Many are pointing to the rise of subprime financing for autos and the current increase in delinquencies as a looming threat to financial markets and the broader economy. There have even been comparisons to 2008. Others aren't worried, seeing the market as being small and contained with little threat of spillover effects even if every subprime loan went belly-up.
The chart below shows the trailing 60-day delinquency index for auto loans. It's reached 6% which is higher than the Great Recession. Notably, there is no uptick in the prime delinquency rate which shows that there's no broader stress.
Like subprime mortgages, subprime autos are facilitated by yield-hungry investors who are willing to purchase these loans en masse which also distributes the risk. Therefore, there's a disconnect as the loan originator is not personally responsible even in the case of a default, because they are immediately selling the loan to a bank who is packaging these loans into larger securities.
Stock Prices Resilient
During the 2007-2008 crisis, the bank stocks were at the epicenter of the subprime fiasco. These stocks began to show stress in terms of share price and earnings, well before the crisis escalated. Currently, the largest companies in subprime auto financing including Ally Financial
Not a Systemic Threat
Beyond the strength in equities, there are other reasons to believe the subprime auto issue is a localized problem rather than a systemic threat. For one, it's relatively small at around $50 billion compared to $1.3 trillion for the subprime auto market. This amount although large in most respects is not large in terms of financial markets or the broader economy.
Another factor in defaults is that more sophisticated borrowers have left the subprime auto financing space and been replaced by newer, more aggressive players who are willing to take on riskier borrowers. Banks' involvement in auto financing increases but their share of the subprime market has declined over the last decade. The resilience of earnings for the auto finance companies mentioned above indicates that these loans remain profitable on an aggregate basis even with higher defaults.