The mood at this year’s Vehicle Finance Conference, held at San Francisco’s Westin St. Francis Hotel immediately prior to NADA 2011, was exponentially more positive than in 2009 and 2010. It was clear from the way finance executives discussed the strategies they fell back on during the credit crisis that they’re feeling a lot better these days. Dealers serving as panelists wondered aloud about whether that would mean a return to the way things used to be.
With the economy on the upswing, members of the host organization, the American Financial Services Association (AFSA), and dealers in attendance spent much of their time on the dais reaffirming the importance of their relationships. But there was also a call from dealers for lenders to be more available, look beyond credit scores and restore the personal interactions they once had with F&I offices.
“Let’s not focus on credit score, let’s buy the customer,” said Michelle Primm, director for the National Automobile Dealers Association and managing partner of Cascade Auto Group in Cuyahoga Falls, Ohio. “Tell me how to get my paper bought, don’t just look at your rate chart.”
Stephen Wade, president of Stephen Wade Auto Center in St. George, Utah, would take over as the NADA chairman for 2011 a few days later. Addressing the AFSA crowd, he called for a return to the days when F&I managers interacted with the same buyer on every deal.
Cindy Kanellis, the F&I director for Freemont Automotive Retailing Group, had her own request. “We’re working weekends and we’re working nights,” she said. “We need our buyer. We need them on weekends.”
Not Out of the Woods
The state of the still-recovering economy wasn’t lost on dealers, either. William Underriner, 2001 NADA vice-chairman and president of Underriner Motors in Billings, Mont., talked about reports that foreclosures could rise again this year. “The sooner that happens, the better off we’ll be as an industry,” he said.
David Wyss, chief economist for Standard & Poor’s, confirmed the recession is over. But, he added, “It just doesn’t feel like a good expansion.” The biggest problem, he said, is the housing market, which is coming off one of the worst periods for home building since World War II.
Wyss said it could take another six months before that market gets into balance, and noted that four states — California, Nevada, Arizona and Florida — were responsible for half of the nation’s foreclosures.
If the economy slips back into decline, Wyss said the Federal Reserve will not be able to lower the federal funds rate as it has in the past. Because it’s near zero, the Fed is looking at other types of rates to lower. Despite fears of inflation, Wyss said the Fed has no other choice.
“[The economy] is too squishy for the Fed to take its foot off the gas pedal,” he said.
Wyss said all markets had bottomed out by March 2009, less than four months after the financial market froze in the fourth quarter of 2008. “It was like we all joined hands and walked off a cliff,” he said.
As for when he thinks the 8.5 million jobs lost during the downturn will be restored, Wyss said he doesn’t expect to see any major improvements until the third quarter of 2012. Others speakers at the conference said it won’t be until 2016 before the national unemployment rate falls to 5.3 percent. The good news, said Wyss, is that jobs are coming back faster than they have during previous recessions.
“Payroll usually recovers last. In 2001, it took 17 months for employment to come back,” he said, noting that it was the American consumer who pulled the economy out of the recession.
“They kept spending,” Wyss said. “I’m not sure that will work again.”
The good news is the American consumer is borrowing less and saving more. The term “down payment” is no longer viewed as a relic of a concept. But what’s good for the consumer may not be good for the still-recovering automotive industry. And, as Wyss pointed out, there are more registered cars than registered drivers.
He finished his thoughts with this: “Cars will need to be replaced.”
Rebuilding the Market
The good news in auto finance is that auto loan defaults are doing well. The rate of defaults peaked in 2009 at 2.8 percent, and has since dropped to 1.77 percent. Loss rates have also fallen to pre-recession levels, another reason for the better mood at the Vehicle Finance Conference.
“There’s a different energy in the room than last year,” said Chris Stinebert, AFSA’s president and CEO.
George Borst, president and CEO of Toyota Financial Services (TFS), talked about the moment his company realized the economy was in trouble. It was December 2007, the month the Great Recession officially started. That’s when the company began shifting its budget toward pulling in as many customer payments as possible. “It was a year of collections,” Borst said.
It was also a year of analytics. Adem Yilmaz, corporate manager of consumer risk for TFS, said the captive finance company began redeveloping its score cards at that time. The goal was to identify the portfolio segments responsible for losses. Although those score cards performed better than expected, he offered a word of warning.
“Can’t rely on historical data to predict the future,” he said. “We have to look at the psyche of the consumer.”
William Shope, vice president of portfolio management for Omni Financial Corp., echoed Yilmaz’s comments. “Predicting consumer behavior is not the strength of the score card,” he said.
Middle Tier Lending Needed
Missing at this year’s Vehicle Finance Conference were the calls from dealers for subprime financing. What is needed, dealers said, is financing for the middle tiers.
“We got financing for the ‘A’ customer, we got subprime [financing] for the ‘D’ customer,” said Underriner. “What we need is financing for the ‘B’ and ‘C’ customer. Those are the people who make this country run.”
Brian Leary, F&I director for Utah’s expansive Larry H. Miller group, echoed Underriner’s comment. He said 20 percent of his business is made up of subprime, and added that he expects that to increase next year as more subprime finance sources become available. “That’s our biggest hurdle, getting advances on nearprime customers,” he said.
For both new and used, the share of loans made to nonprime, subprime and deep subprime customers increased from 36.42 percent in the fourth quarter of 2009 to 38.42 in the year-end quarter of 2010, according to Experian Automotive. However, this still trails what was seen in the fourth quarters of 2007 and 2008, when loan share for credit-challenged customers stood at 44.63 percent and 41.03 percent, respectively.
Greg Oltman, finance director for Van Tuyl Dealer Group, said he’s noticed that consumers who couldn’t get loans during the downturn have yet to return. That could be one reason why subprime isn’t as big of a problem as it was in 2009. Another reason might be that lenders can get a better read on a subprime customer than on a nearprime customer because they have already bottomed out. With nearprime customers, it’s more difficult to gauge whether they’re ascending or descending the credit ladder.
Whatever the case, Freemont’s Kanellis said she sees a change in today’s subprime customer. “[Subprime] customers are more realistic. And when they come in, they’re coming in with a down payment,” she said. “They’re also coming in with a better attitude.”
The Funding Is There
One development that could turn the tide for the middle tiers is an improvement to the health of the securitization market, where finance sources sell loan pools to gain funding.
Toyota Financial Services’ Borst talked about the company’s success in the asset-backed securities (ABS) market in the last six to eight months. “We see it as a vibrant market,” he noted.
Dan Berce, president and CEO of GM Financial, said the market is as good as it was in 2006 and 2007. “The ABS market is open for business,” he said.
Dietmar Exler, head of Mercedes-Benz Financial Services, indicated that his company could be active this year in the ABS market, saying it’ll be one of the tools it will consider this year.
Tim Russi, executive vice president of Ally, also talked about the company’s activity in the ABS market, saying, “I think the world is open.” He also talked about the benefits of the company’s bank holding status, which has allowed it to diversify its sources of funding.
Leasing could also pick up the slack this year. And with Berce telling the audience that GM Financial may be taking General Motor’s new prime leasing program down the credit stream, leasing might also be used to fill the nearprime financing gap.
Whatever plays out, Wade said the relationship between dealers and lenders must continue to strengthen. “I’m excited about where we’re going. We’re moving in the right direction,” he said. “And if we’re going to be effective, we need to stick together.”