The 90-day auto delinquency rate is higher than the peak reached in 2009
Cathie Wood, CEO of Ark Investment Management, has sounded the alarm about rising auto loan delinquencies in the U.S., pointing out that the 90-day delinquency rate has now exceeded levels seen during the 2009 financial crisis. Her warning follows a concerning trend highlighted in recent data, showing a surge in auto loan defaults even as investor interest in auto-backed securities remains robust. The Federal Reserve has confirmed these developments, projecting that auto loan delinquencies will hit a five-year high by 2024.
Auto loan delinquencies occur when borrowers miss payments for 30, 60, or 90 days. As defaults increase, the auto industry has responded with substantial price cuts to stimulate demand. Earlier this year, Tesla slashed U.S. prices for its Model Y, Model X, and Model S by $2,000 after missing first-quarter delivery targets. Ford reduced the cost of its Mustang Mach-E by up to $8,100, while Nissan lowered the price of its Ariya SUV by as much as $6,000. Stellantis followed suit, offering discounts on Jeep Wrangler and Grand Cherokee models.
Despite these troubling signs, investors have been flocking to auto loan-backed securities. As of October 2024, sales of subprime auto loan-backed securities neared $40 billion, a 17% rise from 2023. According to Nicholas Tripodes, senior portfolio manager at Federated Hermes, these offerings were oversubscribed by nearly 20 times. This apparent disconnect—rising default rates paired with strong investor demand—highlights the complexities of current market dynamics. For example, investment-grade auto bonds from Global Lending Services in October 2023 yielded roughly 6%, triple the yield of comparable securities in 2021.
The burden of these financial strains is falling disproportionately on low-income borrowers, who are grappling with higher living expenses and elevated interest rates. Federal Reserve data shows that the overall auto loan delinquency rate climbed to 3.8% in June, the highest level since 2010. The Fed noted that "consumer loan delinquencies remain elevated in the first half of 2024," emphasizing that while credit card delinquencies showed improvement in the second quarter, auto loan defaults continued their year-over-year ascent.