The American auto industry is facing an unprecedented crisis in 2023 with a tidal wave of car loan defaults and repossessions. As the Federal Reserve continues raising interest rates to fight persistent inflation, monthly car payments have become unaffordable for millions of Americans already struggling with sky high prices for gas, food, and other staples. The resulting surge in delinquencies and creditors taking back vehicles creates immense personal hardships and ripples across the economy. This crisis merits heightened attention and action from policy makers.
An Avalanche of Repossessions
According to data from credit monitoring agency TransUnion, over 200,000 cars per month are now being repossessed in the United States, up a staggering 60% from a year ago. Other data sources confirm this rapidly deteriorating situation. Auto finance firm Cox Automotive reports that vehicles sales have plummeted 16% year-over-year in recent months, new car prices are down 6%, and used car prices have cratered over 20% as desperate dealers slash margins to move swelling inventories.
"I‘ve been in the car business for over 20 years and never seen anything like it," says Mark Williams, general manager of a Chevrolet dealership in Ohio. "Our repo guys are going nonstop trying to keep up." Industry analysts warn the pace of repossessions could triple in coming months if the economy continues slowing while the Fed keeps boosting rates, meaning over 600,000 vehicles per month seized from struggling households.
Regional Pain Points
Some regions have seen an even sharper acceleration in auto loan delinquencies and repossessions compared to national averages:
- Midwestern states like Ohio (+82%) and Michigan (+75%) are weathering massive manufacturing job losses detonating personal finances
- The Southwest including Arizona (+70%) and Nevada (+65%) faces plunging housing sector activity combined with inflation eating up service worker wages
- Energy states like Texas (+77%) and North Dakota (+68%) endure ripping job cuts as oil and natural gas firms pull back exploration budgets amid lower commodity prices
- Florida (+60%) suffers from wildly inflated home prices and insurance costs stretching thin entertainment and hospitality employees
- The Southeast manufacturing hub of Alabama (+78%) grapples with major employers downsizing plus lingering Reconstruction from Hurricane Ian
Subprime Timebomb
A key yet underappreciated factor amplifying delinquencies and repossessions is the rapid growth of subprime auto lending over the past decade. Enticed by the high yields available, big banks and specialized finance firms handed out progressively riskier car loans expecting the good times to keep rolling. Even deep subprime loans with interest rates exceeding 20% became commonplace to consumers with heavily damaged credit. Lenders justified these predatory terms with the assumption they could easily resell vehicles and recoup losses if borrowers defaulted.
But this entire subprime edifice now looks extremely fragile as the economy turns south. Classified lifestyle and luxury vehicles flood dealer lots as lower income borrowers hand back keys for basic transportation options instead. Faced with shrinking demand, dealers struggle moving repossessed SUVs and trucks at pricescovering swollen loan balances which frequently exceed actual resale value. This growing industry bloodbath leaves lenders with major losses too. Ally Financial, the largest US auto financing company, reports rising provisions for credit losses directly tied to the surge in delinquencies and collapsing used car prices. Its profits dropped nearly 40% year-over-year in the latest quarter. Regional lenders report similar troubles. How long can they withstand the battering?
The Human Toll
The explosion in car repossessions directly translates to multiplying hardships for financially vulnerable households across America. Missed loan payments quickly spiral once access to reliable transportation disappears. Distraught borrowers then often take on even costlier replacement vehicles they can scarcely afford to keep making it work a few more months.
Sarah D. recently saw her Kia Forte with over 100k miles repossessed in Florida after falling behind almost $1,800 on payments. Her son requires regular medical appointments two counties away only accessible by car. In desperation, she took out a high interest "buy-here" loan on a decade-old Dodge Journey. Between back interest penalties and the new loan‘s 29% APR, she expects monthly payments exceeding $700—over half her take home income working at Dollar General.
Community non-profits report being completely overwhelmed by pleas for assistance as transportation alternatives like public transit, bicycling, or carpooling prove inadequate substitutes for most working Americans. Food bank staff see donations dwindling too as more locals need help making ends meet after losing vehicles critical to staying employed. The wide-ranging fallout across vulnerable communities appears poised to intensify before stabilizing given the economic outlook.
A Deepening Storm Across Auto Industry
With new vehicle sales slowing markedly over 2022 before going negative, automakers now brace for the worst industry downturn since 2008-09. Toyota recently chopped manufacturing targets by nearly 10% in Japan and 15% in North America. Last December, Ford‘s CEO Jim Farley warned dealers to prepare for a looming "bloodbath" across US auto markets based on surging rates and eroding consumer sentiment. Industry analysts broadly expect vehicle sales to plunge at least 10-15% in 2023 with much steeper 30% declines foreseeable if high inflation gives way to a deeper economic contraction.
Beyond immediate revenue hits from shrinking sales, this intensifying storm also threatens the financial stability of lending institutions with significant auto loan exposure—much like subprime mortgages wreaked havoc across Wall Street firms in 2008. Data suggests smaller US community banks and credit unions hold over half of the $1.4 trillion in outstanding auto debt. These local players always faced narrow margins but often leaned aggressively into auto lending as big growth area during the long economic expansion. Now delinquencies are spiking at the worst possible moment.
Likewise, the financing units of major automakers also hold extensive auto loan portfolios that may turn toxic rapidly. Industry leader GM Financial along with Ford Motor Credit report rising losses too, especially on loans made to customers with subprime credit scores below 620. During earnings calls, executives from GM and Ford emphasize their financing divisions as profit centers helping insulate against cyclical auto sector turbulence. But skeptics worry immense risks still lurk should the economy take a sharp leg lower.
Exposed Bank & Lenders
Meanwhile, large regional banks plus specialized lenders also face significant financial hazards given hefty exposures to consumers and dealers now struggling to service debts as economic activity declines. Wells Fargo CEO Charles Scharf estimates nearly 70% of the bank‘s US consumer lending portfolio consists of auto loans. With $48 billion on the books presently and losses mounting, that translates into tens of billions in vulnerable assets should current 90+ day delinquencies worsen as projected.
Other major institutions like Bank of America and JPMorgan Chase also report upticks in non-performing auto debt dragging bank profits lower too. And the heavy concentration among smaller players appears even more precarious. Pennsylvania-based S&T Bank built its entire growth strategy around auto lending the past decade across Midwest and Appalachia markets hard hit by inflation and manufacturing declines. The midsize firm recently set aside $27 million specifically tied to bad auto loans—now equal to 41% of 2021‘s net income.
These current troubles likely presage greater credit market ructions given the widespread exposures as loans securitized into Asset-Backed Securities (ABS) present a looming systemic threat like subprime Mortgage-Backed Securities (MBS) once did. As bundles of car loans sour, the values of related ABS decline sharply meaning losses eventually cascade onto institutional investors like pension funds holding such previously safe yielding assets. Some analysts already detect liquidity troubles related to auto ABS particularly among regional banks. So risks clearly transcend only the auto sector itself.
Fallout Across Communities
Given automaker production cuts now underway and demand spiraling downward, economic fallout from this car crisis spreads across communities where factory jobs and related services concentrate. Toyota‘s elevating adjustments just this year encapsulate the growing turmoil—including suspending operations at 5 Japanese plants for up to 7 days along with eliminating Saturday shifts in Indiana. BMW already plans shedding 5,000 German jobs through attrition and not replacing retirees. Mercedes Benz announced similar intentions back in June citing waning China sales. Meanwhile, Stellantis just indefinitely laid off 1,350 Canadian auto workers due to the new market headwinds. More cuts loom elsewhere.
Among suppliers, parts manufacturers face intensifying distress too from deteriorating revenues now trickling down given shrinking vehicle output. Recently collapsed Michigan firm Eaton Rapids Metal fabricated specialized metal components for decades before abruptly shuttering after major customers dialed back contracts. The fading company initially tried cutting hours and wages for its skeleton crew still clocking in but ultimately ran out of options – becoming just one of many smaller players fighting a losing battle against deteriorating conditions.
In turn, fading fortunes across manufacturing regions spill over into still weaker consumption activity as displaced workers cut spending. Local car dealers, restaurants, retail outlets all report declining sales from thinner customer traffic and lower ticket sizes, which forces additional tough decisions around staffing and operations. So the negative effects compound quickly once root auto sector interruptions hammer regional economic bases long heavily reliant on associated factory jobs.
Cascading into Credit Markets
In terms of sheer widespread exposure combined with extraordinary leverage ratios, perhaps the closest parallel to today‘s car crisis stretches back to 2008 when subprime mortgage backed securities took down the mighty Bear Stearns before nearly sinking the rest of Wall Street too. Once again complex layers of securitization distributed across the global financial system redirect risks away from direct auto loan originators into a tangled web of indirect exposures. Like someone juggling hand grenades, once dropping activity feeds contagion.
Most large investment banks learned hard lessons last time and show limited direct vulnerabilities in this brewing storm based on recent stress tests. However, smaller regional players and specialized lenders attracted by the big upfront yields without appreciating the backend risks continue getting hammered. For example, New Jersey hedge fund 400 Capital Management held a portfolio with nearly 80% exposure to auto ABS and got wiped out this spring amid margin calls from its prime brokerage.
Contagion into wider lending realms also grows morepalpable now as shaken investors shun additional exposures to consumer debt baskets. Liquidity for supporting new issuances appears strained lately based on reports from ABS bankers at firms like Barclays and Credit Suisse fielding calls from struggling customers. That pulling back curtails lending options for financing everything from houses and educations to small businesses already reeling from the economic squeeze – presenting yet another systemic threat if the credit contraction feeds negatively back onto consumer spending and activity. The world saw how quickly even an initially localized crisis metastasizes during 2008 so complacency today seems Extremely dangerous no matter how carefully risk managers model sensitivities showing secure positions.
Ripple Effects into Housing
Trends in the auto market often signal wider economic shifts given transportation remains fundamental for most consumers. With industry sales plunging as fewer drivers splurge on models with 72 or 84 month loans, analogous pressures simmer in real estate too now especially evident in former boomtowns like Phoenix, Las Vegas and many Florida markets witnessing properties sit unsold 3 times longer this year versus mid-2021 based on Redfin data.
These regions lured droves of remote workers and investors that bid up home values to stratospheric levels last season. But the rate spike just as sharply reversed appetites while also cratering lending activity. 30 year fixed mortgages topping 7% translate into at least $900 extra per month for median price dwellings around major US cities – essentially tacking on a luxury car payment for strained family budgets.
And just like 2007, the innate human biases to ignore gathering storms means household balance sheets likely rot from underneath with credit scores taking hits from missed payments stretching across housing, education, healthcare and autos. Meanwhile, banks tighten lending standards and debt collectors swarm those barely holding on right now as economic clouds darken.
So risks clearly abound for negative feedback loops to gain momentum whereby household financial duress then weighs on consumption and employment activity – ultimately sinking GDP while putting bank balance sheets under greater stress too. With inflation simultaneously eroding purchasing power and flirting with 1970s style price instability, the policy options to stabilize markets appear limited this cycle as well. The Fed’s Quantitative Tightening regime intends promoting gradual cooling but history shows unintended consequences frequently emerge like the S&L crisis did back in the early 1990s after rates initially rose to address lingering 1970s inflation.
Hardship & Opportunity
The human toll from this unfolding auto crisis touches nearly every community across the country with heartbreaking stories of preventable setbacks and dashed hopes becoming commonplace. At the same time, the misfortune inevitably presents potential opportunities too – especially for cash rich customers and investors able to access financing when it disappears for marginal buyers.
Wealthier purchasers can increasingly capitalize on desperation across auto dealers overstocked with cars they cannot sell at current pricing levels. Just like home sellers eventually capitulated last decade allowing well capitalized investors to sweep up properties at bargain prices – the same dynamic appears unfolding now across car and truck segments. Used luxury SUV values fell over 35% in 2022 per various auto sales sites as distressed buyers unloaded Land Cruisers, Range Rovers and Escalades surrendered back to lenders originally pegged at $90,000+ when shiny and new.
Investment Opportunities
For risk tolerant investors with ready access to liquidity, similar prospects to capitalize on asset value discrepancies between forced sellers and intrinsic market clearing prices arise again this cycle across autos, housing and inevitably into small businesses, commercial developments and even industrial uses should cascading economic impacts worsen.
Savvy capitalists like billionaire Wilbur Ross made names for themselves picking through the rubble last go around purchasing steel mills, chip fabricators and local bank chains at pennies on the dollar once credit dried up for marginal enterprises after 2008. For strategic long term investors, pressing systemic threats frequently pave the way for consolidating supply chains and concentrating ownership stakes within weakened sectors – arguably speeding business evolution despite inflicting shorter term local hardship from restructuring and consolidation aftermaths.
Of course, effectively timing the inflection point on asset valuations matters tremendously based on lessons from 2008-10 – underscored by turbulent swings greeting those investing too early into sinking knives over both residential and commercial domains. Yet for patient financial players boasting spare dry powder reserves outside fraying markets today, the ultimate reward opportunities could prove unprecedented given the extraordinary policy measures unleashing torrents of global capital flows over recent decades now at growing risk of dramatic reversals should the American consumer economy buckle under compounding rate strains.
For the 64 million households holding prime auto loans today, unfortunately most lack viable options to sidestep swelling pressures beyond making increasingly painful household budget and employment trade-offs to prioritize transportation costs above almost everything else except food and shelter when the going gets tough. But having internet access and financial literacy to anticipate early stage repossession processes could help many identify assistance programs or at least make informed rather than desperate choices when confronting looming defaults. Too often hiding from issues allows small problems to spiral completely out of control.
Policy Actions to Alleviate Crisis
With the auto sector intricately enmeshed across modern economies, the mushrooming crisis requires substantive attention from policy makers rather than merely dismissing consequences stemming from interest rate medicine delivered for the greater inflation fighting good in eyes of the Federal Reserve. Since Washington played pivotal roles rescuing foundational players like GM and Chrysler last go around, the current challenges similarly demand interventions to prevent overshoot with uncontained downstream impacts.
In the near term, consumer advocates propose stimulus measures benefiting economically vulnerable families including gas tax holidays along with direct subsidy payments for commuters relying on their vehicles for lower wage employment. Enhanced unemployment benefits for involuntarily displaced workers also moves back onto radar screens amid gathering recessionary signals. Additionally expanding income-based repayment and forbearance options through the CFPB could assist cash strapped households temporarily modify monthly auto loan obligations without shredding already damaged credit records at this stage.
Longer term, investments supporting affordable and accessible public transportation alternatives also warrant higher prioritization for future infrastructure spending bills given vast populations clearly struggling with individual automobile ownership costs today – especially across locales lacking reasonable transit alternatives. Even modest gas price stability could alleviate some of the present strain should global oil markets cooperate. Additionally convincing major lenders and the Federal Reserve to establish more flexible loan modification options focused on maximizing ultimate principal recovery could blunt observed spikes in delinquency rates when short term interruptions strike – rather than pursuing blanket enforcement without reflecting scenarios on the ground for actual borrowers.
Addressing this nationwide car crisis requires both compassion and pragmatism across public policy as well as commercial domains since downstream risks for detoured lives clearly spill into fiscal and monetary spheres when local household hardships converge and amplify. With proper planning and support, the system has tools to blunt cascades before they overwhelm – protecting access and ownership for future generations eager to get behind the wheel chasing American dreams.