Bank News: Car loans to banks increase

Banks and investors are still wary of lending to Americans purchasing houses and almost everything else, but they are lending people money to buy cars-even to borrowers who must stretch to make their payments.

The value of auto loans outstanding at the end of the second quarter hit $725 billion, according to the automotive division of Experian, a credit-reporting firm. That is 5.7% above a year ago and the highest level since the first quarter of 2009.

More banks tell the Federal Reserve that they are easing standards for making new auto loans, and the market for securities backed by car loans has rebounded.

The car-financing surge is nourishing one of the few parts of the consumer economy that is doing well. Lenders, eager to boost their interest income because yields on alternatives like U.S. Treasurys are very low, see auto loans as particularly attractive and safe.

Car loans are relatively small and span three to six years, making them more appealing to lenders than longer-term mortgages. Even lending to less creditworthy, or so-called subprime, borrowers was up about 1% in the latest survey by Experian from a year ago, after declining the quarter before.

"The banks are getting into auto loans because they have the money," said Jim Lentz, U.S. chief executive at Toyota Motor Corp. 7203.TO -0.16% "We are seeing more 'subprime,' which is good."

One attraction of auto loans to lenders is that when borrowers get into trouble, they tend to skip mortgage payments before car payments because cars can be more easily seized by banks. The percentage of auto-loan payments 30 days past due fell to a recent low of 2.52% in the second quarter, around 2007's rate, Experian said.

One potential worry for lenders: More borrowers are taking out loans as long as 72 months, or even 84 months. That could cause problems later if stretched borrowers need to sell their cars but owe more than the vehicles are worth.

Dustin Hughes, 36 years old, of Houston, got a six-year loan for a 2012 Dodge Charger. He and his wife refinanced their mortgage in February and put the savings toward a $4,500 down payment on the Charger, replacing a beat-up used car that Ms. Hughes drove. They financed the balance on the $35,000 vehicle with a 5% loan from the dealer.

Mr. Hughes in June replaced his truck with a 2012 Dodge Ram, borrowing from a dealer at 4.5%. The average rate on a five-year car loan was 4.46% as of Aug. 8, according to Bankrate.com.

Mr. Hughes said he would have preferred a three-year loan on the Charger, but he and his wife, Jessica, chose a more expensive model and wanted to get the monthly payment down to $600.

"I'm not doing what I know I should, and I don't like that," he said. But he and his wife have both gotten raises recently, making him more comfortable. "We just have to get used to not having as much disposable income," he said.

The lending increase in the latest period was broad-based, with about half coming from banks and the rest from finance units of auto makers, credit unions and other financial firms.

Finance companies increased auto loans on their books during the first quarter by about $2 billion to $228.4 billion while reducing their credit-card loans by $7 billion to $93.5 billion, the Fed says. Car makers that scaled back their lending businesses are eager to expand again: General Motors Co. GM +1.14% said Monday it has made a bid for Ally Financial Inc.'s international operations in Canada, Mexico, Europe and Latin America.

On Wall Street, the market for securities backed by auto loans, which collapsed during the 2008-09 financial crisis, has rebounded. Roughly $50 billion in bonds backed by auto loans have been issued so far this year, nearly the $53 billion raised in all of 2011, according to Dealogic. Finance units of auto makers and banks initiate the loans, and then package them into securities which are sold to investors.

The volume of auto-loan-backed securities so far this year is about 33% above 2006 pre-crisis levels. In contrast, the volume of mortgage-backed securities is about 70% below 2006 levels.

The most recent Fed survey of senior bank-lending officers found more than 20% reporting they had eased standards for making auto loans in the past three months. In contrast, 11% said they had eased standards for credit cards and 3% for prime residential mortgages.

The availability of financing has helped drive up auto sales. Year-over-year, total sales rose 8.9% to 1.15 million new cars and light trucks in July, maintaining an annual pace of 14.1 million vehicles, according to industry researcher Autodata Corp. Annual sales could hit 15 million, said Paul Edelstein, economist at IHS Global Insight, who says consumers are more willing to borrow money to buy cars than other items.

In the first half of the year, sales at motor-vehicle dealers were up 8.7%, before adjusting for inflation, compared with an overall increase in nonauto retailers' sales of 5.9%, according to the Commerce Department's monthly retail sales data. Sales at clothing stores were up 6.6%; at department and other general merchandise stores, 2.7%, and at electronics and appliance stores, only 0.4%.

The average car on the road is 11 years old, according to Experian. That is a record and is helping to boost demand at a time when credit is readily available.

"It's definitely flowing better, the credit issue has eased up," said Gary McAlister, general manager of the Fairway Ford Lincoln Subaru dealership in Greenville, S.C.

Copyright: wsj.com

Source: http://bankemax.blogspot.com/2012/09/car-loans-to-banks-increase.html

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