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Finance

Rescuing Nonprime Finance

September 2008, F&I and Showroom - Cover Story

by Jim Bass - Also by this author

It came as quite a shock to most people in the automobile retail and finance business when it was announced that Triad Financial Corporation was ceasing originations in the indirect dealer channel on May 23, 2008. After all, Triad had been through three or four ownership changes since its founding in 1990 and had always come out of the experience stronger. The performance of Triad’s $3.8 billion portfolio was acceptable within expected parameters and the professional staff was very well regarded in the industry.

However, the financial markets put the whammy on Triad when one of its warehouse line providers didn’t renew the warehouse line of credit. With that news, the rating agency, Moody’s Investors Service, downgraded Triad’s credit rating from B2 to Caa1, a junk bond rating. When that happened, Triad’s liquidity, its source of funds, virtually dried up. This led the company’s management to reach the decision to cease active operations. As of this writing, Triad exists primarily as a servicer for its existing portfolio. Roadloans, a direct branch of Triad, is still operating but is rumored to be for sale.

So how does a fine company like Triad come to this point? It’s really pretty simple. The subprime mortgage crisis that led to a full-scale credit crisis is now nearly worldwide. There have been many articles and comments regarding the subprime mortgage crisis, and the auto and credit card crises that quickly followed. I’m puzzled by the lumping together of these crises, particularly mortgage and auto.

Does it really follow that a person who has trouble with his overpriced mortgage will, ipso facto, default on his car loan? I don’t believe performance statistics prove that, because even if a person must go from being a homeowner to a renter, that person still needs transportation to drive to work, the grocery store, or even have a social life.

Delinquencies are up somewhat, but there has been no wholesale turning in of automobiles. But perception rules the day, and the perception is anything associated with the term subprime is in dire trouble. So don’t renew a credit line and shazam, you have a self-fulfilling prophecy where credit ratings fall and access to liquidity quickly vanishes.

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