From Bloomberg – Re-Blogged From Newsmax
Amid all the reflection on the 10-year anniversary of the start of the subprime loan crisis, here’s a throwback that investors could probably do without.
There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.
“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.
Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.
The reason for the increase, she posited, is that lenders have loosened underwriting requirements as more firms tap into a declining market for car loans, not that there are more customers with worsening credit profiles.
Cutts said Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years. There may also be “loosening by all lenders on factors that I cannot evaluate in my data,” she said, citing downpayment requirements, lack of third party validation of income and employment.
Meanwhile, the overall rate of late payments exceeding 60 days on all types of auto loans came in at a still-healthy 0.91 percent, up just eight basis points from last year. The rate on prime loans was at 0.33 percent, an increase of three basis points.
Still, the “rapid rise” in deep subprime delinquencies should not go unnoticed, Cutts said.
“As soon as lenders (and the investors behind them) get overconfident that they have better models and can make excess profits by disrespecting credit risk, they always get their hats handed to them sooner or later,” Cutts said. “The mortgage market learned this lesson at the expense of the entire global financial system, and it is playing out now in a micro-level, in the ABS market for subprime auto loans.”