PODCAST: TransUnion study on current delinquencies & implications for finance companies

The newest TransUnion study reinforced where a monthly vehicle payment lands in the family budget pecking order.

Analysts explained that lower inventories, higher prices and reduced demand, among other factors, are central to some of the changing dynamics in the auto finance market, resulting in a rise in delinquency rates.

TransUnion’s study titled, “A Critical Eye on Auto Performance,” found that despite an increase in serious auto delinquencies, consumers possessing multiple credit products continue to value auto financing nearly as much as mortgages, and much more than their credit cards.

TransUnion’s study observed auto trade lines that were more than 60 days past due and included vintage performance for all auto retail installment contract and lease originations by annual and quarterly cohort.

Analysts explained a key observation in the study: the “numerator” (or total number of delinquencies) is above pandemic-level lows, but it’s primarily driven by the backlog of likely delinquencies that were temporarily in accommodation or bolstered by pandemic-related government relief and other stimulus programs.

TransUnion noted that another factor contributing to the rise in delinquency rates is that of the shrinking “denominator,” derived from total number of vehicles currently being financed. Causes for this reduction include:

—Falling originations in 2020 due to falling demand
—A continued decline in originations in 2021 and 2022 due to limited vehicle supply
—An increase in repossessions and payoffs in 2021 and 2022.

Analysts indicated these factors have led to an imbalance between origination volumes and total account runoff resulting in lower total outstanding account volume.

“Because of the unusual and unsettled economic environment that accompanied the pandemic era, it’s critically important that we look at the big picture when it comes to auto delinquencies,” said Satyan Merchant, senior vice president and automotive business leader at TransUnion.

“While point-in-time delinquency rates are elevated when compared to prior periods, we have observed fairly stable vintage performance,” Merchant continued in a news release.

Point-in-Time Auto Loan Delinquency Rates Q2 2018-2022

*DPD = Days Past Due; Source: TransUnion U.S. consumer credit database

In examining vintage performance as related to delinquency, the study showed that while the Q1-Q3 vintage cohort has generally performed similarly as that of the 2019 cohort, there was a slight deterioration of performance found when comparing Q4 2019 to Q4 2021.

Quarterly Vintage Delinquency of Auto Loans and Leases at 6 months on Book

*bps = basis points; Source: Prama @ Vintage Analysis

The study also showed that consumers continue to prioritize auto payments just behind mortgages in their payment hierarchy, but well above credit cards, as consumers protected secured products with positive equity position.

In addition, TransUnion mentioned elevated vehicle values are providing consumers with positive loan-to-value positions, offering borrowers options in the event of financial stress. This is especially true for pre-2021 vintages, which has helped keep lender losses low, according to the TransUnion research.

“As the economic environment continues to evolve, lenders can prepare themselves for an array of possible scenarios so trends can be spotted and decisions made to best manage their portfolios,” Merchant said.

“Enriched data and analytics can help lenders identify areas of existing and emerging risk and opportunity, as well as better understand customers’ behavior by providing a cross-wallet and longitudinal view of their performance,” he went on to say about the study, which can be downloaded via this website.

Merchant elaborated about the study finding and more during an episode of the Auto Remarketing Podcast that’s available in the window below.