Auto Loans On Fire: Sizzle Or Big Fizzle In The Making?

While everyone is gearing up for the Oscars, some of us may be in La La Land blithely ignoring smoke coming from the auto industry. This week’s big story is a bit schizophrenic and focused on consumer debt, which may eventually be a fizzle, while the battle rages on in eCommerce amid retail giants, to the chagrin of department stores everywhere.

SIZZLE

SMB Retail Squares With Economic Data

You know that economic data that shows things humming along in the U.S., at least in terms of consumer spending and business confidence? Turns out numbers are popping up in other places that corroborates the bigger picture. The latest salvo comes from Square, where transactions were up 34 percent year over year among its retail merchant client base — you know, the ones in the field and on the ground, with the card readers. The growth came from its core foundation of smaller firms, hinting that spending has some legs.

mPOS Growth A Giant Wave

Mobile is the wave of the future in payments, and the wave shows no sign of cresting. Orbis Research has estimated that the mPOS market is slated to grow by as much as 50 percent, compounded, in a relatively short timeframe, over 2016 to 2020. It’s not a software-only world, it seems, with hardware about to show some serious growth.

Shark Tank Reject Has Teeth

An anomaly to be sure, but just goes to show that TV can help lead the path to power, prestige and no small chunk of change — and we’re not talking about Trump. In this case, Jamie Smirnoff, who went on the “Shark Tank” show four years ago and offered up wireless, connected doorbells (hence the name Ring) and security devices, has closed on a $109 million Series D financing round. From Ring comes ca-ching.

FIZZLE

Wells To Shoulder Pru Costs?

The Wells Fargo saga seemingly never ends, with the latest wrinkle coming amid the news that the beleaguered bank may be pressed by Prudential to shoulder legal fees the latter may incur defending against allegations that retail bankers pushed Pru insurance on clients. No word yet about the costs that may be in the offing, but one wonders just how many eyes Wells has left to blacken in terms of reputation.

e-Macy-ated eCommerce

Amazon and Walmart. Two retail Tyrannosaurus Rexes (OK, we don’t know the plural here) battling for dominance in eCommerce. Walmart just showed some U.S. digital traction, with that segment growing 29 percent year over year versus Amazon at 22 percent growth. Meanwhile, Macy’s is forecasting another year of sales declines. Comp sales, including the eCommerce biz, were down 2.7 percent year over year in the latest quarter. Weighed down by bricks and mortar, this is one name that’s been plodding, toothless, like a Brontosaurus.

Department Stores

Macy’s is not the only one tied to terra firma that may see struggles ahead. Moody’s has said op income for the year that just ended for the department store industry in general has declined about 18 percent, worse than had been expected. That downdraft will continue in 2017, and with only 20 percent of sales in the sector tied to eCommerce, the momentum may be hard to escape.

Consumer Debt — Sizzle Or Fizzle?

In the immediate aftermath of the Great Recession, credit in the U.S. hit the pause button in a big way. This is not an entirely surprising result — especially since the economic cataclysm itself was brought on, in part, by a severe flaw in loan underwriting standards, particularly in the housing sector.

But that was nearly a decade ago, and while underwriting standards were extremely tight for a while (in part because of the new capital requirements of banks, which constrained the supply of capital in the market) and consumers were a little gun-shy, it seems that Americans are falling in love with credit again. Houses are selling, credit cards are swiping and cars are being driving off the lots.

Yet, the party on the part of lenders, so far at least, is muted. In fact, the pervading attitude is nervousness as debt climbs back to 2008 levels since it remains to be seen if the American consumer learned their lesson about using borrowed cash responsibly or if another round of high-default rough riding is yet to come.

Unfortunately, the news out of the auto segment this week has suggested it is more of the former than the latter.

The Rising Default Tide In Automobiles

Americans bought more new cars in 2016 than ever before — a fact often held up as a talisman of consumer confidence.

But with the surge in car sales came a surge in auto debt. As of the end of 2016, U.S. auto debt was hovering just below $1.2 trillion, an uptick of 9 percent over the previous year and a full 13 percent above the pre-crisis peak in 2005.

Rising with the tide of auto lending is subprime auto lending — for consumers with spotty, troubled or non-existent credit histories, which has also picked up notably. As of 2016, subprime loans account for a fifth of all car loan originations — around $400 billion.

That surge, apart from being propelled by the general rising demand, has been aided by a few outside factors, notably that subprime auto loans generally run an interest rate between 10 and 20 percent, meaning they are ideally suited for bundling and packaging for sale to investors on the hunt for high-yield bonds. Bond yields have been a particularly pressing concern in the zero or near-zero interest rate environment that has abounded for the last decade.

If packaging and bonding out consumer debt is bringing back the not-so-fond memory of ringing alarm bells, it is likely because similar practices abounded in the mortgage lending marketplace in the immediate wind-up to the financial crisis and Great Recession.

The concern is that delinquency rates, particularly in subprime lending, have been marching steadily up for the last few years. More than 6 million American consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.

“The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years,” the Fed noted.

And even among the loans that are current, they are contributing to the bigger worry — that consumers are, once again, taking on too much debt.

The New Consumer Debt Picture

As of the end of 2016, total U.S. household debt had reached $12.58 trillion — an uptick of $266 billion from the third quarter, according to a report from the Federal Reserve Bank of New York.

Overall, household debt was up $460 billion, which marks the biggest jump in the marketplace in over a decade.

It also puts U.S. consumer debt loads within shouting distance of the 2008 peak when total consumer debt hit $12.68 trillion.

The increasing figures reflect pickups across a range of areas. Mortgage balances were on the rise and ended the year at $8.48 trillion.

Non-housing debt, the category that holds credit card debt, student and auto loans, saw the most dramatic growth last year.

Student loan debt balances rose by $31 billion in the fourth quarter to a total of $1.31 trillion, according to the report. Auto loans jumped by $22 billion as new auto loan originations for the year climbed to a record high. Credit card debt rose by $32 billion to hit $779 billion.

Those figures taken together mean that, barring an unforeseen circumstance, consumer debt will meet and exceed 2008 levels sometime during 2017.

To Worry Or Not To Worry

Some — the sober minds at Salon, for example — are deeply concerned that the newly added-on levels of consumer debt combined with the uptick in subprime delinquencies in the auto lending market can only portend one thing — potential doom.

“The next subprime lending bubble could be about to burst” is their takeaway.

It is worth noting, however, that, even if that bubble did burst in the biggest and most spectacular way imaginable, it couldn’t do the kind of damage the housing market collapse did, simply as a matter of scale. When the U.S. housing market began to fall apart 10 years ago in 2007, there were about $10 trillion in mortgages on the books — $7 trillion of which had been bonded out and sold to investors. Auto loans as a segment is worth a paltry $1.2 trillion — only about $97 billion of which is securitized.

And while the subprime market has seen an uptick, defaults among prime and near-prime consumers have remained stable. Which is in line with the overall picture at present and the most major difference between the consumer lending spike of 2017 and the spike of 2008.

In two words: Fewer delinquencies.

As of the end of last year, 4.8 percent of debts were delinquent compared to the 8.5 percent of total household income debt was eating up in Q3 2008.

It also hasn’t been a banner year for bankruptcies in the U.S. Around 200,000 consumers had a bankruptcy added to their credit report during Q4, a 4 percent drop from the same quarter in 2015.

So, is consumer credit use sizzling and now the more responsible version of itself from 10 years ago? Or are we on the verge of an epic fizzle that starts in auto lending and sends falling dominoes flying?

So far, the good news is it seems we are leaning toward the former, as delinquency rates, by and large, are remaining low.

If they start to climb?

Well, you will likely get the chance to read the pure fizzle version of this story.