Cathy Wood, CEO of Ark Investment Management, has raised concerns about the U.S. auto loan situation, noting that the 90-day delinquency rate has surpassed levels seen during the 2009 financial crisis. This warning follows recent data indicating rising auto loan defaults, even as investors remain confident in auto-backed securities. The Federal Reserve's latest report confirms this trend, highlighting that auto loan delinquencies are expected to reach their highest point in five years by 2024.
Auto loan delinquencies occur when borrowers fail to make timely payments on their loans, typically after 30, 60, or 90 days of non-payment. As these delinquencies rise, the auto industry is responding with significant price reductions. Earlier this year, Tesla reduced the prices of its Model Y, Model X, and Model S by $2,000 in the U.S. after first-quarter deliveries fell short of expectations. Ford cut the price of its Mustang Mach-E by up to $8,100, while Nissan lowered the price of its Ariya SUV by up to $6,000. Stellantis also offered discounts on its Jeep Wrangler and Grand Cherokee models.
Despite these warning signs, investors are actively pursuing auto loan-backed securities. As of October 2024, sales of securities linked to subprime auto loans neared $40 billion, a 17% increase from the total in 2023. Nicholas Tripodes, a senior portfolio manager at Federated Hermes, reported that these deals were oversubscribed by nearly 20 times. The disconnect between rising default rates and investor enthusiasm reflects broader market dynamics. In October of the previous year, Global Lending Services' investment-grade auto bonds yielded about 6%, three times the yield of similar subprime auto loan-backed securities in 2021.
The pressure is particularly evident among low-income borrowers struggling with rising living costs and interest rates. Federal Reserve data shows that the overall auto loan delinquency rate reached 3.8% in June, the highest since 2010. The Fed noted, "In the first half of 2024, consumer loan delinquencies remain elevated," adding that while credit card delinquencies improved in the second quarter, auto loan defaults continued to rise year-over-year.
