Sub-Prime Auto Loans: The Next Financial Crisis?
Yes, I know. A meltdown in subprime auto loans has been predicted almost every year of the past decade. I am not an economist or stock analyst, so take all this with a shaker of salt, but here is the new factor that I don't think is being discussed much in the context of subprime auto loans: the end of student loan forgiveness:
The U.S. Department of Education announced it will restart interest accrual for student-loan borrowers in the Saving on Valuable Education (SAVE) plan, starting from Aug. 1, according to a July 9 Education Department (ED) statement....
According to the ED, 42.7 million borrowers currently owe $1.6 trillion in student debt.
“Only 38 percent of borrowers are in repayment and current on their student loans,” the ED said in April.
“Most of the remaining borrowers are either delinquent on their payments, in an interest-free forbearance, or in an interest-free deferment. A small percentage of borrowers are in a six-month grace period or in-school.”
The SAVE plan only includes 7.7 million of these borrowers, about 1/3 of delinquent borrowers, but its termination demonstrates this Administration's commitment to end forbearance for delinquent borrowers. Over the last 6 months many other student loan borrowers have been taken off of variouis deferral agreements and asked to pay what they owe.
The reason this is relevant to auto loans is this: there is a large overlap between households with student loans, particularly those with non-performing student loans, and those with sub-prime auto loans. Borrowers delinquent to both a bank for auto loans and to the US government for their student loans will quickly learn that only one of these lenders has the legal power to force their debt to the top of the debt repayment stack.
I am not a financial analyst so I am not sure who would be most hurt by this -- certainly I would not want to be long the equity tranches of securitized auto loans. There are banks such as Ally Financial that have a large percentage of their income in auto loans, including sub-prime, And there are situations like Carvana, which is complicated right now. On the positive side Carvana** stock is way up, likely in anticipation of rising used car sales and prices due to Trump tariffs. On the negative side they are a huge sub-prime auto lender (short-sellers argue that their car sales business is just a loss-leader for their auto lending business).
**Postscript: Carvana is one of those battlefield stocks where super-bulls and super-bears (the later now including Hindenburg Research and Chanos) duke it out constantly. I will mostly stay away as I have already been sucked for years and years into the mother of all battlefield stocks (Tesla). But I will say on Carvana that there may be an interesting pattern emerging. Several years ago the founding family the Garcias sold billions in stock at the top, right before it crashed 99%. Now that the stock has climbed back to those old highs again, the Garcias are selling billions more. It is normal for founders to sell more than they buy to diversify their holdings, but their timing as historically been spectacular.