Although auto paper has become more difficult to securitize, the tightened credit market is not the primary cause for the drop in vehicle sales. Fear and lack of knowledge about the country’s financial health are the underlying causes of consumers’ reluctance to spend money.
Without a doubt, the financial services industry is in turmoil. However, certain sectors of the industry are in better shape than many media reports have led consumers to believe. Specifically, vehicle financing still remains available to qualified borrowers. And steps taken in recent months by Congress, the Treasury Department and the Federal Reserve have the potential to restore confidence to the troubled credit markets.
Credit markets have seized up primarily due to the unwillingness of banks to lend their cash reserves. When this happens, credit is not extended to those who need it — farmers do not receive funds to purchase seed or machinery, small businesses cannot get start-up loans or money to meet payroll obligations, and students and their parents have difficulty obtaining loans to finance a college education. In the vehicle finance industry, this means auto paper is more difficult to securitize. Interestingly, there is plenty of money in the market, but it is not moving because banks lack confidence in other institutions’ ability to repay those funds.
Every sector of the financial services industry has been impacted, and vehicle financing is no exception. And with auto sales accounting for as much as 20 percent of state tax revenue, a continued decline in vehicle finance sales could have huge repercussions, especially with states like California requesting $7 billion in federal loans for day-to-day operations.
Many consumers — particularly those with good credit — are not seeking loans or applying for credit in these turbulent times. The misconception that borrowers need flawless credit to get a loan for a vehicle or any other purpose is keeping many consumers out of dealerships. Yet financing remains available to qualified borrowers, as most vehicle finance companies have not changed their criteria for granting credit. In fact, one vehicle finance company is offering zero-percent financing on 11 models with terms ranging from 36 to 60 months. Members of AFSA have always worked with borrowers up and down the credit spectrum, and will continue to do so.
The Emergency Economic Stabilization Act of 2008 (EESA) aims to inject liquidity into the marketplace and restore consumer confidence. The purpose of the rescue package is to allow the Treasury Department to buy up the troubled assets owned by financial institutions, thereby removing the fear other institutions have about those assets. While banks may be wary of lending to one another, the federal government can act as an intermediary.
Because it has the biggest balance sheet, the government can exercise patience in buying and holding assets for longer periods of time than compared to financial institutions. Additionally, by buying loan portfolios from financial institutions, the Treasury will free up credit lines across the spectrum.
Although the EESA’s definition of “financial institution” is rather broad, it is hard to see how the Treasury Department could not recognize that auto paper is critical to financial market stability.
Under the EESA, the Treasury could have started buying troubled assets from banks before the passage of the financial relief package in October. Treasury Secretary Henry Paulson had already appointed staff to put the mechanism in motion, naming Assistant Treasury Secretary for International Economics and Development Neel Kashkari to oversee the Troubled Assets Relief Program and the newly created Office of Financial Stability on Oct. 6. The auction piece of the bill, however, will take longer to get under way.
The Federal Reserve Board is also working to get credit flowing again. On Oct. 7, the Board created an entity to buy three months of unsecured and asset-backed commercial paper directly from eligible companies.
Markets will need some time to fully recover, but with the actions taken by Congress, the Treasury Department and the Federal Reserve Board, we are heading in the right direction. Money and customers still abound, but they need some encouragement to return to the marketplace.
Chris Stinebert is the president and CEO of the Washington, D.C.-based American Financial Services Association, a national trade association for the consumer credit industry. He can be reached at [email protected].