Greg Gardner

Detroit Free Press

The wave of easy credit and longer auto loans has left a record percentage of consumers trading in vehicles that are worth less than what they owe on their loans.

In auto finance parlance, these folks are underwater, or upside down. They already are affecting the market as automakers boost incentives and subprime lenders monitor their delinquency rates more closely.

So far this year, a record 32%, or nearly one-third, of all vehicles offered for trade-ins at U.S. dealerships are in this category, according to research by Edmunds.com. When these people go to buy a new vehicle they must add the difference between their loan balance and the vehicle's value to the price of the one they want to buy.

►Related: Car buyers borrowing more than ever with loans topping $1 trillion

For perspective, the lowest the underwater percentage has been was 13.9% in 2009, the depths of the Great Recession when credit was tight. The previous high was 29.2% in 2006, about when the housing market was near its frothiest point.

“There’s been a lot of water building behind this dam for some time because of higher transaction prices, lower down payments and long-term loans," said Greg McBride, chief analyst with Bankrate.com, a consumer finance information service.

The average new car loan is for 68 months, according to Experian Automotive, which tracks the auto finance market. But subprime borrowers, generally those with FICO credit scores in the low 600s or lower, are borrowing over an average of 72 months, or six years.

While those loans reduce monthly payments, they also mean that the buyer's equity, or the portion of the loan principal paid off,grows more slowly than the vehicle depreciates.

"It’s problematic for the consumer because there’s no foolproof way to eliminate his financial exposure," McBride said. "If the car gets stolen, is totaled or you get new car envy while you’re upside down then it’s a big problem."

This is happening as the average selling price of a new vehicle is near a historic high of about $34,000. Some of that increase is driven by consumers' preference for larger, fully equipped pickups, SUVs and crossovers.

The result is consumers borrow more to get the vehicle they want. The average new auto loan was $29,880 in the second quarter of this year, according to Experian Automotive. That's 4.8% higher than a year earlier.

Moreover, leasing, which has reached record levels of more than 30% of all vehicle sales, has grown more popular for several years.

Already, especially in segments such as subcompact, compact and midsize cars, used car values are falling as a wave of 3-year-old models are returned by lessees. This increased supply is pushing down the price dealers are willing to pay for them at auctions.

Just last week, Ford Chief Financial Officer Bob Shanks told analysts that the company's finance arm, Ford Credit, cut its forecast for 2017 pretax profits because of declining auction values for used cars.

Credit agencies, such as Moody's, Standard & Poor's and Fitch, so far, have expressed mild concern about the trend. Their focus is on the $38-billion market for securities backed by auto loans. These are bundles of auto loans, similar to the tranches of mortgages that collapsed in the 2008 crash of the housing bubble.

But they are also different. History shows borrowers are more likely to stay current on their car loans than on their house payments if the economy weakens. Lenders can repossess automobiles more quickly than it takes for mortgage holders to foreclose on a house.

Fitch reported that 60-days-plus delinquencies on subprime auto loans rose to 5.05% in September, the second highest level since 2001, and 13.2% higher than a year earlier.

"When you look at recessionary levels where unemployment was near 10% in 2009 and late 2008, we touched 5.04%," said Hylton Heard, senior director at Fitch Ratings. "Today you’re pretty much at that peak."

Fortunately, unemployment is down to 4.9% nationally. Prime borrowers have a 60-day delinquency rate of only 0.44%. Those factors tend to offset the higher risk in the subprime market.

New vehicle sales are expected to continue slightly below their record year-ago levels in November, according to J.D. Power and LMC Automotive.

Yet even their forecast flags some warning signs.

Incentive spending in early November rose to $3,886 per vehicle, up 15% from $3,374 from November 2015 and the second-highest level ever behind the record $3,939 set in September.

"People's monthly payments are being kept very low by low interest rates that most manufacturers are willing to subsidize," said Ivan Drury, senior analyst at Edmunds.com. "But if we see those rates go up a bit, some of these people won’t be able to afford their cars."