Subprime Auto Worries Appear Overblown: Fed Report

The post-recession revival of subprime auto lending has spurred concern in some quarters about excessive risk, but researchers at the Federal Reserve Bank of New York are not among those worried.

In a new report, the bank's researchers found that automobile buyers in the lowest band of credit scores are borrowing about $20 billion per quarter, which is roughly in line with pre-recession trends.

"While individuals with lower credit scores are able to originate auto loans," New York Fed officials wrote in a blog post Wednesday, "the origination amounts are still below, but approaching, the levels seen in the early- and mid-2000s."

"When we break out originations by borrowers' Equifax credit scores at the time of origination, we do not see evidence supporting a disproportionate or unusual volume of new loans being issued to riskier borrowers."

Earlier this year, Reuters reported that auto loans to subprime borrowers surged by 18% in 2012. The story attributed the subprime market's resurgence to the Fed's easy-money policies.

But the New York Fed report throws cold water on the notion that the return of higher-risk auto lending is cause for broad concern. The subprime auto market contracted during the financial crisis, and the new report suggests that it is just now returning to a relatively normal state.

Loans to borrowers with the worst credit scores amounted to about 24% of total auto loan originations in the second quarter of this year, according to the report. That's a high mark for the last five years, but it's well below the 30%-plus levels reached in both 2001 and 2006.

The auto lending recovery has been comparatively weak among young adults, many of whom are burdened with student loan debt, the report found.

"It appears that eighteen- to twenty-nine-year-olds are simply borrowing less frequently," the New York Fed researchers wrote. "The especially slow recovery in auto borrowing among the young is consistent with recent analysis suggesting a long-term decline in the demand for autos among younger Americans."

Total auto loan originations reached $92 billion in the second quarter, which is the highest level in nearly six years. Delinquencies on auto loans, which have been falling since 2010, dropped to 3.6% last quarter. That's still high compared with pre-recession levels.

Other consumer lending markets also showed signs of improvement in the second quarter, the New York Fed found.

Mortgage delinquency rates fell from 5.4% in the first quarter to 4.9%. Delinquency rates on home equity lines of credit dropped from 3.2% to 3.0%, and on credit card debt they fell from 10.2% to 10%.

Even delinquencies on student loans, which have been worsening as other consumer lending categories have improved in recent quarters, fell from 11.2% to 10.9% in the second quarter.

Across all consumer loan categories, borrowers were current on 92.4% of their obligations in the second quarter, the lowest level since the first quarter of 2008. It was the seventh consecutive quarter that overall delinquency rates fell, according to the New York Fed.