With auto loans a traditional early sign of credit challenges, should brokers be worried by rise in foreclosures?
As auto loan foreclosures and bankruptcies rise across the United States, many brokers will be shuddering at the prospect of having to survive another market crash. The scars of the 2008 subprime mortgage crisis remain, but is another credit disaster on the horizon?
This week’s events do not inspire confidence. Auto loans have historically served as a bellwether for household financial stress. Because they are typically smaller and shorter-term than mortgages - and often held by borrowers with less financial cushion - auto loans are usually the first to go unpaid when budgets get tight.
Recent data shows a sharp increase in auto-loan foreclosures, with defaults now spreading beyond just subprime borrowers. In addition, auto-parts maker First Brands filed for bankruptcy protection on Monday, following the recent bankruptcy of subprime auto lender Tricolor Holdings.
Steve Edwards, senior investment strategist at Morgan Stanley Wealth Management, told Reuters that lower-income consumers have been impacted by high interest rates, mounting labor market weakness and tariffs. "In this context, defaults on loans for lower-income consumers should not be very surprising," he said.
The nine-month lag: Myth or market signal?
Historically, there’s a well-documented pattern: auto loan delinquencies often rise 6 to 12 months before mortgage delinquencies accelerate. Before the 2008 crisis, auto defaults began climbing about nine months before mortgage defaults surged. If auto loan stress is rising now, could we see a wave of mortgage delinquencies by next summer?
History also shows, however, that this lag is not automatic. For example, in the years before the pandemic, subprime auto loan delinquencies increased, but mortgage defaults remained low thanks to strong home prices and tighter lending standards. During the pandemic, auto loan delinquencies rebounded quickly once stimulus programs ended, but mortgage delinquencies stayed muted, supported by forbearance and record home equity.
What’s different this time?
For mortgage professionals, the question of whether we are months away from some sort of market reckoning is nuanced and there are significant differences compared to 2008.
- Home equity: Most homeowners have more equity than before the last crisis, providing a buffer against foreclosure.
- Stricter underwriting: Post-2008 reforms have led to tighter lending standards, reducing the risk of widespread defaults.
- Broader credit trends: If credit card and personal loan delinquencies rise in tandem with auto loans, the risk to mortgages increases.
- Regional differences: Areas with high subprime auto lending exposure could see mortgage stress sooner.
So, while the current spike in auto loan foreclosures does not mean a repeat of 2008, it should be viewed as a warning sign - especially if other forms of consumer debt begin to show similar stress. Mortgage brokers should closely monitor trends in credit card and personal loan delinquencies, regional economic shifts, especially in markets with high subprime exposure, and changes in home equity and property values.
A floor under prices?
Writing in his recent blog, Glen Weinberg, of Fairview Commercial Lending, believes there will be three factors that accelerate foreclosure filings – a correction in the stock market; continued migration back into the urban cores; and an uptick in unemployment:
He also believes that while real estate is set for a bumpy ride over the next year or two and foreclosure filings will continue to rise, a repeat of 2008 is unlikely as there is substantial institutional and Wall Street money ready to come to the rescue. He warned, though, that a correction of 15% in most markets is still in the cards.
“There are two major changes between 2008 and now - Wall Street and subprime variable rate products,” he wrote. “Since the last recession, Wall Street has gotten in on the single-family home market similar to what occurred years ago in the apartment market.
“As prices of residential properties begin to fall/correct, there are huge funds waiting to buy investment single family homes. They would buy these homes in bulk from banks, the federal government, etc.... which will ensure that prices do not fall precipitously as there will be substantial demand for these defaulted properties. The sheer amount of available institutional capital waiting to invest in single family rental homes will put a ‘floor under prices’ and ensure that this real estate cycle is not nearly as deep as 2008.”
