The results of the Consumer Bankers Association (CBA)'s annual study weren't shocking. If anything, the results provided a snapshot of how the industry got to the point it is today.
Conducted by Benchmark Consulting International, the CBA's 2008 Auto Finance Study showed that 2007 loan terms stretched, advances increased and credit quality worsened. It also provided a clearer picture of what is becoming a major concern for the industry this year: repossessions.
"I think when you look at the data next year, you're going to see a significant increase in those numbers," says Rich Apicella, an executive for BenchMark Consulting International. "The biggest thing we see this year is the decrease in credit quality and the increase in repossessions. Terms are up as well, which is also a continuing concern."
This year's study attracted 32 participants, which, combined, accounted for more than 12.5 million loan accounts. The total outstanding principal balances for all was more than $223 billion. Surveyed were 16 large national banks, eight regional banks, five captive finance companies and three independent finance companies.
The study results were released at the CBA's annual conference and expo. Apicella said attendees weren’t too surprised by the findings, and added that many are looking to retrench this year.
"Many lenders are changing underwriting guidelines," Apicella adds, "Some are withdrawing from certain segments of the market, states and dealers."
Liquidity is a challenge today, says Apicella, especially for consumers who relied on home equity, and lenders who rely on the asset-backed securities market for funding. This is one reason why new 2009 vehicle sales are forecasted at their lowest levels in more than 10 years.
"Historically, many consumers have funded vehicle purchases by drawing down on their home equity lines. Today, this is less often the case, due to the slump in housing prices. With respect to the capital markets, investors are not buying ABS debt instruments as freely," says Apicella, who adds that many investors are looking at other markets. "As a result, lenders are picking their spots more carefully, they’re raising their underwriting criteria and many of them are cutting back their originations."
Signs of Housing Market Spillover
Credit quality for new-vehicle purchases was 31 points lower than last year's study, with FICO scores dropping from 709 in 2006 to 678 last year. Scores for used-vehicle purchases dropped one point.
"That's a pretty sharp decline in the average FICO for new vehicles," says Apicella. "I think part of that is the credit crunch for the homebuyers and the subprime market spillover effect, which is leading to higher debt levels for the typical car buyer."
The slight uptick in delinquencies was another side effect of the credit crunch, notes Apicella. Delinquencies increased six basis points last year for new-vehicle purchases, and 27 basis points for used-vehicle purchases.
The average for loan terms on new-vehicle purchases jumped one month last year, increasing from 64 months in 2006 to 65 months in 2007. Loan terms for used-vehicle purchases also increased by one month last year.
What is concerning is the increasing percentage of new-vehicle originations that were greater than 60 months. In 2006, 61 percent of new-vehicle loans were longer than 60 months. Last year, that percentage jumped to 65 percent. Additionally, 40 percent of respondents said they now offered terms greater than 84 months.
The average loan amount for new-vehicle purchases last year realized a 3.5 percent decrease. However, the loan-to-value (LTV) ratio experienced a 2 percent increase. Amount financed on used vehicles experienced a 2.9 percent increase last year, while the LTV jumped one percent.
Apicella says the reason for the higher LTV on new-vehicle loans could be attributed to consumers coming to dealerships with higher amounts of negative equity.
In 2007, about 25 percent of consumers who financed their vehicles were upside down by an average of more than $4,000, says Apicella. And while dealers sought to cover the difference by requesting higher advances, they also extended terms to keep payments attractive to today’s payment buyer.
Lenders Retrenching; Dealer Reserve to Suffer
Apicella says there were signs in the data that finance companies began to change their lending habits in the second half of 2007. However, he says the results of those changes won’t be clearly visible until next year, as 2007 lending habits remained highly competitive.
"There's probably going to be a moderation of that if you look at the data next year," says Apicella. "It will be interesting to see what happens next year as a result of the marketplace response, because most of the actions were not really started until the fourth quarter of last year, which was at the tail end of this study."
This expected retrenching, however, may hurt dealer reserve, a trend that was already being seen in the fourth quarter of 2007. "With higher advances and longer terms, in general, reserves are higher," says Apicella. That won't be the case next year, he adds, as lenders require deals to be restructured to conform to their new underwriting guidelines.
One statistic to keep an eye on this year will be repossessions. Apicella says he expects that to be a bigger problem this year than the predicted increases in bankruptcies.
"Repos are much more of a problem right now," says Apicella, who notes that more than 2 percent of accounts are repossessing. "Repossessions were four times more prevalent than bankruptcies during 2007, and the average net loss for repos is about $1,000 higher than bankruptcies."
Despite the challenges ahead, Apicella says the automotive finance industry will not experience a similar fate to the mortgage industry.
"In the car business, the fundamentals are sounder, and the good lenders know how to originate and liquidate loans," Apicella says. "From a risk standpoint, there’s been a slight worsening in some of the overall metrics, but fundamentally there is still good business to be had. And I think the general mood of the bankers at the CBA event is 'we've seen markets like this before, and it causes us to relook at our operations and improve them and manage them much more carefully. But sooner or later we’re going to come out of this cycle, leaner and meaner.'"