The likely ‘shock’ that pushed Q4 delinquencies higher

To borrow a term often used now that it’s election season, the soundbite version of what TransUnion discovered about auto delinquencies might sound ominous. TransUnion determined 2015 closed with the high fourth-quarter delinquency rate since 2010.

But instead of frothing like an overzealous campaign staffer, Jason Laky, senior vice president and TransUnion’s auto and consumer lending business leader, tried to offer some explanation for what happened, discussing the likely “shock” that triggered a 6.9 percent year-over-year rise.

First, the numbers that were released on Wednesday. TransUnion’s Q4 2015 Industry Insights Report indicated the auto loan delinquency rate — the reading of borrowers 60 days or more past due on their vehicle installment contracts — increased from 1.16 percent in Q4 2014 to 1.24 percent in Q4 2015.

As of Q4 2015, analysts acknowledged the auto delinquency rate reached its highest level since Q4 2010 when the reading hit 1.22 percent.

“When we look at trends in the auto market, I think we expected to end the year a little bit lower so this increase came as a bit of surprise,” Laky said during a conversation with SubPrime Auto Finance News in advance of the data being released.

However, when we go back and talk about the rather larger rise in delinquencies we’ve seen in the energy space, that says there’s a shock that happened in certain parts of the U.S. economy — particularly if you’re in oil, gas or coal — that is causing job loss and other displacement and causing delinquencies to rise in those certain places. We believe that’s pulling up the overall U.S. delinquency,” Laky said.

TransUnion noted that states in which energy plays a major role in the economy showed an impact in the delinquency rates for the first time in the fourth quarter. In 2015, both credit card and auto loan delinquency rates experienced double-digit increases in energy-rich states such as Louisiana, Oklahoma, North Dakota, Texas and West Virginia. The year-over-year auto loan delinquency rise during Q4 was a follows in those five states:

— Louisiana: up 14.3 percent
— Oklahoma: up 15.3 percent
— North Dakota: up 42.3 percent
— Texas: up 14.9 percent
— West Virginia: up 14.3 percent

“Clearly if you’re in one of those markets, you want to take a close look at what’s going on there and make sure your account management practices are in line,” Laky said.

“Certainly as a subprime lender whatever is happening in the state of Texas is of concern because you’re likely to have a fair number of accounts there,” he continued. “I wouldn’t be too worried about North Dakota because even though it’s a big increase, it’s coming off of a very low base.”

Also impacting delinquencies is the sheer number of subprime contracts in finance company portfolios.

TransUnion data showed that at the conclusion of 2015 there were 1.26 million more subprime borrowers with credit card accounts showing a balance, and 1.21 million additional subprime consumers with auto loan accounts, compared to the end of 2014. The share of subprime accounts compared to other risk tiers also rose slightly in the last year.

“If you look at the broader U.S. economy, even in in the context of lots of stock market volatility, the overall consumer metrics that matter to auto finance — employment, consumer spending — we’ve had a couple of good reports on job creation and consumer spending in December and January that I think bode well for sales and consequently auto financing,” Laky said.

“When employment remain strong, it means that consumers outside of these energy effected areas are going to stay employed and make payments on their auto loans,” he continued. “This delinquency increase we hope will be short-lived as certain areas of the country work through the changes that have gone on in the oil market and that the rest of the economy will remain strong and pick up some of the slack.”

Laky was hesitant to give any specifics about what level of delinquency would trigger industry-wide concern.

“The challenge is that the alarm part is really a function of each lender’s risk management strategy,” Laky said. “As a subprime lender, you have a different tolerance for overall delinquency than if you’re a prime-focused lender.

“What I will say from our perspective when we look at things that might cause an alarm, we look at the distribution of balances of consumers from the different tiers,” he continued, pointing out that TransUnion data has subprime contract constituting about 19 percent of outstanding balances. That’s down from the recent high point of 24 percent back in 2009.

“That quells my concerns about whether this increase is something that we should really be worried about at this point,” Laky went on to say.

More Q4 auto metrics

In Q4 2015, TransUnion determined 75.6 million consumers had an auto loan, up 7.8 percent from 70.1 million in Q4 2014. This is the largest year-over-year auto loan account growth observed by TransUnion.

New auto loan and lease originations, viewed one quarter in arrears (to ensure all accounts are reported and included in the data), exceeded 7.5 million for the first time in Q3 2015. Originations increased 8 percent from 7.0 million in Q3 2014.

“Loan and lease originations and balance growth are outpacing auto sales, as more consumers choose to finance rather than pay cash for their vehicle,” Laky said.  “Growth was observed across all risk tiers, a promising sign for the auto industry as we head into 2016.”

TransUnion also mentioned average auto loan debt per borrower grew to $17,999 by the end of 2015, a 3.1 percent increase from $17,453 spotted at the close of 2014.

Trends in the Auto Market

*Note: Originations are viewed one quarter in arrears, reflecting data for the prior quarter (Q3).

Overall credit market analysis

As more consumers — and more non-prime consumers — are gaining auto loan and credit card access, TransUnion reiterated delinquency levels for these credit products have only risen slightly and remain at relatively low levels.  Both mortgages and personal loans experienced yearly drops in their delinquency levels, with mortgages dropping nearly 30 percent in the last year.

“Overall, the consumer credit markets are performing well. It is a positive sign that delinquency levels have remained relatively low despite more borrowers receiving credit,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.

“We have seen a continued rise in the proportion of non-prime borrowers in both the auto loan and credit card industries, and that is a likely driver for the uptick in delinquency among recently originated cohorts in those sectors,” Becker continued.

“We also believe lower energy prices and the resulting job losses in energy-dependent markets have played some role in delinquency rates. Even so, that impact appears at this point to be localized, and mild in terms of national effect,” he went on to say.