Why it matters: The big three areas of credit expansion this cycle – energy, auto and student loans – are not of the magnitude of the housing sector in the last cycle. Not only is the mortgage sector bigger, it was international in scope, adding significantly to systemic risk by undermining the balance sheets of European banks as well as American ones.
Nevertheless, increased delinquencies in the auto sector will spell trouble given the high LTVs of loans and lower credit scores of borrowers. And I am troubled by the OCC’s depiction of the commercial real estate sector; we could see heavy loan losses there in the next downturn.
On autos, High LTVs mean lower recovery values for a depreciating asset. And this will be compounded by falling prices given the glut of production, now buoyed by subprime auto financing. And this will have a negative impact on the auto sector and the US economy. The question on a pullback in auto loans is timing; it’s not if, it is when and how hard — and how much this will impact bank balance sheets and the economy.Credit Writedowns
Subprime auto delinquency rate at highest level since financial crisis