans. This process started in Q2 2016, when auto lending had reached the apogee of loosey-goosey underwriting that had boosted sales of new and used vehicles to record levels and had ballooned auto loan-balances outstanding to the $1-trillion mark. It also boosted risks for lenders. Inevitably, subprime auto loans started running into trouble in 2016, and it was time to not throw the last trace of prudence into the wind entirely.

The chart below - based on data from the Fed’s Senior Loan Officer Survey on bank lending practices for the third quarter - shows the net percentage of banks tightening lending standards. The negative percentages below the red line signify net easing. It shows how loan officers have gradually, in fits and starts, dialed back their easing before Q2 2016 and ratcheted up their tightening after Q2 2016:

During Q3 2017, 10% of the banks tightened underwriting conditions, compared to the prior quarter, but 0% loosened underwriting conditions. In other words, the tightening is proceeding gradually, on a bank-by-bank basis, and the easing has stopped entirely.

“Banks reportedly tightened most terms surveyed for auto loans,” the report says. Specifically, here are some of the terms the banks tightened in Q3, which adds to the banks that tightening in prior quarters:

• 7% net tightened conditions on minimum required down payments.


• 5% net tightened conditions on credit scores


• 8% net tightened granting loans to customers that did not meet credit scoring thresholds

In a set of special questions, the October survey asked why banks were changing credit standards or terms for prime and subprime borrowers “this year.” The reasons were nearly the same for both prime and subprime borrowers, but subprime is clearly the bigger concern. Here is what banks said about their reasons for tightening lending standards for subprime borrowers:

• Less favorable or more uncertain economic outlook: 50% somewhat important; 30% very important.


• Deterioration or expected deterioration in the quality of your bank’s existing loan portfolio: 30% somewhat important; 40% very important.


• Reduced tolerance for risk: 30% somewhat important; 50% very important.


• Less favorable or more uncertain expectations regarding collateral values [used vehicle values]: 40% somewhat important; 40% very important.


• Lower or more uncertain resale value for these loans in the secondary market: 33% very important; 0% somewhat important.

Some of this tightening is already showing up in the data. For example, the average maturity of new-vehicle loans peaked in Q1 2017 at 67.4 months, according to Federal Reserve data. The data for Q3 is not yet available, but by Q2 the average maturity dropped to 66.5 months, the first major drop since 2011.

Note on the left side of the chart how the average maturity plunged during the Financial Crisis as credit was freezing up and as auto sales collapsed, and it was hard to get anything financed:

But the tightening hasn’t yet shown up in total auto loan balances outstanding, which jumped by $19 billion during the third quarter, likely boosted by the first batch of replacement sales from the hurricanes.

What has shown up is a massive adjustment of the data going back to Q4 2015. Since I keep the old data, I overlaid the prior unadjusted data (red line) and the current adjusted data (blue columns) in the chart below. The adjustment retroactively wiped out $39 billion in auto loan balances in Q4 2015. By Q1 2017, the adjustment had wiped out $41 billion:

Adjustment of data happens all the time. These are estimates that can be off, and occasionally, adjustments are made to try to put them back on track. But it does show that auto loans did not suddenly plunge in Q4 2015, as the chart based on the blue columns alone would have otherwise indicated.

That banks are tightening their auto-lending standards ever so gradually is another headwind the auto industry is facing. The hurricanes, by destroying or damaging a few hundred thousand vehicles, created some temporary replacement demand for new and used vehicles, some of it financed by insurance companies.

This replacement demand is now papering over the underlying problems of the industry that are constraining demand:

• Too much auto debt


• Too much “negative equity” in vehicles after years of loosey-goosey lending, which makes trading difficult


• New vehicle prices that have moved out of reach


• And incomes that have been stagnating for a large part of the population.

And these headwinds will still be there after the replacement demand from the hurricanes settles down.

Carmageddon for Tesla, Fiat Chrysler, Hyundai, and Kia. But not for all automakers. Read…  Pickup Sales Boom, Cars get crushed, Tesla Deliveries Plunge

The Fed Just Started Pulling the Plug on the Markets

Global equity flows might have just peaked.

Bull markets are driven by new capital: you need more money from more buyers to increase buying pressure so that stock prices rise.

However, it looks as though globally investors are tapped out. After months of new capital pouring into the market, global equity fund inflows slowed dramatically in the last week.

And not just a little… by a LOT.

Source: Sober Look

This is a MAJOR warning sign to stock bulls that buying pressure is weakening in the markets. Throw in the fact that the Fed is now both RAISING rates and DRAINING liquidity from the markets and there is the recipe for a serious market disruption to hit.

Regarding that latter point...

The Fed has now announced that rather than continuing reinvest the proceeds from its maturing debt securities, going forward every month it will let $10 billion ($6 billion in Treasuries and $4 billion in mortgage-backed securities) “come due” and NOT reinvest the money.

Put another way, going forward the Fed will be withdrawing $10 billion in liquidity from the financial system every month.

This amount will increase by another $10 billion next quarter (bringing the monthly withdrawal of liquidity to $20 billion in 4Q17) and another $10 billion the following quarter (bringing the monthly withdrawal of liquidity to $30 billion in 1Q18).

Put simply, according to the current plan, the Fed will be:

1)   Withdrawing $90 billion in liquidity in 2017 (three months of $10 billion per month and three months of $20 billion per month).

2)   Withdrawing $510 billion in liquidity in 2018 (three months of $30 billion per month, three months of $40 billion per month, and six months of $50 billion per month).

This marks the FIRST time in 8 years that the Fed will not be actively providing liquidity to the US markets. Will this mark the top for the latest stock market bubble?

A Crash is coming…

And smart investors will use it to make literal fortunes from it.

We offer a FREE investment report outlining when the market will collapse as well as what investments will pay out massive returns to investors when this happens. It"s called Stock Market Crash Survival Guide.

We made 1,000 copies to the general public.

As I write this, only 63 are left.

To pick up one of the last remaining copies…

CLICK HERE!

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Good Luck Getting Out Of That Subprime Auto Loan When Used Car Prices Crash

We"ve written frequently in recent months about the coming subprime auto crisis which will very likely be prompted by a wave of off-lease vehicles that will flood the market with used inventory over the coming years.  In fact, Morgan Stanley recently predicted that the surge in used inventory could result in as much as a 50% crash in used car prices over the next couple of years which would, in turn, put further pressure on the new car market which has already resorted to record incentive spending to maintain volumes.

Here are just a couple of our most recent notes on the topic:

• Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can"t Be Good


• New Warning Signs Emerge For Subprime Auto Securitizations


• Auto Lending Update - Someone Please Explain How This Is Not A Bubble

Of course, while pretty much anyone has been able to purchase that brand new BMW of their dreams over the past 5 years...courtesy of a surge in subprime lending volumes....

 

...getting out of those loans once used car prices crash and millions of Americans are left with massive negative equity balances won"t be quite so easy...just ask Yvette Harris who is still making payments on her 1997 Mitsubishi nearly a decade after her car was repossessed.  Per the New York Times:

More than a decade after Yvette Harris’s 1997 Mitsubishi was repossessed, she is still paying off her car loan.

 

She has no choice. Her auto lender took her to court and won the right to seize a portion of her income to cover her debt. The lender has so far been able to garnish $4,133 from her paychecks — a drain that at one point forced Ms. Harris, a single mother who lives in the Bronx, to go on public assistance to support her two sons.

 

“How am I still paying for a car I don’t have?” she asked.

 

For millions of Americans like Ms. Harris who have shaky credit and had to turn to subprime auto loans with high interest rates and hefty fees to buy a car, there is no getting out.

 

Many of these auto loans, it turns out, have a habit of haunting people long after their cars have been repossessed.

And while the aggregate subprime auto credit balances are no where near the trillions in debt that was extended to subprime mortgage borrowers leading up to the great recession, for many low-income Americans the fallout could actually be worse because they can"t simply walk away.

With mortgages, people could turn in the keys to their house and walk away. But with auto debt, there is increasingly no exit. Repossession, rather than being the end, is just the beginning.

 

“Low-income earners are shackled to this debt,” said Shanna Tallarico, a consumer lawyer with the New York Legal Assistance Group.

Meanwhile, with low-income borrowers unable to afford a lawyer in many cases, defendants often skip court dates and don"t even realize they"re still on the hook for payments until debt collectors start to garnish their wages.

"Essentially, the dealers are not selling cars. They are selling bad loans,” said Adam Taub, a lawyer in Detroit who has defended consumers in hundreds of these cases.

 

Many lawyers assisting poor borrowers like Ms. Robinson say they learn about the lawsuits only after a judge has issued a decision in favor of the lender.

 

Most borrowers can’t afford lawyers and don’t show up to court to challenge the lawsuits. That means the collectors win many cases, transforming the debts into judgments they can use to garnish wages.

Of course, if used car prices tank leaving millions of people with negative equity balances and defaults from auto loans they could never afford in the first place...you know what that means for new car prices...

Morgan Stanley: Used Car Prices May Crash 50%

For months we"ve been talking about the massive lending bubble propping up the U.S. auto market.  Now, noting many of the same concerns that we"ve highlighted repeatedly, Morgan Stanley"s auto team, led by Adam Jonas, has just issued a report detailing why they think used car prices could crash by up to 50% over the next 4-5 years. 

Here"s the summary (flood of supply, poor lending standards and desperate OEMs who need to keep new car sales elevated at all costs):

• Off-lease supply: This has already more than doubled since 2012 and is set to rise another 25% over the next 2 years.

• Extended credit terms: Auto loans are at record lengths and lease assumptions (residuals, money factor) are at record levels of accommodation.

• Rising rates: Starting from record low levels in auto loans.

• Overdependency on auto ABS: The outstanding balance of auto securitizations has surpassed last cycle"s peak.

• Record high deep subprime participation: 32% of subprime auto ABS deals were deep subprime (weighted average FICO < 550) in 2016 vs. 5% in 2010.

• Record high units of new car inventory: 2016YE unit inventory levels were near 10% higher than 2015YE, and are continuing to trend higher in 2017.

• OEM price competition: Car manufacturers have capacitized to a 19mm or 20mm SAAR. At this point in the cycle we start seeing more money "on the hood" to move the metal. As new car prices fall, used prices look relatively more expensive, which necessitates a decline in used prices to equilibrate the supply/demand imbalance.

• Increased ADAS penetration: We expect auto firms to achieve nearly 100% active safety penetration by 2020, creating an unprecedented safety gap between new and used vehicles, accelerating obsolescence of the used stock. Rising insurance premiums on older cars could accelerate this shift.

• Trouble in the car rental market: Due to a number of secular shifts, including how consumers access transportation options (e.g. ride sharing), car rental firms are facing stagnant growth, weak pricing and over-fleeted conditions. As these cars hit the auction, the impact on prices could be significant.

All of which Morgan Stanley thinks could spark a 50% decline in used car prices over the next couple of years.  So, for all of you pension funds out there scooping up all of the AAA-rated slugs of the latest auto ABS deals for the "juicy yield", now might be a good time to review what happened to the investment grade tranches of MBS structures back in 2009 when home prices crashed by similar amounts.

And here are the stats...

Off-lease volumes have already doubled since 2012 and are only expected to get worse...meanwhile, lending standards have gradually gotten worse and worse...

...as further revealed by the growing share of "deep subprime" loans in auto ABS deals.

Of course, so far negative equity hasn"t been a problem for car buyers because lenders have been all too willing to roll those debt balances into new loans.  And, courtesy of low rates and stretched out terms, consumers haven"t really cared that their debt balances are ballooning so long as their monthly payments remain low. 

Meanwhile, none of the warnings about a flood of used car volumes about to hit the market has impacted new car volumes being pushed on to dealer lots.

All of which results in this fairly brutal outlook for used car prices:

Dear OEMs, the first step is admitting you have a problem.

Banks Slash Loan Books While Equities Hover Near All-Time Highs; Someone Is Massively Wrong

Over this past weekend we noted that the Fed"s latest weekly commercial bank loan data revealed some rather shocking deterioration in year-over-year loan growth.  As shown in the chart below, after growing 4.6% one week ago, total loans and leases grew only 4.2% in the week ended March 8: the lowest growth rate since May 2014. However, it was once again the Commercial and Industrial loans creation - or lack thereof - which was more problematic, because after growing 4.0% on a year over year basis as of March 1, and 5.7% one month ago as of February 8, the growth rate has since tumbled to just 2.9%, a 1.1% decline in the growth rate over the past week.

As shown in the chart below, on a cumulative 4-week basis the slowdown in C&I loan creation tumbled by 2.8% as of the latest period: this was the biggest monthly slowdown going back to the financial crisis.

That said, many equity analysts have dismissed the sudden collapse in new business loans as the fortunate side effect of a long-term positive trend whereby corporates are tapping the fixed-rate bond market to take advantage of current low rates and extend out bank debt while reducing exposure to rising floating rates. 

And while that"s a very convenient explanation, particularly for equity bulls, it would seem to ignore the fact that C&I lending standards seemed to tighten at the precise moment that loan volumes started to drop...i.e., it wasn"t a loan demand problem from borrowers but rather a loan supply problem from the banks that caused the collapse in issuance growth.  From Bloomberg:

But it"s not just business loan volumes that are drying up as banks are pulling back in consumer segments as well.  Auto loan growth, for example, was hovering around 8-9% for the first 3 quarters of 2016 but have collapsed over the past 6 months.

So are auto borrowers also tapping the high-yield market to buy their new Camaro"s?  Or, is it possible that banks are starting to take notice of the accelerating delinquency rates that we"ve been pointing out for a while now?

Perhaps banks also noticed that upticks in YoY changes in auto delinquency rates have historically been a fairly decent indicator that all is not well with the economy. 

Meanwhile, credit card charges offs are spiking to "great recession" levels as well.  Unfortunately, there"s no easy way to blame this metric on the high-yield market.

Could it be that banks are actually starting to act prudently with their capital and react to the deteriorating data that equity markets seem all too happy to dismiss?

Fed Loan Officers Survey Shows Demand Is Tumbling

If ever there was proof that "hope" is not a strategy, it is the 2017 Q1 Fed Senior Loan Officer Survey. Despite soaring confidence, spiking optimism, and striking gains in financial assets, demand for loans (from credit cards to autos to residential and commercial) have all plunged in the last 3 months.

Loand Demand collapsed across all asset classes in 2017 Q1

As Goldman Sachs notes, The Fed"s Senior Loan Officer Survey for 2017Q1 showed that lending standards on commercial and industrial loans were largely unchanged. Standards on commercial real estate loans continued to tighten, while demand for construction and multifamily residential loans declined. Demand for residential mortgages weakened, while standards were little changed.

MAIN POINTS:

1. According to the Fed’s Senior Loan Officer Survey for 2017Q1, credit standards on commercial and industrial (C&I) loans were mostly unchanged. Relative to the prior survey, the net percentage of banks reporting tighter standards on loans to large and medium sized firms edged down (+1.4pp, from +1.5pp) while standards on loans to small firms were balanced (0pp from -1.5pp). Fewer respondents reported weaker demand from large and medium sized firms (0pp from -5.9pp) and from small firms (+1.5pp from -1.5pp).

2. On balance, commercial and industrial (C&I) lending standards remained unchanged while standards on commercial real estate (CRE) loans continued to tighten. A higher net percentage of banks reported weaker demand for construction and land development as well as multifamily residential property loans, while demand for nonfarm residential properties was roughly unchanged.

3. Relative to the last survey, lending standards for residential mortgage loans were mostly unchanged. Banks additionally reported weaker demand for most categories of residential mortgages, particularly for subprime and government loans.

4. The net percentage of banks reporting increased willingness to make consumer installment loans declined (+3.1pp from +12.5pp). Demand for these loans softened as well, particularly for auto and credit card loans.

5. This survey asked additional questions on the outlook for lending in 2017. Banks anticipate easier standards on C&I and residential loans and tighter standards for CRE and auto loans. Asset quality on C&I and residential loans are expected to improve somewhat, while the quality of credit card and auto loans is expected to deteriorate somewhat.

Charting some of the details makes the pain a little easier to comprehend...

Credit Card loan demand crashed... and standards tightened to near 7-year highs...

And even more problematic for the American economy - given the "inventory bubble" - Auto loan demand has plunged and standards are tightening drastically.

And finally while "hope" remains Trumphoric, loan officers" "willingness to lend" signals a very different picture ahead for Small Businesses...

While "optimism" for sales and business outlooks soars near record highs, bank willingness to lend has plunged to 7 year lows!!