The structural cracks in the U.S. auto loan ABS market are widening, with banks beginning the repossession process not from consumers, but from dealers. The 2025 structural collapse is underway from all directions: commercial real estate (CRE), auto, and consumer credit. Unicus, an independent short-only investment firm, has been closely monitoring the auto sector, banks that deal with the auto industry, and the U.S. auto loan ABS market.
According to the latest data, prime and subprime delinquencies have risen while recoveries have slid. Spikes in delinquencies in the auto ABS market are particularly concerning. Prime sector 60- and 30-plus-day delinquencies rose marginally month over month to 0.58% and 1.89% in November 2024 from 0.56% and 1.86%, respectively. However, they decreased slightly year over year from 0.60% and 1.96%, respectively. Subprime sector 60-plus-day delinquencies also rose month over month to 6.01% in November 2024 from 5.87% in October 2024, and declined marginally year over year from 6.03% in November 2023. Subprime 30-plus-day delinquencies increased month over month to 15.91% in November 2024 from 15.79% in October 2024.
Auto loan extensions have become the norm, leading to an increasing risk of double defaults. According to the latest data from S&P Global, the prime extension rate decreased month over month to 0.70% in November from 0.89% in October, but it rose substantially from 0.53% in November 2023. Of the 15 issuers with at least four months of data for both November 2023 and November 2024, 12 (80%) reported higher extensions year over year.
The three highest reported year-over-year increases were CarMax (rose 49 bps to 1.51% from 1.02%), Mercedes-Benz Auto Receivables Trust (MBART; 42 bps to 1.29% from 0.87%), and Carvana Prime (38 bps to 0.82% from 0.44%). Systemic risks that trigger year-over-year extensions are due to consumers taking on more debt at higher interest rates and facing affordability issues. For instance, vehicle payments and other basic living expenses, such as auto and home insurance premiums, have risen significantly since before the COVID-19 pandemic.
CarMax auto finance noted in its third-quarter earnings call that it is testing an enhancement to its extension policy that would allow delinquent customers to take greater advantage of a payment extension. While the company has indicated that early performance results are encouraging, it also recognizes that some customers will eventually return to delinquency, which would result in charge-offs.
This situation is likely to end badly. New cars are cheaper and better, even with guarantees. The question arises: why repo from dealers rather than transfer to other dealers? Is this just a sign of too much inventory on dealer lots and high short-term rates? The answer is yes, and floor plan defaults are surprisingly not widely discussed.
The structural cracks in the U.S. auto loan ABS market are widening.
Sources:
https://x.com/UnicusResearch/status/1880025362547241198
https://www.spglobal.com/_assets/documents/ratings/research/101586624.pdf
https://www.propublica.org/article/auto-loan-calculator-with-extensions
https://www.capitalone.com/cars/learn/managing-your-money-wisely/what-is-a-loan-extension/1010
https://www.propublica.org/article/exeter-finance-skip-payments-debt
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