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OP-ED: Subprime Auto Is Not Subprime Mortgage

In an op-ed piece submitted to F&I and Showroom, an executive with the American Financial Services Association rebuts claims made about subprime auto financing in an Aug. 8 opinion piece penned by the New York Times’ 18-member editorial board.

August 2014, F&I and Showroom - WebXclusive

by Bill Himpler

In an op-ed piece submitted to F&I and Showroom, the American Financial Services Association's Bill Himpler responded to claims made about subprime auto finance in an Aug. 8 opinion piece penned by the New York Times’ editorial board.

The 18-member board urged the federal government, including agencies like the Consumer Financial Protection Bureau and the Federal Trade Commission, to regulate the subprime auto finance market in the same way it cracked down on the mortgage industry. To read the New York Times’ opinion piece, click here.

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Comparisons between mortgages and vehicle finance fall short as the underlying assets and the loans themselves are vastly different. 

Vehicles are an essential part of everyday life for many people, whether for transportation to work, getting to medical appointments or simply going to the grocery store. Consumers from all walks of life need access to affordable financing for a vehicle. An increase in subprime vehicle finance means that more working class Americans have access to reliable transportation when they need it, which could make the difference between holding a job or not. Vehicle ownership provides many opportunities for consumers.

Vehicle Finance Exhibits Strong Performance

Along with other forms of credit, the availability of vehicle finance contracted during the recent recession. However, vehicle finance has rebounded and vehicle sales have led the uneven U.S. economic recovery. Pent-up consumer demand combined with an aging American auto fleet has contributed to the strong growth.

Data from multiple sources show that vehicle finance performed well throughout the recession and continues to do so. According to a recent Equifax report, “despite record high balances, serious delinquencies on auto loans remain near all-time lows, representing less than 1% of total outstanding balances for the third consecutive month.” Several studies from Equifax and others have shown that Americans, when faced with financial hardship, choose to pay on their vehicle over almost any other asset class. Getting to and from work is critically important, and is impossible without reliable transportation.

The S&P/Experian Consumer Credit Default Indices showed that the auto loan default rate hit a historic low in April 2014, at 0.92 percent. Thirty-day delinquencies are at their lowest level since 2007, while 60-day delinquencies show a slight variance both up and down over the last four years, based on a first quarter trend line from Experian.

Outstanding balances in subprime auto have not returned to 2007 peak levels. While the near-prime segment (borrowers with credit scores from 620-699) has experienced some growth, prime borrowers have been driving the increase in auto lending. According to data from Experian Automotive, the share of used subprime loans in the first quarter 2014 was lower than in the first quarters of 2013 and 2012.

Differences between Vehicle Finance and Mortgages

Unlike a house, a vehicle is a depreciating asset, and lenders calculate this loss of value into their financing. No one — from consumers to dealers to manufacturers to finance companies — believes that a car or truck will be worth more in the future. Thus, the talk of a bubble — which occurs when assets become overpriced based on a belief that they will continue to appreciate — in subprime auto is misguided. The mortgage bubble grew from this very premise, but the underlying fundamentals of automobile values mitigate a bubble.

Retail installment sales contracts on vehicle purchases are structured quite differently from residential mortgages and do not contain the exotic features that contributed to homeowner defaults. Vehicle finance products feature a fixed rate and a fixed term. Unlike in mortgages, there has been little innovation in the structure of retail installment sales contracts. While some automobile customers have subprime credit histories, there are nosubprime products commonly used in vehicle finance. This market is not structured to encourage financial institutions to misprice risk. By contrast, the subprime products in housing finance were based on an unreasonable assumption of appreciating home values.

By Bill Himpler, Executive Vice President of the American Financial Services Association (AFSA), the national trade association for the consumer credit industry, protecting access to credit and consumer choice. AFSA represents the majority of vehicle finance sources in the U.S.

Comment

  1. 1. Patrick Inks [ August 14, 2014 @ 01:34PM ]

    Good Op Ed article, thank you for sharing, and I completely agree with all of Bill's points regarding portfolio performance and with the main differences that exist between Vehicle Finance and Mortgages.
    I would like to add a few more differences that will mitigate any "bubbles" in the Vehicle Finance portfolios, as long as the lenders maintain consistency in their originations, risk analysis, and servicing, which include:
    • Lack of Alternate Choices – When home owners have to make a decision on defaulting on their mortgages, they can find alternatives by renting apartments or homes, which makes their life decisions easier than the same decision on their vehicles. The only alternatives to owning their vehicle is public transportation, taxi cabs, or bicycles, which makes their lives much more difficult.
    • Dramatically Increased Asset Liquidity – Due to the thousands of automotive auctions nationally, vehicles can be liquidated in less than 15 days, versus average sale time of a home of 6 to 12 months, thereby decreasing the loss severity due to depreciation and wear/tear.
    • Larger required Initial Investments in Asset – Automotive Lenders have always required an average of 10% Down Payment when financing vehicles, where FHA and other mortgage programs have only required as little as 2%.

    Perception is reality, and we need to ensure Washington DC, Wall Street, and the Public know these significant differences in our industry, so we don't get lumped into the mortgage debacle, and have unnecessary regulations placed on us, increase our cost of funds, and limit our access to capital while we help this country with our recovery.

 

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