Heading into the magazine’s September conference, there were plenty of signs pointing to a return to health for the auto finance industry. But one keynote speaker and several auto finance reps wondered if the market has overshot its return to normalcy.
The auto finance business is a long way from 2008, when the industry suffered through $62 billion in losses. Barring any unforeseen circumstances, finance sources stand to make $23 billion by year end. But there is evidence that some are beginning to cycle back to those fast-paced, pre-recessionary times.
“Don’t assume this time will be different,” warned Kevin Borgmann, the president of Capital One Auto Finance, noting the return of the 72-month term.
Borgmann, who opened the show on Monday, Sept. 26, was one of three keynote speakers to address attendees at Industry Summit 2011. Also there to talk about auto finance were executives from Toyota Financial Services, GM Financial, TD Auto Finance, Bank of America and Wells Fargo Dealer Services.
John Gray, senior vice president of Experian Automotive, took the stage to open the first full day of the conference on Sept. 27. He said that one indicator of the auto finance industry’s recovering health was the 22.4 percent year-over-year increase in below-prime originations. He also noted that banks are becoming a force in the high-risk credit tiers, increasing their share of that market for new vehicles by 65 percent on a year-over-year basis.
“The banks [have been] dominating subprime lending for the last 10 months,” he said, adding that banks currently own 40.52 percent of the below-prime, new-vehicle financing segment. Finance companies continue to lead the way in below-prime, used-vehicle financing, but banks are a close second at 26.66 percent share.
Gray said that the Top 20 lenders in new-vehicle financing own more than 77 percent of the market, with Ally, Honda Financial Services, Ford Motor Credit, Toyota Financial Services and Chase Auto Finance at the front of the pack. On the used side, Wells, Ally, Chase, Capital One and Toyota are leading the way. Gray added, however, that his data points to an aggressive battle for market share at the lower end of the market, a trend Borgmann also touched on during his address.
Borgmann listed three deals, all of which involved car buyers with FICO scores of below 550, as evidence of the intense market share battle his company is tracking. In one deal, a finance source funded a customer with a 441 FICO score at 7.15 percent despite having two bankruptcies, a repo and 68 inquiries in a two-month span. The vehicle, a 5-year-old, 80,000-mile GMC Yukon with a book value of $17,450, was sold for $23,000. Back-end profit on the deal was $4,989.
The other two appeared no less egregious. Borgmann asked the audience to guess when they had been booked. Shouts of “2007!” and “Early 2008!” rang out from the crowd. The answer? 2011.
“The market is getting more aggressive,” said Borgmann. “My hope is people will remember that we’re in a cyclical business.”[PAGEBREAK]
Panelists who joined the conference’s Lending Executives Roundtable said the main reason for the pickup in activity is that there’s plenty of liquidity in the marketplace. And for investors, auto remains an attractive asset class because it has and continues to perform well. That’s why sources are getting more aggressive and why newcomers are entering the market.
“TD bought [Chrysler Financial], in part, because they had an incredible amount of excess assets that they needed to employ,” said TD Auto Finance’s Kelly Mankin. “So, combined with more opportunity through the increased SAAR (seasonally adjusted annual rate) and the increase in used-car sales, those economic factors are going to drive more lenders into the industry.”
Mankin added that the stretching out of terms is more of a regional phenomenon than a nationwide trend. He said that his company is starting to see more 75- and 84-month terms on the West Coast because the market demands it. Wells Fargo Dealer Services’ Adam Pope added that consumers and even manufacturers are what are driving the seemingly aggressive nature of the business.
“It’s not how much the car costs; it’s how much is their monthly payment. That’s what dictates what customers can afford, which is why dealers are always trying to go for longer terms,” he said. “On the other side, manufacturers are still announcing price increases on their vehicles, so that’s driving things up.”
Panelists also attributed the dive into the lower credit spectrums to the fact that there is a higher concentration of subprime customers at dealerships these days. GM Financial’s Craig Hewitt said that subprime is now more attractive because some of the associated risks with that segment no longer exist.
“I think there has been a small shift in the positive direction for underwriting subprime credit in that there is not the same number of offerings for subprime consumers that there were in 2005,” he said. “That means that the [subprime] customer you take onto your books isn’t going to be taking on additional debt.”
As for the unemployment picture, panelists expect the rate to remain high. They agreed that it will be difficult for the industry to offset the trend. But they all said they are willing to make concessions, noting that consumers will eventually need to replace their current vehicles.
“If the unemployment rate doesn’t improve in time to catch up with that,” said Bank of America’s Walter Masnyj, “we’re going to have to find ways to work around it and make some concessions that we normally would not have done in a different environment.”