The Subprime Auto Report

Special Finance Lenders Taking Back a Lot of Cars 

I noticed that the cover story in USA Today’s Money section says: “Repo Lots Overflow with Reclaimed Cars.”

The article states that repossessions are at their highest level in ten years.  There were 1.6 million repossessions in 2007, which is a third higher than they were ten years ago.  These levels are blamed on the turndown in the economy and the recent liberal credit policies of most of the subprime lenders.

I know from personal experience that, starting a few years ago, Wells Fargo was originating quite a lot of loans with high front end LTV’s and long terms, some without requiring proof of income.  When I was a rep for HSBC Auto Finance I found it difficult to compete with their programs.  Wells Fargo recently reported that  it charged off 1 billion in auto loans last year!  That’s 3.5% of their porfolio.   I’m not sure if it’s their aggressiveness or a combination of it with the economic crunch we are in that has caused this situation.  I’m not saying they did anything wrong, but I remember how many loans they were capturing with what seemed like a very liberal credit policy.  I’m not sure they could have predicted this downturn.

Also I’ve recently read that Americredit is doing business with caution.  I think, given the fact that their past liberal credit policies almost put them out of business and lowered their stock price to under a dollar, they don’t want make the same mistake twice.  Their credit losses for the second quarter of last year are at 7.3%, which is a point and a half higher than the same period the previous year.

Americredit is performing more poorly in Florida than in other parts of the country.  Given that Florida’s housing slump was probably the worst in the country, and that many local economies rely a great deal on housing, it makes sense that this deterioration coincides.

They are responding by reducing the amount of loans they will originate going forward, eliminating certain non-performing dealers and by reducing their sales force.  Also, they will start to look at individual dealer portfolios when making credit decisions, which means that if your special finance department is very aggressive, and the performance of your loans isn’t the greatest, you might not get the overrides (exceptions) that you’re used to getting.

It’s going to be an interesting 2008.  I’m looking forward to seeing how the recent 125 basis point reductions in the Federal Funds Rate will affect our industry.  I think we’re tied in with housing.  Next to a home, the automobile is the largest purchase.  When housing starts to rebound, I think the auto industry will follow suit.  The USA Today article said that many of the repossessed vehicles were luxury pickup trucks from people involved in the housing and construction related industries. 

I’m going to start addressing more technology issues here.  Stay tuned for more. 

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