ARK Invest CEO Cathie Wood popularly known for leading ARK Innovation ETF (NYSE:ARKK) has raised alarm bells about the state of auto loans in America, noting that 90-day delinquency rates have now exceeded levels seen during the 2009 financial crisis.
What Happened: Wood's comments came in response to recent data showing rising auto loan defaults, despite continued investor confidence in auto-backed securities. The Federal Reserve's latest Supervision and Regulation Report confirms this trend, highlighting that auto loan delinquencies are approaching five-year highs in 2024.
Delinquency rates on auto loans refer to the percentage of auto loan borrowers who have failed to make their scheduled payments on time. A loan is typically considered delinquent when a payment is missed for a certain period, usually 30, 60, or 90 days.
Rising auto loan delinquency coincides with significant price cuts across the auto industry. Tesla Inc. (NASDAQ:TSLA) reduced U.S. prices for its Model Y, Model X, and Model S by $2,000 in April following lower-than-expected first-quarter deliveries.
Ford Motor Co. (NYSE:F) cut the Mustang Mach-E's price by up to $8,100, and Nissan slashed up to $6,000 off its Ariya SUV. Stellantis NV (NYSE:STLA) also introduced discounts on Jeep Wranglers and Grand Cherokees.
The 90-day auto delinquency rate is higher than the peak reached in 2009.
— Cathie Wood (@CathieDWood) November 20, 2024
Despite these warning signs, investors are aggressively pursuing auto loan-backed bonds, with sales of securities tied to subprime auto loans reaching nearly $40 billion through October 2024 – a 17% increase from 2023's total. Nicholas Tripodes, senior portfolio manager at Federated Hermes, reports seeing deals "almost 20 times oversubscribed," according to The Wall Street Journal.
Why It Matters: The disconnect between rising delinquencies and investor enthusiasm reflects a broader market dynamic. Auto bonds from Global Lending Services with the lowest investment-grade rating yielded approximately 6% in October, triple the yield of comparable subprime auto loan-backed debt in 2021.
The stress is particularly evident among lower-income borrowers struggling with increased living costs and higher interest rates. The overall auto loan delinquency rate hit 3.8% in June, the highest since 2010, according to Federal Reserve data.
"The delinquency rate for consumer loans remained elevated in the first half of 2024," the Federal Reserve noted, adding that while there was some improvement in credit card delinquencies during the second quarter, auto loan defaults continued to rise year-over-year.
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