Auto Loan Delinquency Forecasts Point to Lack of Consensus About the Economy's Bottom

The percentage of auto loans past due 60 days or more rose 8.9 percent in the 4th quarter of 2008, according to credit reporting agency TransUnion. And the numbers, says the agency, point to auto delinquencies shooting to their highest point in a decade by the end of the year.

On the other hand, Wachovia Bank notes that delinquency rates have improved in both January and February, possibly signaling a peak to delinquencies.

Further evidence that forecasters are having a difficult time knowing where the bottom of the economy lies.

Since the recession began in December 2007, auto loan delinquencies have jumped 25 percent, compared with a 10 percent increase in the 2001 recession. The agency projects the rate will rise rise another 15 to 16 percent before peaking.

Besides the obvious causes—plunging home values and rising unemployment, the rate is also driven by people being wildly upside-down in their auto loans—-owing more than the vehicle is worth. There was also a disturbing trend leading up to the problems in the credit markets: dealers rolling up balances owed on a trade-in vehicle into a new loan, securitized only by the new car purchased.

This resulted in people owing well above 100% of the value of their new vehicle from the get-go.

A conflicting view comes from Wachovia Bank. Auto analyst Rich Kwas said the average delinquency rate in January and February actually came down from the fourth quarter levels, signaling that we may have reached a peak in delinquencies.

That, said Kwas, could move used car retailer CarMax to get a boost in its already climbing share price. Lower delinquency rates mean less people are behind on their automotive loan payments, meaning higher profits for CarMax’s financing arm.

Kwas noted that CarMax shares have increased about 29 percent since March 6 as used car prices and transactions have both been climbing as consumers opt for used cars instead of more expensive new ones.

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