TransUnion: Subprime lags, though overall auto originations rebound

TransUnion discovered that finance companies originated paper at an overall pace during the third quarter of last year resembling what analysts spotted during Q3 of 2019.

When looking closer at the subprime market, however, TransUnion found originations are lagging. Analysts pegged the year-over-year decline at about 21% since subprime originations made up approximately 860,000 of the 7.32 million contracts flowing into portfolios during Q3.

For reference, TransUnion indicated 1.09 million of the 7.45 million contracts booked in Q3 2019 fell into the subprime category.

The data arrived through TransUnion’s Q4 2020 Industry Insights Report released on Thursday.

“A tightening in auto lending standards would generally be the primary reason for such a precipitous drop in subprime origination activity,” TransUnion senior vice president and auto line of business leader Satyan Merchant said in a news release, which reiterated originations are viewed one quarter in arrears to account for reporting lag.

“We’ve conducted further analysis that demonstrates that, in this case, it could be a combination of lagging consumer demand and adjustments in lending criteria,” Merchant continued. “This revelation points to the outsized economic impacts some subprime borrowers are feeling as a result of COVID-19.”

Meanwhile, TransUnion was able to share Q4 metrics for auto delinquencies, which include contract payments that are 60 days or more past due.

TransUnion’s overall 60-day delinquency rate rose to 1.57% in Q4 2020 from 1.50% the previous year. Looking closer at the subprime segment, the increase was even more pronounced. Analysts said it climbed from 7.41% to 9.05% year-over-year.

All told, TransUnion determined there were 83.5 million outstanding installment contracts at the close of 2020, down slightly from the close of 2019 (83.8 million) and up from the end of 2018 (82 million).

Furthermore, TransUnion said balances continued to grow on a year-over-year basis, rising 3.5% to $1.33 trillion. Analysts added the average outstanding balance on those current contracts sat at $19,818, which is more than $1,200 higher than the end of 2017.

“The recovery observed in the auto lending market since the height of the pandemic has been a positive sign,” Merchant said. “The auto marketplace is unique in that originations activity may be more impacted by a lack of demand, whereas some of the other credit products have seen slower loan activity due to limited supply.

“We will likely have a better picture of what is to come in the auto lending industry as more accounts exit both auto and mortgage accommodation programs,” he went on to say.

Q4 2020 Auto Loan Trends

*Note: Originations are viewed one quarter in arrears to account for reporting lag. Source: TransUnion.

Other credit market performances

As Merchant referenced, TransUnion’s report delved into other parts of the credit market, including personal loans that sometimes are held by subprime consumers, too.

Analysts indicated unsecured personal loan lenders continue to be cautious as originations in Q3 2020 were 30.7% lower than the prior year, but grew strongly quarter-over-quarter, indicating a gradual ramp-up in volume.

TransUnion determined serious delinquency rates increased slightly by 15 basis points in Q4 2020 on a quarterly basis, though remained 78 basis points lower than Q4 2019. The relatively low level of lending resulted in total outstanding balances falling again in Q4 2020 to $148 billion.

TransUnion senior vice president and consumer lending business leader Liz Pagel mentioned that continued availability of lender hardship programs, in addition to eviction moratoriums and decreased consumer spending, helped keep delinquencies and new charge-off balances low.

“The recent approval of another stimulus package and the potential for additional payments and the extension of federal unemployment benefits should help keep delinquencies and charge-offs at low levels in the near term even as lenders re-enter the market,” Pagel said.

“High savings rates and low credit card balances may continue to depress demand for debt consolidation loans, which could impact originations until lockdowns subside and consumers begin spending more,” she continued. “The end to lender forbearance programs, particularly mortgage, could impact delinquency rates, and later could drive more demand for credit as current liquidity sources are depleted.”

Also of note, TransUnion reported that mortgage originations continued to surge in Q3 2020, reaching nearly 4 million loans. Analysts said that’s the highest level of originations since the Great Recession and 67% higher than last year at the same time.

According to the report, mortgage originations were spread out evenly between refinancing and new purchases, with a 52% refinance share and 48% purchase share.

“On the surface, the consumer credit market is performing quite well. Serious delinquency levels remain near record lows while balance and origination activity is picking up,” said Matt Komos, vice president of research and consulting at TransUnion. “Additional stimulus and flattening unemployment rates point to a continuation of this trend.

“However, the performance of those accounts still in accommodation will help shape the true consumer credit picture,” Komos continued. “With many accounts expected to come out of accommodation between March and May, most notably mortgage accounts, we will soon see the true impact of those programs for both consumers and the credit marketplace.”

For more information about the report, register here for a webinar TransUnion is hosting on Wednesday.