Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

If there's one thing the recent news flow has shown, it's that there are lots and lots and lots of things to be scared about, in financial markets and beyond. 

Famous short-seller Jim Chanos suggests there's something people should add to the list: auto loans. Some lenders are doling out loans worth as much as 125 percent of used-car values, and that "should scare the heck out of everybody,” Chanos said on Wednesday in an interview with Bloomberg TV's Scarlet Fu.  

Carload of Debt
Outstanding auto loans have surged to more than $1 trillion as cheap money fuels borrowing
Source: Federal Reserve Bank of New York

Indeed, bubble chasers have been watching auto loans -- especially the subprime variety, which makes up almost a fifth of the debt -- and warning of consequences for a while now, drawing comparisons to the subprime mortgage bubble that caused the last financial crisis. As is often the problem with bubbles, spotting them is one thing -- accurately predicting when they'll burst is another. Still, it's become harder and harder to look at the numbers without wondering if this could end badly, and when. 

Delinquency rates are increasing as auto-loan amounts and payments reach record highs for new-car loans, according to a recent report from Experian. Adding to the risk, the terms for loans have grown longer -- reaching 68 months for new cars, according to Experian. And an increase in the popularity of leasing cars -- 31 percent of new vehicles in the first quarter -- is fueling concerns of a supply glut that will drive down prices, making auto loans riskier in the same way that falling home prices made mortgages riskier during the financial crisis. 

It all has resulted in brokerages receiving an "explosion in calls" from hedge-fund managers looking to short asset-backed securities containing car loans, as Bloomberg's Matt Scully reported a few months ago. But there's a problem: The trade is almost impossible to pull off because banks aren't exactly interested in being counterparties and there's a lack of derivatives to bet against pools of car loans. 

So where are the shorts going to turn? Well, there's always an equity lurking somewhere. 

Short-sellers have focused on the shares of companies considered most exposed to an auto-loan bubble, such as Credit Acceptance Corp. and Santander Consumer USA Holdings Inc. Short interest on both remains elevated despite year-to-date declines in the stocks of 21 and 34 percent, respectively.   

Short Focus
Short interest has been elevated at Credit Acceptance Corp. and Santander Consumer USA as concerns grow about auto loans
Source: Markit via Bloomberg
Note: Shows short interest as a percentage of free float.

Is the auto-loan situation enough to "scare the heck out of everybody” as Chanos suggests?  Well, even at more than $1 trillion, auto loans are a fraction of the size of the mortgage market, which was almost 15 times bigger at its peak in 2008. Yet there are reasons to be concerned about how the auto-loan situation fits into the rest of the consumer-credit environment, especially in light of recent turmoil in marketplace lenders like LendingClub. As Chanos pointed out, most of the loans issued by online lenders like these were for debt-consolidation purposes, so “if they’re having problems, the ability of poor credit consumers to refinance is tougher.” 

It's clear the market is on alert for a sign that consumer credit is taking a turn for the worse after a nice long stretch of healthiness. Look no further than the huge plunge in shares of Synchrony Financial after the issuer of private-label credit cards said it was expecting a 20 to 30 basis point increase in charge-off rates.  

Synching Feeling
Synchrony Financial led a sell-off in credit-card companies this week after warning of an increase in credit-card charge-offs
Source: Bloomberg

Synchrony CEO Margaret Keane made it clear at a Morgan Stanley conference that she's keeping a close eye on auto loans for signs that a worsening environment there could affect her business: "The last crisis started with mortgages, not with credit cards, right?"

Even if the situation with auto loans doesn't  "scare the heck out of you," it'd be foolish not to find a spot for it somewhere on your list of frightening things.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net