The Wall Street Journal-20080116-For Financial Stocks- Is It Another False Bottom-- Lax Lending Standards Could End Up Fueling Sudden Acceleration in Auto-Loan Delinquencies
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For Financial Stocks, Is It Another False Bottom?; Lax Lending Standards Could End Up Fueling Sudden Acceleration in Auto-Loan Delinquencies
In the waning days of the housing-market bubble, lenders lowered their standards, and that made the downturn worse. There is growing evidence that standards also came down for auto loans, and rapidly rising default rates could be the next dilemma for the staggering financial sector.
The amount of auto loans that were past-due or written off as a loss moved sharply higher in the last part of 2007, according to analysts.
Two of the big reasons for the deterioration have been easy to spot. The economy has been slowing, leading to job losses and depressed wages. And the mortgage downturn has prompted banks to cut the availability of home-equity lines of credit, which borrowers have used to pay down car and credit-card loans.
It is becoming clear that several auto lenders let lending standards slip substantially in 2006-07. This increased the chance that loans were made to borrowers who couldn't really afford them -- even at the outset. There is also some evidence that credit-card companies made the same mistake.
"The problem of lax loan-underwriting standards was not just concentrated in the mortgage sector; it's looking like it took place across the consumer-finance sector, from credit-card loans to auto loans to motorcycle loans," says William Ryan, consumer-finance analyst at Portales Partners, a research firm.
The deterioration in credit quality appears to have accelerated in the last quarter of 2007. Certain classes of loans made in 2006-07 are reporting some of weakest early credit performances in recent memory.
For instance, 2.06% of prime auto loans made in 2006 were more than 30 days past due in November, according to a Standard & Poor's Corp. survey. That past-due number for loans in their first year exceeds the historical high rate recorded in 2001 -- and it is well up from the 1.75% for prime auto loans made in 2005, S&P says.
The past-due numbers for loans made in 2007 are even worse than the 2006 credits -- a trend that exists for both prime and subprime loans, according to S&P.
"We expected losses generally to rise, due to what we perceived as the loosening of standards by lenders," says S&P analyst Amy Martin.
The lower standards, combined with lower house prices, means consumer balance sheets are looking grim, says Donald Yacktman, a money manager. Without the ability to tap into a home-equity line of credit, "the piggy bank is broken," he said.
Lenders that appear to have let loan-underwriting standards slip include subprime auto-loan company AmeriCredit Corp. and Harley- Davidson Inc., which lends to people who want to buy its motorcycles.
Mr. Ryan says AmeriCredit, which has a $16 billion auto-loan portfolio, loosened underwriting standards in the past two years by increasing the length of its loans and upping the loan-to-value, or LTV, ratio of its loans.
For example, the LTV ratio on AmeriCredit's 2005 loans was 112% of the wholesale price, but that jumped to 120% for 2007 loans, Mr. Ryan calculates, using data provided by the company.
Harley-Davidson also appeared eager to extend easier credit. In a loan-securitization filing last August, Harley-Davidson said 42.9% of the loans it was selling in the securitization trust had zero down payment, which is double the level of zero down-payment loans recorded for securitizations done in 2006. AmeriCredit and Harley-Davidson said they were unable to comment because of their upcoming earnings.
Credit-card delinquency levels are expected to rise this year, albeit from levels that are quite low by historical standards. This month, American Express Co. and Capital One Financial Corp., both said credit problems became worse at the end of 2007.
"We are assuming that those December trends will continue for the remainder of the year," says Meghan Crowe, credit-card analyst at Fitch Ratings. While there has been more use of things like teaser rates to gain customers, Ms. Crowe doesn't feel that there has been a big decline in underwriting standards by credit-card lenders -- and she notes that credit-card lenders have the ability to reduce and limit credit availability for at-risk borrowers.
Of the $284 billion of prime credit-card loans that Fitch rates, 2.91% were more than 60 days past due in December 2007, versus 2.59% a year earlier.
The stocks of consumer lenders are massively off their highs, suggesting some will -- like Countrywide Financial Corp. -- struggle to make it through the credit crisis. However, several consumer lenders took measures in recent years to make sure they could make it through a steep downturn. After a consumer credit crunch at the start of this decade, both Capital One and AmeriCredit strengthened their balance sheets and made sure they had more stable financing.
Their underwriting may once again cause them problems. "Some consumer lenders are managing their balance sheet better than they ever have, but they appear to have repeated the mistake of letting underwriting standards slip," says Mr. Ryan.
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Tom Lauricella contributed to this article.
(See related article: "Heard on the Street: Big Cash Infusion Fails To Prop Up Citigroup; Keeping Powder Dry" -- WSJ Jan. 16, 2008)
