Revisiting the Subprime “Crisis” - nafassociation.com · Revisiting the Subprime “Crisis”...

Revisiting the Subprime “Crisis”

Brian Landau

Senior Vice President and Auto Business Lead

TransUnion

May 31, 2018

© 2018 TransUnion LLC All Rights Reserved | 2

Several news outlets have raised the question:

is a subprime bubble in auto forming?

“Is there a subprime auto loan bubble?”

USA Today,

September 27, 2014

“The makings of the next credit crisis

could be in your driveway”

CNBC,

April 24, 2017

“Why America's Auto Debt Boom

Fuels Bubble Talk”

Bloomberg,

March 23, 2017

“Why The Auto Financing 'Bubble' Is

Really An Affordability Issue”

Forbes,

December 7, 2016

“Overstretched consumers raise fears

of bubble in echo of subprime

mortgage crisis”

Financial Times, May 29, 2017

“In a Subprime Bubble for Used Cars,

Borrowers Pay Sky-High Rates”

New York Times,

July 19, 2014


The Past:

Why are we talking about a potential subprime

bubble in auto finance?


Early speculation was driven by the subprime

meltdown in mortgage

421

2006

530521

2005 2015

184

2014

135

2013

153

2012

140

2011

106

2010

125

2009

188

2008

244

2007 2017

204

2016

216

Subprime

Near prime

Mortgage Originations, $B

VantageScore® 3.0 risk ranges, calculated at origination

Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database

Financial Crisis,

12/2007-6/2009


Higher-than-average growth in near prime and

subprime allowed the speculation to grow

17.6M

2010

28.0M

2015

14.2%

12.6%

9.4%

7.8%

6.2%

Prime plus

Subprime

Super prime

Prime

Near prime

2010-15

CAGR

Auto originations by risk tier, count

Source: TransUnion consumer credit database


Subprime = 300–600, Near prime = 601–660,

Prime = 661–720, Prime plus = 721–780, Super prime = 781+

Near prime and

subprime segments

grew more than 10%

per year for five years


The growth in the near prime and subprime

segments also attracted new entrants to the market

35

21

+67%

Q4 2010 Q4 2015

20

5

Q4 2015

+300%

Q4 2010

Independent

finance companies Credit unions

# institutions originating 2,000+ non-prime1 loans per quarter


1. Non-prime includes Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database


Starting in 2015, delinquency rates began to rise

sharply

1.27%

1.44%

1.19%1.11%

0.5

1.0

1.5

2011 2012 2013 2014 2015 2016

% o

f borr

ow

ers

with a

delin

quency

Delinquency rates, 60+ days past due – Q4 results



Declining performance in near prime and subprime

loans drove the increase in delinquency rates

Prime and above

Non-prime:

Near prime and Subprime

DQ rates 60+ DPD, cumulative @ 12 months

0.8%0.7%0.6%0.6%

2012 20152014

+19 bps

2013

Year of origination

9.5%8.3%7.8%7.2%

Year of origination

20152012 20142013

+237 bps



Prime = 661–720, Prime plus = 721–780, Super prime = 781+ Source: TransUnion consumer credit database


The Present:

What makes us believe a subprime bubble is

not forming – or worse, ready to burst?


1.43%1.44%

1.27%1.19%

We have seen average delinquency rates begin to

stabilize – why?

1.32%1.30%

1.16%

1.02%

Q4 results

ending in

Q4 2017

Q1 results

ending in

Q1 2018

T T+1 T+2 T+3

Delinquency rates, 60+ days past due

Early sign of

stabilization


Year


Reason #1: Lenders have shifted more of their

focus to prime plus and super prime originations

16% 15%

21% 20%

22% 21%

21% 22%

20% 22%

20172015

+1.6

+1.5

-0.5

-1.1

-1.5

+3.1Super prime

Near prime

Prime

Prime plus

Subprime

Share of auto originations (count) by risk tier

share

(ppts)





0%

5%

10%

15%

20%

25%

0 6 12 18 24 30 36 42 48

Delin

quency r

ate

s

60+

DP

D, cum

ula

tive

Months on Book

Reason #2: Non-prime loan performance has

started to improve

2012

2016

The performance of the 2016 vintage is

comparable to the performance of the

2015 vintage (notice the tight variance)

20152014 2013

2017

DQ rates 60+ DPD, cumulative, for non-prime originations





Performance has improved largely in the South,

where many non-prime loans are originated

` ` ` `

Top 10 states with the highest

percentage of non-prime borrowersTop 10 states with the largest YOY

improvement

% of borrowers by state,

Q4 2017

Change in average DQ rate by state,

Q4 2016 to Q4 2017


Non-prime includes Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database


Many lenders have started to reenter near-prime

and subprime – an early sign of market stability

Lenders expanding into

NEAR PRIME…

Lenders doubling efforts into

SUBPRIME…

“[Lender] has started the

process of expanding its

credit band to include near

prime loans…”

Auto Finance News,

January 2018

Lenders expanding into

SUBPRIME…

“[Lender] moves down credit

tiers as others move up;

lender sees opportunity in

prime, near-prime…”

Automotive News

May 24, 2017

“…[Lender] and [Lender]

continue to express interest

in subprime lending …”

Auto Finance News

December 2018

[Lender] Eyes Subprime

Expansion Amid Lower 3Q

Originations”

Auto Finance News

October 30, 2017

“[Lender] is working on

shifting the company’s

focus back to its niche as a

subprime lender…’

Auto Finance News

February 2018

“Buy-here, pay-here dealers

could “get back into the

mix” of auto financing in

2018…”

Auto Finance News

January 2018


The Future:

What makes us believe that the market is

healthy – and will remain healthy in the near

future?


Consumers are willing to make good on their auto

obligations, even during times of financial distress

0

2

4

6

8

10

% b

orr

ow

ers

with

a d

elin

qu

en

cy

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

2017

Q1

2018

Q1

2008

Q1

2009

Q1

2007

Q1

2006

Q1

2005

Mortgage

Auto

Private label

HELOC

Bankcard

Personal loans

Delinquency rates (90+ DPD for Cards, 60+ DPD for Others)


Rank

order for

Q1

2018

Financial crisis,

12/2007 – 6/2009


Lenders are able to quickly make adjustments

when early signs of distress arise

• Lenders are able to respond

quickly to changes in the market

and rising levels of risk

• Lenders have the ability to

tighten their underwriting

requirements in different ways

• Lenders have other options to

pursue to incrementally grow

their business

• DQ rates began to rise in Q4

2015; lenders began to pull

back on non-prime originations

in Q2 2016 (two quarters later)

• Lenders can…

‒ Require more money down

‒ Pull back on extended terms

‒ Adjust price to changes in risk

• Auto refinancing

• Prequalification (to gain insight

into in-market consumers)

• Etc.

Actions Evidence


Lenders are armed with new sources of consumer-

level information to make more informed decisions

Currently Use

Alternative Data

Do Not Use

Alternative Data

Today

Survey Results

53%

47%

47%

71%

Additional Approvals 65%

Second Reviews

74%

Loss Mitigation

Pricing Enhancement

Universe Expansion

88%

>50% of non-prime auto lenders

surveyed use alternative data

They use alternative for a

variety of applications

% of total respondents (N = 32) % of active users (N = 17)

Source: Alternative Data Survey Results sponsored by

Factor Trust, June 2017


In summary

Is a subprime

bubble forming?

• No – despite some speculations

If no, what

makes us

believe this is

the case?

• Delinquency rates, especially in near prime and

subprime, appear to be stabilizing

• A number of lenders are expanding into or re-

entering near prime and subprime risk tiers

• Our forecast model indicates that delinquency rates

will remain steady throughout the rest of 2018

What have we

learned from

this experience?

• Consumers are willing to make good on their auto

loan obligations – even during times of financial

distress

• The market is fairly resilient to market changes

• Lenders now have access to alternative data to more

accurately predict credit behavior

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