Revisiting the Subprime “Crisis”
Brian Landau
Senior Vice President and Auto Business Lead
TransUnion
May 31, 2018
© 2018 TransUnion LLC All Rights Reserved | 2
Several news outlets have raised the question:
is a subprime bubble in auto forming?
“Is there a subprime auto loan bubble?”
USA Today,
September 27, 2014
“The makings of the next credit crisis
could be in your driveway”
CNBC,
April 24, 2017
“Why America's Auto Debt Boom
Fuels Bubble Talk”
Bloomberg,
March 23, 2017
“Why The Auto Financing 'Bubble' Is
Really An Affordability Issue”
Forbes,
December 7, 2016
“Overstretched consumers raise fears
of bubble in echo of subprime
mortgage crisis”
Financial Times, May 29, 2017
“In a Subprime Bubble for Used Cars,
Borrowers Pay Sky-High Rates”
New York Times,
July 19, 2014
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The Past:
Why are we talking about a potential subprime
bubble in auto finance?
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Early speculation was driven by the subprime
meltdown in mortgage
421
2006
530521
2005 2015
184
2014
135
2013
153
2012
140
2011
106
2010
125
2009
188
2008
244
2007 2017
204
2016
216
Subprime
Near prime
Mortgage Originations, $B
VantageScore® 3.0 risk ranges, calculated at origination
Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database
Financial Crisis,
12/2007-6/2009
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Higher-than-average growth in near prime and
subprime allowed the speculation to grow
17.6M
2010
28.0M
2015
14.2%
12.6%
9.4%
7.8%
6.2%
Prime plus
Subprime
Super prime
Prime
Near prime
2010-15
CAGR
Auto originations by risk tier, count
Source: TransUnion consumer credit database
VantageScore® 3.0 risk ranges, calculated at origination
Subprime = 300–600, Near prime = 601–660,
Prime = 661–720, Prime plus = 721–780, Super prime = 781+
Near prime and
subprime segments
grew more than 10%
per year for five years
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The growth in the near prime and subprime
segments also attracted new entrants to the market
35
21
+67%
Q4 2010 Q4 2015
20
5
Q4 2015
+300%
Q4 2010
Independent
finance companies Credit unions
# institutions originating 2,000+ non-prime1 loans per quarter
VantageScore® 3.0 risk ranges, calculated at origination
1. Non-prime includes Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 7
Starting in 2015, delinquency rates began to rise
sharply
1.27%
1.44%
1.19%1.11%
0.5
1.0
1.5
2011 2012 2013 2014 2015 2016
% o
f borr
ow
ers
with a
delin
quency
Delinquency rates, 60+ days past due – Q4 results
Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 8
Declining performance in near prime and subprime
loans drove the increase in delinquency rates
Prime and above
Non-prime:
Near prime and Subprime
DQ rates 60+ DPD, cumulative @ 12 months
0.8%0.7%0.6%0.6%
2012 20152014
+19 bps
2013
Year of origination
9.5%8.3%7.8%7.2%
Year of origination
20152012 20142013
+237 bps
VantageScore® 3.0 risk ranges, calculated at origination
Subprime = 300–600, Near prime = 601–660,
Prime = 661–720, Prime plus = 721–780, Super prime = 781+ Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 9
The Present:
What makes us believe a subprime bubble is
not forming – or worse, ready to burst?
© 2018 TransUnion LLC All Rights Reserved | 10
1.43%1.44%
1.27%1.19%
We have seen average delinquency rates begin to
stabilize – why?
1.32%1.30%
1.16%
1.02%
Q4 results
ending in
Q4 2017
Q1 results
ending in
Q1 2018
T T+1 T+2 T+3
Delinquency rates, 60+ days past due
Early sign of
stabilization
Source: TransUnion consumer credit database
Year
© 2018 TransUnion LLC All Rights Reserved | 11
Reason #1: Lenders have shifted more of their
focus to prime plus and super prime originations
16% 15%
21% 20%
22% 21%
21% 22%
20% 22%
20172015
+1.6
+1.5
-0.5
-1.1
-1.5
+3.1Super prime
Near prime
Prime
Prime plus
Subprime
Share of auto originations (count) by risk tier
share
(ppts)
VantageScore® 3.0 risk ranges, calculated at origination
Subprime = 300–600, Near prime = 601–660,
Prime = 661–720, Prime plus = 721–780, Super prime = 781+ Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 12
0%
5%
10%
15%
20%
25%
0 6 12 18 24 30 36 42 48
Delin
quency r
ate
s
60+
DP
D, cum
ula
tive
Months on Book
Reason #2: Non-prime loan performance has
started to improve
2012
2016
The performance of the 2016 vintage is
comparable to the performance of the
2015 vintage (notice the tight variance)
20152014 2013
2017
DQ rates 60+ DPD, cumulative, for non-prime originations
VantageScore® 3.0 risk ranges, calculated at origination
Subprime = 300–600, Near prime = 601–660,
Prime = 661–720, Prime plus = 721–780, Super prime = 781+ Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 13
Performance has improved largely in the South,
where many non-prime loans are originated
` ` ` `
Top 10 states with the highest
percentage of non-prime borrowersTop 10 states with the largest YOY
improvement
% of borrowers by state,
Q4 2017
Change in average DQ rate by state,
Q4 2016 to Q4 2017
VantageScore® 3.0 risk ranges, calculated at origination
Non-prime includes Subprime = 300–600 and Near prime = 601–660 Source: TransUnion consumer credit database
© 2018 TransUnion LLC All Rights Reserved | 14
Many lenders have started to reenter near-prime
and subprime – an early sign of market stability
Lenders expanding into
NEAR PRIME…
Lenders doubling efforts into
SUBPRIME…
“[Lender] has started the
process of expanding its
credit band to include near
prime loans…”
Auto Finance News,
January 2018
Lenders expanding into
SUBPRIME…
“[Lender] moves down credit
tiers as others move up;
lender sees opportunity in
prime, near-prime…”
Automotive News
May 24, 2017
“…[Lender] and [Lender]
continue to express interest
in subprime lending …”
Auto Finance News
December 2018
[Lender] Eyes Subprime
Expansion Amid Lower 3Q
Originations”
Auto Finance News
October 30, 2017
“[Lender] is working on
shifting the company’s
focus back to its niche as a
subprime lender…’
Auto Finance News
February 2018
“Buy-here, pay-here dealers
could “get back into the
mix” of auto financing in
2018…”
Auto Finance News
January 2018
© 2018 TransUnion LLC All Rights Reserved | 15
The Future:
What makes us believe that the market is
healthy – and will remain healthy in the near
future?
© 2018 TransUnion LLC All Rights Reserved | 16
Consumers are willing to make good on their auto
obligations, even during times of financial distress
0
2
4
6
8
10
% b
orr
ow
ers
with
a d
elin
qu
en
cy
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
Q1
2015
Q1
2016
Q1
2017
Q1
2018
Q1
2008
Q1
2009
Q1
2007
Q1
2006
Q1
2005
Mortgage
Auto
Private label
HELOC
Bankcard
Personal loans
Delinquency rates (90+ DPD for Cards, 60+ DPD for Others)
Source: TransUnion consumer credit database
Rank
order for
Q1
2018
Financial crisis,
12/2007 – 6/2009
© 2018 TransUnion LLC All Rights Reserved | 17
Lenders are able to quickly make adjustments
when early signs of distress arise
• Lenders are able to respond
quickly to changes in the market
and rising levels of risk
• Lenders have the ability to
tighten their underwriting
requirements in different ways
• Lenders have other options to
pursue to incrementally grow
their business
• DQ rates began to rise in Q4
2015; lenders began to pull
back on non-prime originations
in Q2 2016 (two quarters later)
• Lenders can…
‒ Require more money down
‒ Pull back on extended terms
‒ Adjust price to changes in risk
• Auto refinancing
• Prequalification (to gain insight
into in-market consumers)
• Etc.
Actions Evidence
© 2018 TransUnion LLC All Rights Reserved | 18
Lenders are armed with new sources of consumer-
level information to make more informed decisions
Currently Use
Alternative Data
Do Not Use
Alternative Data
Today
Survey Results
53%
47%
47%
71%
Additional Approvals 65%
Second Reviews
74%
Loss Mitigation
Pricing Enhancement
Universe Expansion
88%
>50% of non-prime auto lenders
surveyed use alternative data
They use alternative for a
variety of applications
% of total respondents (N = 32) % of active users (N = 17)
Source: Alternative Data Survey Results sponsored by
Factor Trust, June 2017
© 2018 TransUnion LLC All Rights Reserved | 19
In summary
Is a subprime
bubble forming?
• No – despite some speculations
If no, what
makes us
believe this is
the case?
• Delinquency rates, especially in near prime and
subprime, appear to be stabilizing
• A number of lenders are expanding into or re-
entering near prime and subprime risk tiers
• Our forecast model indicates that delinquency rates
will remain steady throughout the rest of 2018
What have we
learned from
this experience?
• Consumers are willing to make good on their auto
loan obligations – even during times of financial
distress
• The market is fairly resilient to market changes
• Lenders now have access to alternative data to more
accurately predict credit behavior