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At the intersection of cars and banks

Auto loans outstanding surged by 9.6% in the 12 months till June 30, reaching an all-time high of $1.1 trillion, according to the Federal Reserve Bank of New York. Yet, curiously, in the second quarter bankers tightened auto-underwriting standards for the first time in five years, the Fed’s Senior Loan Officer Opinion Survey reveals.

A “conundrum,” Alan Greenspan might call this evident statistical non sequitur. For clarification, we turn to CarMax, Inc. It’s not that banks are approving fewer loans, CFO Thomas W. Reedy told his dial-in audience on the June 21 earnings call: “What we’re seeing is a degradation, I guess, in . . . the quality of the offers, meaning they might be asking for a little bit more money down or they’re asking for stipulations. And particularly we’ve seen a step-up in that with one of the lenders . . . asking for proof of income, asking for proof of residence, asking for proof of phone number, things like that.”

E-Z money has proven the spark plug of the post-crisis auto recovery. The average sticker price on a new car or light truck—$34,264, according to Kelley Blue Book—would be utterly unaffordable without a credit pick-meup. And not with your father’s loan, either. According to Bankrate.com, in no metropolitan market could a household earning the median income swing a new-vehicle purchase with a conventional loan on the customary terms, i.e., 20% down payment, 48-month term, loan repayments no greater than 10% of income. As to term, new-car loans these days average 68 months.


There are few visible signs of a slowdown just yet. Thus, the July selling rate, 17.8 million, was a pleasant surprise (analysts had expected 17.3 million). And July used-car prices registered a year-over-year gain of 2.3%, according to the Manheim U.S. Used Vehicle Value Index.
Not that the month was entirely carefree. In July, dealer incentives rose by $159, year-over-year, to $3,225, according to Kerrigan Advisors. Then, too, Detroit is bracing for a boom in off-lease vehicles. Numbers are slated to jump by 35% in 2016 and by 10% in 2017 (to 3.1 million and 3.4 million units, respectively). In autos and light trucks, too, the knee bone is connected to the thigh bone: Used-car prices, pressured by bottlenecks of off-lease vehicles, will likely weigh on new car prices.

Maybe for that reason, there have been fewer used-car auctions this year than many had counted on. “This could indicate,” speculates Kelley Blue Book in its second-quarter Market Report, “that manufacturers and rental companies are choosing to hold on to inventory, rather than oversaturate the market and risk a drop in vehicle values.”

The first loss is the best loss, as we say on Wall Street.

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