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Lost in the shuffle: auto loans & the personal toll of repossessions

A wave of consumer defaults comes for auto. Just as industry and government wards off near-term home evictions, so too should efforts be made to ward off car repossessions.

Even before this coronavirus downturn, auto delinquencies were rising - a troubling sign for a $1.3+ trillion industry. Recent consumer finance news has focused on the 60-day suspension on federal student loan payments and a 3-month suspension of mortgage payments.

However, eyes should also be vigilant of the auto finance market. The prospect of a painful wave of auto loan defaults and car repossessions will take a personal and economic toll on American households.

In 2008: Auto payments > mortgage payments

In the great recession of 2008-2009, Americans prioritized auto payments over mortgage payments - for the first time ever.

For many, the car is a lifetime - it’s how Americans commute to work and earn money; for housing insecure Americans, it’s also the emergency backup plan B in the event of an eviction. Repossession is a true threat to people’s lives and livelihoods; many go to great lengths to keep their cars during times of distress as its loss can represent a crippling loss of mobility and ability to work.

During this recession, are we likely to see a repeat of 2008-2009 where Americans prioritized mortgage payments over auto? Likely not. Here's why.

In 2020: Mortgage payments > auto payments

Defaults are likely to hit the auto finance industry hard.

This is due to two main reasons. For one, Americans are being asked to stay home - negating the car’s primary purpose of providing transport. Further, we live in a starkly different reality than just a decade ago: the introduction of car share services, collaboration tools for remote working, and the expansion of online shopping to cover any item imaginable has made it possible to do most anything from the convenience of one’s home. At least in the near-term, many Americans are situated to ride out the coronavirus at home without their car.

The second reason is differences in the auto finance market itself: underwriting standards have loosened considerably. Over the last 10 years, subprime auto lending has exploded - more than doubling in size. 2019 was a bumper year with over $193B in originations, or 32% of all auto loans issued.

Many of these subprime loans contained risky features for consumers: high interest rates (24-36% is not atypical), spread out over record loan terms (6+ years), and loans equal to or greater than the underlying value of the car (LTV > 100%). All of this spells trouble for consumers - it was difficult for many to make timely payments even during “normal” times.

To their credit, many auto lenders like Capital One have publicly indicated they are willing to work with borrowers to avoid defaults and repossessions.

However, this is not universal: there are many others, particularly non-bank lenders more sensitive to economic shifts and where subprime lending is concentrated, that are currently mum.

How lenders & government can help

Just like as the mortgage industry and federal and state governments are moving forward with measures to prevent home evictions during this time, so too should there be temporary measures to ward against car repossessions.

Already, some states like New York's Department of Financial Services are leading the way: state-chartered lenders there must provide consumer's hardship relief. At the Federal level, the Treasury Department and Consumer Financial Protection Bureau (CFPB) still have the opportunity to play leading roles.

The personal and economic toll of a repossession is significant. Preventing them will bolster Americans’ economic resilience. Once the coronavirus storm passes, a car will be crucial to help many find work once again and earn income. Handling the upcoming wave of auto loan defaults with business-as-usual repossession practices will only leave deep scars for years to come.

#autofinance #coronavirus #repossession #creditdefaults #consumerfinance

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