\n<\/p>\n
Alarm bells are ringing on Wall Street. The recent collapses of Tricolor, a used car seller and sub-prime auto lender, and First Brands, an auto parts supplier, have put the finance industry on edge, almost two decades after problems in the sub-prime mortgage lending market set the stage for the global financial crisis.<\/p>\n
\u201cWhen you see one cockroach, there are probably more,\u201d Jamie Dimon, the JPMorgan Chase CEO, ominously cautioned analysts this week, after the US\u2019s largest bank disclosed a $170m charge tied to Tricolor\u2019s bankruptcy. \u201cEveryone should be forewarned on this one.\u201d<\/p>\n
As the car lending market shows signs of strain, business around repossessions is booming. \u201cRight now, we\u2019re overwhelmed with work,\u201d George Badeen, who runs Midwest Recovery and Adjustment in Detroit, Michigan, said.<\/p>\n
The so-called repo man, tasked with recovering vehicles from drivers who default on loan agreements, was eulogized in music by Bruce Springsteen and in the 1984 Alex Cox film Repo Man.<\/p>\n
Repossessions \u2013 especially in the sub-prime auto market \u2013 are on the rise, according to Badeen, who is also president of the Allied Finance Adjusters trade body. \u201cWe\u2019ve seen some sub-primes making changes, which probably indicates they\u2019re having issues,\u201d he said. \u201cThey\u2019re not financing cars like they were. Two years ago they were financing anybody.\u201d<\/p>\n
While few are bracing for a crisis on the scale of the crash that pushed the world economy to the brink in 2008 \u2013 sub-prime auto lending is a fraction of the $1.7tn overall car lending business \u2013 the collapses of Tricolor and First Brands have drawn the car sector into the spotlight, amid fears they highlight credit stress in lower-income households, as well as problems in credit markets tied to auto debt.<\/p>\n
First Brands received approval for $500m rescue financing from a bankruptcy court, although Scott Greenberg, an attorney for First Brand\u2019s lenders, told the court of concerns that they could be \u201clending good money after bad\u201d.<\/p>\n
The wider fear \u2013 and the one causing consternation among investors \u2013 is what the troubles inside this one market might indicate about broader pressures rippling throughout the wider economy. \u201cDistress in auto lending broadly is often seen as a bellwether to changing circumstances in the US economy, because Americans particularly in the lower-income brackets tend to put their highest priority in auto payments,\u201d said Brett House, an economics professor at Columbia Business School.<\/p>\n
\u201cHaving a car is essential to being able to work,\u201d he added. \u201cSo when we see stress in the auto financing market, we typically receive that as an indication that household finances are getting tighter.\u201d<\/p>\n
An estimated 100 million Americans hold auto loans, with 85% of new car purchases and 55% of used car purchases financed. It is the third-largest consumer credit market in the US, behind mortgages and student loans.<\/p>\n
Problems in the auto loan industry have been manifesting for several years, as car prices rose sharply during the Covid-19 pandemic while inflation soared and interest rate increases followed. Paying off a new car required 42 weeks of income in 2023, according to Cox Automotive, up from about 33 before the pandemic.<\/p>\n
High prices meant bigger loans. The average monthly repayment now stands at more than $750.<\/p>\n
Car repossessions surged to their highest level since 2009 last year, according to Cox, with 1.73m vehicles seized, up 16% from the year prior and 43% from 2022.<\/p>\n
Car owners were found to be missing payments at the highest rate in more than 30 years in January, when a Fitch Ratings index monitoring the share of sub-prime auto borrowers at least 60 days past due on their loans hit 6.5%.<\/p>\n
\u201cThe consumer has been distressed for a little while,\u201d Bill Nash, CEO of CarMax, the biggest seller of used cars in the US, told analysts last month after its lower sales and profits unnerved shareholders. \u201cI think there\u2019s some angst.\u201d<\/p>\n
Auto loans are short-term investments, and Kevin Armstrong, author of Repo Blood: A Century of Auto Repossession History, believes they are often extended to consumers who may not be credit-worthy. For this reason, he said, auto loan delinquencies are often seen as clues \u2013 \u201cone of the canaries in the coalmine\u201d \u2013 to the health of the broader economy.<\/p>\n
Loan operators are now \u201cgiving out massive amounts of loan modification to try to move back delinquencies\u201d to stave off repossession orders, Armstrong said. But they may only be buying time. \u201cThere\u2019s a massive amount of recidivism when it comes to loan delinquencies,\u201d he added.<\/p>\n
Armstrong traces the rise in repossessions to the pandemic, when stimulus checks and extra unemployment aid allowed consumers to pay up for pricier cars. \u201cWhen Covid hit, prices went through the roof,\u201d he said. \u201cI watched people paying outrageous amounts for cars that just weren\u2019t going to hold their value, and the dealers laughing all the way to the bank. They got hosed.\u201d<\/p>\n
Now, coupled with higher mortgage or rental payments, high grocery bills and higher auto loan payments, he added: \u201cConsumers got stuck with loan payments they can\u2019t afford.\u201d<\/p>\n
Under most loan agreements, the lender or leaseholder can repossess the car even if borrowers are only a few weeks behind in payments, in part because a borrower could try to hide the car if they know the lender is looking to repossess it \u2013 and potentially sell it at auction.<\/p>\n
The job of repossessing a car is becoming harder, according to Badeen, with greater consumer rights awareness and a higher likelihood of confrontation. \u201cWe\u2019ve had so much violence in recent years that we\u2019ve had to train our people in what people like to call situational awareness and de-escalation,\u201d he said. His company typically now sends tow trucks out with two people, one to pick up the car and another to keep watch.<\/p>\n
The clouds gathering over the auto lending market could grow darker. Should Congress fail to agree on a continuation of Covid-era healthcare subsidies, the political issue at the center of the current federal government shutdown, that could put more pressure on the finances of auto borrowers.<\/p>\n
\u201cThat whole mess comes out of Covid. It has an impact on individual people that many people don\u2019t understand,\u201d said Badeen. \u201cEverything intertwines in some way, shape or form.\u201d<\/p>\n
If a large sub-prime lender stumbles as a result of this pressure \u2013 Santander Consumer is the nation\u2019s biggest, and was last year fined $550m to resolve claims it violated consumer protection laws by placing borrowers with sub-prime credit into auto loans it knew carried an unacceptably high probability of default \u2013 there could be wider turbulence.<\/p>\n
Unlike First Brands, Tricolor sought bankruptcy protection last month under the shadow of fraud allegations that have prompted two federal investigations. Charles Gibbs, the attorney representing Tricolor\u2019s court-appointed trustee, told a Texas court this month that initial reports \u201cindicate potentially systemic levels of fraud\u201d.<\/p>\n
\u201cTricolor\u2019s failure is not necessarily indicative of what is immediately ahead for the sector as a whole, because of the special circumstances, but I would still see it as an economic warning indicator,\u201d said House.<\/p>\n
Armstrong, too, was reluctant to call the failure of the companies, and the rise in repossessions, a trend. \u201cBut it\u2019s on the verge,\u201d he added.<\/p>\n","protected":false},"excerpt":{"rendered":"
Alarm bells are ringing on Wall Street. The recent collapses of Tricolor, a used car seller and sub-prime auto lender, and First Brands, an auto parts supplier, have put the finance industry on edge, almost two decades after problems in the sub-prime mortgage lending market set the stage for the global financial crisis. \u201cWhen you<\/p>\n","protected":false},"author":1,"featured_media":28698,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[49],"tags":[540,17032,1495,8043,1404,8995,3023,17031,2229,5066],"class_list":{"0":"post-28697","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-business","8":"tag-americans","9":"tag-auto","10":"tag-car","11":"tag-default","12":"tag-economy","13":"tag-finances","14":"tag-loans","15":"tag-repossessions","16":"tag-surge","17":"tag-tighter"},"_links":{"self":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/28697","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=28697"}],"version-history":[{"count":0,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/posts\/28697\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=\/wp\/v2\/media\/28698"}],"wp:attachment":[{"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=28697"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=28697"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/naijaglobalnews.org\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=28697"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}