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Primed for a Comeback

March 2010, F&I and Showroom - Feature

by Jim Bass - Also by this author

There isn’t a person out there in the automotive retail world who wasn’t ready to say goodbye to 2009. From the closure and wind down of Chrysler and General Motors dealerships to the lack of floorplan and consumer financing, it’s simply been terrible. Adding to this witch’s brew is the government pussyfooting around with the start date for the Red Flags Rule, financial services reform and the general and ubiquitous fear or hatred of anything not superprime. So, has the good ole U.S. of A. run out money? Hardly.

Admittedly, finance companies that are not part of a depository institution (e.g., AmeriCredit, Consumer Portfolio Services, etc.) have had a devil of a time finding liquidity with which to purchase contracts. Those companies that are linked, such as Wells Fargo/Wachovia, Capital One and Regional Acceptance/BB&T, have had plenty of liquidity. However, the bank regulators have made it, shall we say, difficult to distribute additional funds in the lower credit tiers.

So, while the administration talks about making loans, the banking regulators criticize all but the best credit loans, be they commercial or consumer. If you believe the banks were just being difficult because of some internal policy, corner someone of authority over a cocktail and ask him to tell you about a few ridiculous loan classifications made by regulators. Consequently, the credit sources, especially depository institutions, are really between a rock and a hard place.

The news regarding credit lines of any form for “other than prime” auto activity was drying up, but became absolutely arid in the fall of 2008. There are so many culpable parties, it’d be difficult to truly identity who is to blame. First, there were the foolhardy consumers who overbought their ability to pay for very expensive homes. There also were the foolhardy mortgage agents, banks, insurance companies, retirement fund managers, et al, which — with the blessing of the rating agencies — purchased those mortgages by the billions.

Derivatives (bets on how the pools of loans would perform) were then sold by enterprising and very creative investment bankers. Then, to no surprise, mortgage defaults began to occur, bond payments were missed and the house of cards came tumbling down.

Guilt by Association

How much did the subprime and nonprime auto industry have to do with this breakdown? Well, judging by performance statistics for auto-loan portfolios, not very much. Unfortunately, the ones who suffered when credit guidelines tightened were dealerships, auto finance companies and — probably most importantly — auto consumers. So, did something happen to auto portfolio performance during 2008 to merit this punishment? Let’s take a look:

Credit Acceptance: In its most recent Form 10-Q filing with the Securities Exchange Commission, the company reported that its collection percentage changed very little over the last few years. Against an average initial predicted collection percentage of 71.316 percent, the average actual collection percentage as of Sept. 30, 2009, was 71.29 percent. That’s an unfavorable and almost immeasurable variance of 0.021 percent. Additionally, net income expressed as a percentage of total income was 37.8 percent for the period ending Sept. 30, 2009, compared to 21.5 percent for the same period in 2008.

AmeriCredit: This finance company is definitely digging out of its profitability hole and is rebuilding in a prudent and reasonable fashion. According to its Website, the company reported the following for its securitized portfolios:

• Delinquencies of 31–60 days ranged from 8.11 percent to 11.38 percent.

• Delinquencies 61–90 days ranged from 2 percent to 3.09 percent.

• Cumulative net liquidated receivables range from 10.23 percent in a mature portfolio to a high of 14.63 percent in a 2006 portfolio that still has a ways to go before maturing. Now, 14.63 percent might be higher than desired, but it’s only about two percent over what usually happens in good times.

• Profits, liquidity and total equity were also all up compared to 2008.

On a much broader scale, counting all levels of creditworthiness, all categories of auto finance contracts had decreased delinquencies from the third to fourth quarters of 2009, according to the American Bankers Association.

Experian Automotive also published its top 10 list of subprime finance companies in January. Although the names on the list are broadly familiar, it’s important to note that all 10 represent only a 37.6 percent share of the market. What that means is the subprime auto finance market is highly fragmented, with no company outside of those listed having more than a 1.2 percent market share. Let’s hope the finance sources upstream from the finance companies that are actually purchasing auto finance contracts — be they banks, private equity firms, insurance companies, etc. — see the strength of the market and resume funding in our segment.

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