The Wall Street Journal reports that ‘Risky Borrowers Are Falling Behind on Car Payments’ which runs counter to overall delinquency trends. They point out that ‘more subprime borrowers are missing monthly payments on their cars and trucks, pointing to an uneven economic recovery.’ The combination of economic stimulus payments and forbearance programs have helped all types of consumers but they haven’t been enough to keep those who were already high risk from falling further behind.

Many of these borrowers will face challenging financial times ahead. As the WSJ notes:

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.

While subprime borrowers may not have mortgages most are paying rent. If they've fallen behind on their car payments there's a good chance they're also behind on their rent. Hence we may be seeing only the tip of the future delinquency iceberg. The charts below detail subprime auto loan delinquencies over time:

This highlights the need to segment your portfolios into risk groups for more accurate CECL reserve calculations. Understanding how the risk profile of your portfolio is changing is a key element in developing future strategies and tactics.

New subprime originations in 2020 are down as a share of all new auto loans, falling to 19% from 22% a year earlier per the article. This raises a question about what performance is like on a vintage basis. How much of the increase in subprime delinquency is being driving by a more mature portfolio with accounts moving into higher delinquency stages? Vintage analysis is a critical tool to measure whether newer account are performing better or worse than older accounts all at the same point in the customer lifecycle.

Vintage analysis combined with benchmarking makes for an incredibly powerful tool to understand pockets of risk and how to reduce future losses. The tools also help identify how you can grow your portfolios at low risk. Using the CECLNow approach you can leverage the data to maximize its value. Contact Us to get started now.