Mike Schenk

Another bubble brewing?

Energy price declines and subprime lending growth may be affecting some loan markets.

April 28, 2016

A recent TransUnion analysis finds that energy price declines and a growing subprime population may be affecting some loan markets, particularly auto loans. Some have even suggested this may be the next “bubble.”

Should credit unions be concerned?

TransUnion reports that in the fourth quarter of 2015, 75.6 million consumers held auto loans. That’s a 7.8% year-over-year advance—and the strongest calendar-year increase on record. Average auto loan debt per borrower grew to $17,999 by year-end 2015, a 3.1% increase from $17,453 at the end of 2014.

This narrative undoubtedly sounds familiar to credit union leaders. Both new- and used-auto loan balances at credit unions have increased at double-digit rates in each of the past three years.

Importantly, the TransUnion report finds that the 60-day auto loan delinquency rate is increasing—dramatically in some cases. That’s due to an increase in subprime lending activity and economic challenges in states experiencing the energy sector slowdown.

The TransUnion report was almost immediately picked up by the New York Post, which reported the developments and added a bit of drama, claiming “Some analysts call it a bubble waiting to burst.”

The TransUnion report does highlight asset quality erosion: The year-end 2015 auto delinquency rate was at its highest level in five years, with levels increasing from 1.16% in the fourth quarter of 2014 to 1.24% at the end of 2015.

The report’s author, however, seems much more sanguine about the situation than the Post: “As lenders’ portfolios rebalance to accommodate the growth in nonprime lending over the past few years, we expect a mild uptick in delinquency. We remain in a low-delinquency environment but have observed pockets of pain in states with large exposure to the energy industry. Lenders should be mindful of different economic impacts and employment levels in various regions of the U.S.”

That view aligns more closely with the credit union experience. Both the credit union auto loan delinquency rate and the net chargeoff rate changed little over the past year. Both remain near cyclical lows, and the credit union delinquency rate is far lower than the national averages TransUnion reports.

While there has been an increase in subprime auto lending, that’s to be expected. The ranks of the unemployed have been declining and wage gains have become more significant and more obvious.

Many Americans saw their credit scores decline in the wake of the housing market collapse. And many of those folks are just recently getting back in the game and purchasing automobiles.

In the grand scheme of things we doubt there’s a bubble in the auto market. The sky is not falling.

While there may be some bad actors in the subprime auto finance arena, it’s extremely unlikely any are to be found in the credit union space.

As member-owned financial cooperatives, credit unions are careful to put members—regardless of income—in safe, responsible, and affordable loans.

MIKE SCHENK is CUNA’s vice president of economics and statistics. Contact him at 608-231-4228.