While Predicting Repo Upswing, Webb Points to Factors Bolstering Recovery Bottom Lines

While also predicting repossessions should trend upward again, Manheim chief economist Tom Webb explained why lenders didn’t sustain as much of a loss when a loan contract went south during the past two years.

Webb stated that “in those cases in which repossessions did occur in 2010 and 2011, lenders experienced a significant reduction in the severity of loss. This reflected the strength of wholesale used vehicle prices, more conservative loan-to-value ratios in the underlying contract, and the general aging of portfolios."

In Manheim’s annual Used Car Market Report, Webb pointed out repossession volumes are determined by contracts outstanding, their aging and their static pool loss performance.

“Those forces combined to produce a record number of repossessions in 2009 and then a steep decline in both 2010 and 2011,” Webb surmised. “The peak-to-trough swing was from an estimated 1.9 million units in 2009 to 1.3 million in 2011, or a decline of 32 percent.”

Given the recent growth in originations and some easing in lending standards, Webb thinks repossession volumes will likely grow in future years.

“It is clear, however, that households have increased the priority that they associate with making their monthly car payment and, as such, delinquencies and default rates will be lower than they otherwise would be for any given set of economic circumstances,” Webb emphasized.

“In addition, strength in wholesale used-vehicle pricing (a condition which we think will persist for some time) has meant more borrowers have positive (or only slightly negative) equity in their vehicle loan and, thus, are less likely to default,” he continued.

“These two factors, which substantially reduced repossession rates in 2010 and 2011, will keep repossession volumes from returning to their 2009 peak anytime soon,” Webb concluded.