It's difficult to ignore the challenges the industry faces this year with reports coming out daily about lowered forecasts for vehicle sales, used-vehicle prices dropping, suppliers struggling, and stock prices for major dealer groups weakening. What's unfortunate is the dim news includes the automotive financing side of the business, which was the saving grace for many dealerships last year.
Before the problems in the subprime mortgage industry were realized last year, the industry warned of shrinking margins, growing regulatory and legislative constraints, negative equity and longer average monthly terms. Today, the problem is much worse, with finance companies finding it difficult to securing funding for their financing activities.
The problem stems from what the subprime mortgage crises did to investor confidence, as many are pulling back from auto finance of their overall retrenchment from financial services. Losses are also mounting for several financing institutions, mainly because of rising delinquencies.
Auto Financing's Threatened Role
Automotive financing has played a major role in the automotive retail world, whether it's through special financing programs, dealer credit or nonprime financing. Now that role is being threatened, with a greater amount of scrutiny being placed on financing sources. For some in the industry, the scrutiny is coming from the investment community. For others, the scrutiny is coming from within, especially for those who operate as a division within a bigger organization. And while captives would seem to benefit from the retrenching, they are also under closer watch by their parent companies these days.
Technology is also playing a role, with the introduction of dealer financing platforms leading to the commoditization of auto financing. While the platforms have allowed for greater efficiencies, they have also put all financing sources on an even playing field. And in today’s tightened credit environment, being able to innovate and differentiate is definitely a difficult challenge.
The industry is already seeing the consequences, with massive layoffs for some, market curtailment for others, and tightening of credit for almost all.
The question now is, will a solid base of financing sources be available to offer an adequate set of products and pricing across the full spectrum of business? Will the rates be enticing enough to get the deals done? Will customers have to postpone their purchases until they can afford it? Or will financing be able to help lift up the dreary sales situation?
New Sources Being Revealed
Those who are in the market now and plan to be in the market for the long run will have to ride out the storm. Some current market leaders, such as Wachovia Dealer Services, Chase Auto and Fireside Bank, are actually looking to grow.
"This is a great market for us and our growth validates our market strategy," said Tom Wolfe, president of Wachovia Dealer Services.
Numerous auto financing sources have entered into the market over the last year. They have watched the market closely and are now poised to gain their share. These include companies such as Resurgent Auto in Greenville, S.C., MarkOne Financial in Jacksonville, Fla., Inspire Auto Finance in Dallas, and Sixth Gear in New York.
"We just entered the marketplace last fall and the response to our product has been strong," said Paul Chicky, CEO of Resurgent Auto. "Throughout this time we have managed to maintain lower than expected delinquencies and losses."
There will continue to be retrenchment by other sources in terms of their market reach, pricing and policies. This should be no surprise to any dealer. The cost of money is high, which is why dealers should remain in constant communication with their financing sources.
A major challenge for lenders these days is liquidity, whether it's fueled by asset-backed securitization (ABS) or not. Asset-backed securitization, which had grown tremendously in recent years, is now a rarity these days. That's because the investment community equates nonprime auto financing to subprime mortgage.
Lenders are finding new ways to acquire funding as evidenced by the deal struck in April by AmeriCredit and Deutsche Bank. The strength of the ABS market and the status of auto financing portfolios will continue to grow. That's why the American Financial Services Association (AFSA) is talking to the investment community and teaching it how the auto financing industry works.
Finding New Lenders
The truth of the matter is that the automotive industry is in the best position to manage the economic challenges at hand. In the early 1990s, the auto financing industry went through its own subprime crisis. The industry has greatly improved since then. Prime and nonprime players have seasoned staffs and tested processes in place.
That's why dealers need to visit industry conferences, as they're a great place to find new financing sources. Additionally, dealers can check with industry associations to see if they have an updated list of financing sources. F&I magazine also publishes an annual industry directory that includes a list of financing sources. Dealers can also check with vendors, such as DMS providers or outside legal counsel. Often times they are the first to know of new market entries.
Dealers may not be responsible for the plight of the automotive finance institutions, but it is wise not to ignore it either. Remember it will be a difficult year for everyone. Some auto financing sources will be able to grow within this environment. Much of that will depend on who has the strongest dealer relationships, who has the most credibility with their shareholders, who has alternative funding sources, who has an efficient and reliable process, and who has a clear value proposition for their dealers and customers.
Marguerite Watanabe is the president of Connections Insights LLC, which focuses on strategic partnering between auto finance service providers and auto finance sources. She can be reached at [email protected]