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Dealing With Subprime’s Messy Image

October 2007, F&I and Showroom - Feature

by Gregory Arroyo - Also by this author

Is it me or is just about everyone looking for that one kink in the armor of our business? Yes, blame the subprime-mortgage market all you want, but the reality is that it’s going to be guilt by association from here on out. What’s important now is that we don’t prove those “Chicken Littles” right.

Take Triad Financial. The company filed a notice with California’s labor department that it was laying off 124 jobs. What it was doing was moving those jobs from California to Texas in a cost-cutting effort it announced earlier this year. Unfortunately, early reports of its filing seemed to link the company’s move to its reported increases in delinquency rates. Unfortunately, Triad was simply a victim of its reputation as a subprime lender.

AmeriCredit was also a victim of its reputation. Despite reporting solid earning in the fiscal fourth quarter —with the company lending $2.52 billion, a 45-percent increase —a Goldman Sachs analyst downgraded the company from “Hold” to “Sell” after AmeriCredit cut its fiscal 2008 outlook.

Jack Tracey, executive director of the National Automotive Finance (NAF) Association, was also amazed at all the news reports attempting to link the subprime mortgage industry to ours. According to the lenders he’s spoken with, there are no indications of any major problems as of yet.

“I wouldn’t say the credit crunch will be felt in the credit area,” he said. “Any spillover effect originating from the subprime-mortgage area will be felt in the capital market.”

That’s what one analyst with Jefferies & Co. thought, as he speculated AmeriCredit’s lowered projections were due to an expected increase in the cost to raise money.

The asset-back securities market for nonhousing-related loans remained in good shape as of August. The managing director for Fitch Ratings’ asset-back securities group said new issuance volume in the credit card, auto and student loans sectors had slowed at the beginning of August, but that the underlying credit fundamental of those assets remained strong.

I think Paul Taylor, chief economist for the National Automotive Dealers Association (NADA), put it best when he told me in an e-mail exchange: “We expect tougher subprime credit conditions for loans — although it is not deserved …”

Unfortunately, this undeserved reputation is likely to make it more difficult for consumers to finance purchases. The home equity loans consumers used to buy new cars with have dried up, and Global Insight said in a recent report that it’s already seeing problems and tighter credit in auto loan availability.

The problem is that all this talk is really putting a hurt on consumer confidence. The Conference Board saw its Consumer Confidence Index for August fall to 105, the biggest month-to-month drop since September 2005. August was also met with two not-so-good reports on the job front. ADP said August proved to be the worst month for hiring in four years, and Challenger Gray & Christmas reported that its monthly tally of corporate layoffs climbed by 85 percent in August.

Making matters worse is that home prices are declining at a rapid pace. Standard & Poor's said U.S. single family home prices in the second quarter suffered their biggest declines in at least 20 years. And market analysts believe prices could drop another 5 percent before the end of the year.

And you wonder why vehicle sales projections are being lowered. The NADA’s Taylor lowered his annual sales projections from 16.5 million to between 16.1 and 16.4 million. Ford and GM lowered their projections as well to 16.5 million vehicles sold this year, a drop of almost one million from last year. And light-vehicle sales were projected at 16.1 million, the lowest since 1998.

Toyota said it sees light-vehicle sales falling to 16.3 million. Its changed outlook came shortly before company President Katsuaki Watanabe said he expected the subprime-mortgage problems to cut into U.S. auto sales.

Hopefully by the time you read this, Federal Reserve Chairman Ben S. Bernanke has taken AutoNation’s Mike Jackson’s warning that the economy is in dire need of relief and has cut interest rates.

Unfortunately, my friends, fear is the automotive industry’s worst enemy. However, irresponsible lending practices are our industry’s worst enemy. I understand the pressure to move cars. I also understand the pressure to make as much as possible on each transaction by loading a deal with as many aftermarket F&I products as possible, but this is where we need to be careful.

“Lenders are exacerbating the situation by loaning more money than the vehicle is worth. There are banks in California willing to loan 200 percent of the vehicle’s MSRP,” said David Robertson, executive director of the Association of Finance and Insurance Professionals. “And as a greater portion of the general population become debt-bound, their credit worthiness declines as well. Not able to play in the franchised dealer arena —their only options will be the used-car and buy-here-pay-here venues. In either case, the franchised dealers will suffer.”

He certainly has a way with words.

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