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.
“When you see one cockroach, there are probably more,” Jamie Dimon, the JPMorgan Chase CEO, ominously cautioned analysts this week, after the US’s largest bank disclosed a $170m charge tied to Tricolor’s bankruptcy. “Everyone should be forewarned on this one.”
As the car lending market shows signs of strain, business around repossessions is booming. “Right now, we’re overwhelmed with work,” George Badeen, who runs Midwest Recovery and Adjustment in Detroit, Michigan, said.
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.
Repossessions – especially in the sub-prime auto market – are on the rise, according to Badeen, who is also president of the Allied Finance Adjusters trade body. “We’ve seen some sub-primes making changes, which probably indicates they’re having issues,” he said. “They’re not financing cars like they were. Two years ago they were financing anybody.”
While few are bracing for a crisis on the scale of the crash that pushed the world economy to the brink in 2008 – sub-prime auto lending is a fraction of the $1.7tn overall car lending business – 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.
First Brands received approval for $500m rescue financing from a bankruptcy court, although Scott Greenberg, an attorney for First Brand’s lenders, told the court of concerns that they could be “lending good money after bad”.
The wider fear – and the one causing consternation among investors – is what the troubles inside this one market might indicate about broader pressures rippling throughout the wider economy. “Distress 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,” said Brett House, an economics professor at Columbia Business School.
“Having a car is essential to being able to work,” he added. “So when we see stress in the auto financing market, we typically receive that as an indication that household finances are getting tighter.”
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.
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.
High prices meant bigger loans. The average monthly repayment now stands at more than $750.
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.
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%.
“The consumer has been distressed for a little while,” 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. “I think there’s some angst.”
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 – “one of the canaries in the coalmine” – to the health of the broader economy.
Loan operators are now “giving out massive amounts of loan modification to try to move back delinquencies” to stave off repossession orders, Armstrong said. But they may only be buying time. “There’s a massive amount of recidivism when it comes to loan delinquencies,” he added.
Armstrong traces the rise in repossessions to the pandemic, when stimulus checks and extra unemployment aid allowed consumers to pay up for pricier cars. “When Covid hit, prices went through the roof,” he said. “I watched people paying outrageous amounts for cars that just weren’t going to hold their value, and the dealers laughing all the way to the bank. They got hosed.”
Now, coupled with higher mortgage or rental payments, high grocery bills and higher auto loan payments, he added: “Consumers got stuck with loan payments they can’t afford.”
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 – and potentially sell it at auction.
The job of repossessing a car is becoming harder, according to Badeen, with greater consumer rights awareness and a higher likelihood of confrontation. “We’ve had so much violence in recent years that we’ve had to train our people in what people like to call situational awareness and de-escalation,” he said. His company typically now sends tow trucks out with two people, one to pick up the car and another to keep watch.
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.
“That whole mess comes out of Covid. It has an impact on individual people that many people don’t understand,” said Badeen. “Everything intertwines in some way, shape or form.”
If a large sub-prime lender stumbles as a result of this pressure – Santander Consumer is the nation’s 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 – there could be wider turbulence.
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’s court-appointed trustee, told a Texas court this month that initial reports “indicate potentially systemic levels of fraud”.
“Tricolor’s 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,” said House.
Armstrong, too, was reluctant to call the failure of the companies, and the rise in repossessions, a trend. “But it’s on the verge,” he added.
