Auto finance industry immune from mortgage market
Remember Y2K? A whole lot of fuss and rabble-rousing that fizzled
when the clock ushered in the new millennium?
Recent headlines in the financial pages have begun to use words
like “spikes” and “upticks” when talking about the delinquency
rates on prime and subprime auto loans. When applying a little
perspective, however, the fuss appears as toothless as Y2K proved
Yes, among prime borrowers, the delinquency rate was 4.5 per cent,
up from 2.9 per cent in August, which marked the biggest one-month
jump in at least eight years, according to Lehman Brothers. And,
yes, the delinquency rate among subprime borrowers climbed to 12
per cent — the highest level since 2002. Morgan
Stanley predicts vehicle sales volume to fall below 15.9m units
next year, from 16.6m last year.
But while delinquencies in loan pools originated in 2006 may have
begun to inch up, they are still relatively low. Tightened
underwriting standards in 2003 and 2004 may have created
artificially low delinquency rates. Net losses in those years were
half the rate of losses in 2000 and 2001, when lenders were looser
with credit. As such, when performance deterioration sparks losses
higher than the 2003-2004 range, industry analysts sometimes blow
the results out of proportion.
Another key consideration is that although delinquencies are
growing, they are still well within the range expected — and
reserved for — by securitisation issuers. Though repossessions are
on the rise, continued low unemployment should keep levels in check
— at least for the near term.
And while vehicle sales are predicted to keep sliding, recent data
points to the fact that the domestic manufacturers are backing off
their use of incentives, an indicator that vehicle sales will
reflect actual demand. The days of artificially inflated sales
volume may be on their way out.
Y2K was a time bomb that never went off. The presumed time bomb in
the auto finance sector will be as dud-ly.
Collectors revamp strategies
As credit issues snake their way through the markets, auto loan
collectors have begun to intervene in delinquency situations more
quickly – though they are giving borrowers more leeway in making
Bob Picone, COO of Academy Collection Service, said that around six
months ago some collectors would classify as delinquent loans which
were one or two weeks behind with payments. Now, if payments are
not received by the due date, collectors immediately begin to move.
But the subsequent collection strategy has been eased because “if
they’re late on one payment, chances are they can’t double up and
make a second one,” Picone said.
The hard part is finding assets that auto borrowers can tap. Homes
used to be a standard source of equity but that is no longer the
case, said Paul Errigo, chief executive of Accounts Receivable
Collection executives at GMAC
have implemented collection tactics meant to catch borrowers before
they miss payments. The company uses proprietary third-party
software to scan its portfolio for signs of slipping credit
Along with creativity, collectors simply have to accept the fact
that borrowers lack refinancing options and available cash, said
Meredith Libbey, a spokeswoman for Ford Motor Credit. “Sometimes
you just can’t collect on all your accounts,” she said.
November vehicle sales slide
Sales of General
Motors vehicles dipped 11 per cent last month. Overall, U.S.
sales of cars and light-duty trucks declined 1.6 per cent in
November, compared with the year-prior period, to 1.18m units,
according to AutoData Corp. Rising fuel prices and sliding home
values have largely been blamed for the drop.
But sales climbed 6.1 per cent at Nissan and 4.7 per cent at Honda.
And both Toyota and Ford eked out gains for the month — 0.4 per
cent and 0.3 per cent, respectively. Ford’s increase, spurred by
higher fleet sales, marked its first in a year.
Meanwhile, the average incentive inched up last month, to $2,309
per vehicle, according to Edmunds.com. That compares with $2,444 in
October and $2,288 in November 2006. Overall incentive spending
totalled $2.77bn for the month, up 3.75 per cent from October. Of
that sum, Chrysler,
and GM accounted for 68.5 per cent.