Before COVID (BC), there used to be a relatively simple hierarchy in payments. The rent or mortgage gets paid first. Then, to keep financially stressed households warm and fluid came utility bills, followed by unsecured credit, then unsecured credit cards at the bottom of the list. The strategy was predictable and made sense. Even the call center’s toughest collector would not suggest otherwise, at least not in most cases.
But, COVID changed much of the order. Mortgage forbearances and protections for renters stepped in to protect households. Utility Regulators found compassion. The massive student loan product quickly entered the ring with an array of protections. Auto loan forbearances, particularly for the secondary card market, were less forgiving, but credit cards played a positive role.
Consumer credit cards are holding their own right now. When measured for chargeoffs, deferments, reduced consumer purchasing, and lender constraints make the most recently published 2.56% rate (Q42020) appear much better than the same period in 2019 when it clocked in at 3.70%.
However, as the WSJ reports today, the latest hotspot is loans collateralized with Autos. The pain is particularly with used autos and sub-prime borrowers.
- A more significant share of people with low credit scores has been falling behind on their car payments in recent months, a sign of stress among consumers whose finances have been hit hard by the pandemic.
- Some 10.9% of subprime borrowers with outstanding auto loans or leases were more than 60 days past due in February, up from 10.7% in January and 8.7% a year prior, according to credit-reporting firm TransUnion. It marked the sixth consecutive month-over-month increase and the highest level in monthly data going back to January 2019.
- More than 9% of subprime auto borrowers were more than 60 days past due in the fourth quarter, the highest quarterly figure in data going back to 2005.
For risk managers, the numbers look concerning. According to Trans Union data, 4Q20 delinquency 9.05% up from 7.41% a year earlier. Credit card issuers need to pay attention to whether or not sub-prime auto will be a bellwether for an upcoming shift in credit risk.
- “We are seeing the separation between the consumers who are back on their feet and those who aren’t,” said Satyan Merchant, head of the auto-finance business at TransUnion.
- Some customers started the pandemic in relatively good financial shape but have fallen into what is considered subprime, which many lenders define as those with credit scores of 600 or less on a scale of 300 to 850.
- Car loans are a key indicator of how riskier borrowers are faring. The loans represent the biggest monthly debt payment for many subprime borrowers, who often don’t have mortgages or college debt. Many work in restaurants, hotels and bars that have been hurt badly by Covid-19.
The sub-prime auto segment varies from prime auto loans. Usually, there is a FICO cut-off of about 660, and it is more likely that the collateral behind the loan is a 2015 model than it is a shiny new 2021 version.
- Subprime financing accounted for about 19% of the number of auto loans, and leases originated in 2020, down from roughly 22% a year prior, according to Experian PLC.
- Lenders’ overall portfolios have held up better than expected during the pandemic, thanks in part to their more well-off borrowers. The share of borrowers with midrange to near-perfect credit scores who have missed auto-loan or lease payments remains close to 0%, according to TransUnion. Subprime delinquencies could improve in the next few months with tax refunds and the new round of stimulus payments and if the unemployment rate continues to fall.
The takeaway is do not let low credit card chargeoffs make you complacent. There is still a storm bubbling, and credit cards are probably next.
Overview Provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group