Imagine you’re trying to complete a “first pencil” with a customer who is either in the showroom or communicating through the chat function on your website. The customer has a trade, and better yet, it’s a model you know will turn in 30 days or less.
But then you learn there’s negative equity associated with that vehicle, a record figure in the thousands that Edmunds.com recently discovered to be the average on nearly a third of trades so far this year. What happens next likely determines whether the finance company will buy that deal or if the situation will deteriorate into a slog of trying to get a larger down payment.
“I would certainly say that (negative equity) wouldn’t help in the negotiating at the dealership,” Autotrader senior analyst Michelle Krebs said during a conference call with the media last week.
According to Edmunds data, an estimated 32 percent of all trade-ins toward the purchase of a new model through the first three quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehicle purchases from January to September of last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.
The phenomenon of upside down trade-ins is not limited to new-model purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used market.
“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”
As Drury indicated perhaps negative equity isn’t posing a problem nowadays since contract terms continue to stretch. Experian Automotive indicated in its latest State of the Automotive Finance Market report released this week that 30.7 percent of all new-vehicle financing in the third quarter stretched to 73 months to 84 months, up from 27.5 percent a year earlier. Analysts even added a new segment to its collection of bar charts since now nearly 1 percent of all new-model financing (0.98 percent to be exact) has terms lasting 85 months and longer.
On the used side, analysts didn’t mention terms stretching beyond 85 months, but Experian did point out that contracts lasting between 73 and 84 months represented 17.7 percent of deals in Q3, up from 16.2 percent during the same quarter in 2015.
So if finance companies decide they just won’t stretch the terms any longer, when does all that negative equity start to short-circuit deals?
“Just thinking about it, it’s a great question,” Kelley Blue Book analyst Tim Fleming said during the recent media conference call. “It’s going to be perhaps a growing issue in the next couple of years. But I don’t know that it’s a significant problem right now.”
Stay tuned.
Part of the dialogue happening at the recent SubPrime Forum during Used Car Week stemmed from whether or not finance companies — especially ones that specialize in subprime paper — were tightening their underwriting.
Furthermore, companies such as Consumer Portfolio Services had just discussed why their originations dipped during the third quarter.
Well, Experian’s latest State of the Automotive Finance Market report showed that perhaps underwriting in the subprime space is, in fact, tightening.
Experian’s Q3 data released on Monday indicated that financing extended to consumers in the subprime tier fell 4.5 percent from the previous year, and contracts to deep-subprime consumers dropped 2.8 percent to the lowest level on record since 2011.
Looking specifically at used-vehicle loans, analysts noticed that the subprime sectors saw an even larger decrease.
Financing to consumers with deep-subprime credit dropped by 5.3 percent to 5.11 percent; the lowest Experian has seen on record since tracking began in 2007.
Meanwhile, Experian senior director of automotive finance Melinda Zabritski — who discussed some of the Q3 data during the SubPrime Forum — pointed out that newly originated financing to prime borrowers jumped 2 percent to encompass nearly 60 percent of contracts financed in Q3.
“For anyone making doomsday predictions about a subprime bubble in the auto industry, Q3 2016 provides a stark reality check,” Zabritski said in a news release issued on Monday.
“This quarter’s report shows that lenders are reducing the percentage of loans to the subprime and deep-subprime risk tiers while increasing the percentage to consumers with good credit,” she continued. “The most important takeaway here is to understand the market reality and not to be led astray by rumors or unsubstantiated facts.
“By doing so, lenders, dealers and consumers are able to make smarter decisions and more easily explore financing programs and other opportunities available to them,” Zabritski went on to say.
The report also determined that average credit scores for both new and used vehicle loans are on the rise.
For new-vehicle contracts, the average credit score climbed two points to 712 in Q3, marking the first time average credit scores for new-vehicle loans rose since hitting a record high of 723 in Q2 2012.
For used-vehicle contracts, the average credit score jumped five points to 655.
Experian reported that 30-day delinquencies were flat year-over-year, at 2.36 percent. However, 60-day loan delinquencies were up slightly, moving from 0.67 percent in Q3 2015 to 0.74 percent in Q3 2016.
Beyond the subprime data, Experian highlighted that credit unions continued to gain market share as consumers search for low interest rates
Perhaps the biggest shift from Q3 2015 to Q3 2016 was the growth in market share for credit unions. Credit unions grew their share of the total loan market from 17.6 percent in Q3 2015 to 19.6 percent in Q3 2016.
For new-vehicle contracts, credit unions grew their share by 22 percent, going from 9.9 percent in Q3 2015 to 12 percent in Q3 2016.
According to the report, interest rate increases played a key role in helping boost credit union share. Interest rates for the average new-vehicle loan went from 4.63 percent in Q3 2015 to 4.69 percent in Q3 2016.
“Credit unions typically have the most competitive interest rates, so any time rates jump overall, it’s a natural reaction for credit unions to see a rise in their market share,” Zabritski said. “With vehicle prices and loan dollar amounts rising, car shoppers are looking for any relief they can get. Credit unions’ traditionally lower rates are obviously an attractive option.”
Other key findings for Q3 2016 included:
• Total open automotive financing balances reached a record high of $1.055 billion.
• Used-vehicle contract amounts reached a record high of $19,227, up by $361.
• The average new-vehicle contract amount jumped to $30,022 from $28,936.
• Share of new-vehicle leasing jumped to 29.49 percent from 26.93 percent.
• The average monthly payment for a new-vehicle contract was $495, up from $482.
• The average new-vehicle lease payment was $405, up from $398.
• The average monthly payment for a used-vehicle contract was $362, up from $360.
• The average contract term for a new vehicle was 68 months.
As Fitch Ratings shared its latest update on the auto ABS market, analysts at the Federal Reserve Bank of New York indicated 3.6 percent of auto financing contracts stood at 90 or more days delinquent at the end of September.
Meanwhile, total outstanding auto balances jumped by $32 billion year-over-year during the third quarter.
What’s making these New York Fed observers uneasy, however, is how they’ve determined the overall delinquency rate “masks diverging performance trends” across the two types of finance sources. According to these experts the primary difference is operations that book lots of subprime paper and ones that often do not.
In a blog post titled, “Subprime Auto Debt Grows Despite Rising Delinquencies,” analysts Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw wrote, “It’s worth noting that the majority of auto loans are still performing well — it’s the subprime loans that heavily influence the delinquency rates. Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to have experienced declining performance in their auto loan portfolios.”
The New York Fed contingent explained the 90-plus day delinquency rate for finance company contracts worsened by a full percentage point during the past four quarters, while delinquency rates for bank and credit union auto paper have improved slightly.
“An even sharper divergence appears in the new flow into delinquency for loans broken out by the borrower’s credit score at origination,” these analysts said. “The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years.”
Haughwout, Lee, Scally and van der Klauuw closed their post with this conclusion.
“The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly 6 million individuals at least 90 days late on their auto loan payments,” they wrote.
“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” they added.
Fitch: Losses inch higher for U.S. subprime auto ABS
Losses fell for U.S. prime auto ABS while subprime losses continued their slow climb, according to the latest monthly index results from Fitch Ratings.
Analysts found prime auto loan ABS annualized net losses declined on a monthly basis in October, while subprime losses rose 32 basis points to 9.61 percent. Fitch pointed out subprime annualized net losses remain within levels recorded earlier this year.
Fitch reported subprime annualized net losses crept up 3 percent month-over-month in October and were 19.4 percent higher on an annual basis. The 9.61 percent rate recorded in October was the highest since 9.74 percent spotted in February.
Despite the small increase in losses during October, analysts noticed the pace of monthly increases slowed versus the prior four months. Subprime annualized net losses so far in 2016 have ranged from a low of 6.32 percent in June to a high of 9.74 percent in February, and continue to trend higher this year consistent with prime index trends.
Speaking of prime, Fitch indicated annualized net losses in that sector declined to 0.68 percent in October, down 2 basis points versus the prior month but were still 27 percent higher versus October 2015.
In terms of delinquency, Fitch said prime 60-day delinquencies declined to 0.68 percent in October, improving 2.7 percent month-over-month. However, the rate spotted in October was 27 percent higher year-over-year.
In subprime, delinquencies stood at 5.07 percent in October, virtually unchanged from 5.05 percent recorded in September and 11 percent higher on a yearly basis.
When assessing the broad impact, Fitch mentioned wholesale vehicle values continued to decline over the past month.
“This is translating to lower recoveries for auto ABS as auto values move off peak rates recorded earlier this year,” analysts said while referencing that the Manheim Used Vehicle Value index declined to 126 in October, down from 126.9 in September to the lowest level since June.
“The index is still at solid levels overall in 2016, and recent declines have been minimal,” Fitch added.
Analysts went on to say, “Most vehicle segments are experiencing lower values with rising depreciation, including trucks and SUVs which have been very strong in 2016 but come down off recent highs. The fall months are typically the weakest period of the year as dealers look to clear their lots to make way for the new incoming 2017 models.”
Fitch closed by touching on what the latest data might do to its ratings.
“The performance declines still have no adverse effect on ratings performance in 2016,” analysts said. “Fitch upgraded 67 classes of subordinate notes in 2016 through late November, down slightly from 77 last year.
“Looking ahead, Fitch has a positive rating outlook for the prime sector and stable outlook for subprime ratings despite recent loss increases,” analysts added.
Fitch’s auto ABS indices total $97 billion of outstanding securitized collateral, of which 59 percent is prime and the remaining 41 percent is subprime collateral.
So far in 2016, analysts at White Clarke Group contend that the auto and asset finance industry has coped well with uncertainty.
“While forecasts have been trimmed during the year, they have not been cut so savagely as to threaten the sector’s recovery, but continued uncertainty seems likely to have an increasingly damaging effect on the outlook for the industry,” analysts said when they released their November report about the global auto finance market.
“At present, the election of Donald Trump in the U.S.; the U.K.’s decision to go for Brexit; continued concerns about the state of the economy in the EU and the upsurge during the year in terrorist attacks have created further uncertainty, which will continue to lower growth in the overall economy at least into quarter one of 2017, and this will be reflected in growth rates in the global asset and auto finance industry,” White Clarke Group went on to say.
The firm’s complete report can be downloaded here.
A video summarizing the analysis also can be viewed at the top of this page or by clicking here.
On Tuesday, General Motors Financial announced the completion of a new addition to its Arlington Operations Center campus in Arlington, Texas, with a ribbon-cutting ceremony that featured remarks from state Sen. Brian Birdwell, state Rep. Chris Turner, city of Arlington mayor Jeff Williams and finance company president and chief executive officer Dan Berce.
The company highlighted the $35 million investment is GM Financial’s fourth office location in the city of Arlington, and will house 1,300 employees working in core functions such as loan services, customer experience, remarketing solutions and human resources.
GM Financial’s workforce has grown to approximately 4,500 team members across the state of Texas, with 75 percent of these employees based in the city of Arlington, where the company has nearly doubled in headcount since 2014.
GM Financial’s physical presence in the state of Texas represents integral parts of its business, including the company’s corporate headquarters in Fort Worth, operations center campus in Arlington, a servicing center in San Antonio that opens in 2017 and other operational facilities across the state.
“GM Financial and the City of Arlington share a strong 18-year history together, and we are honored to expand our economic and employment footprint in this community with a new addition to our Arlington campus,” Berce said.
“This new facility underscores the significant growth we’ve experienced across our organization, as well as the impact Arlington’s talented workforce, spirit of collaboration and shared values have had, and will continue to have, on our success,” Berce continued.
Berce went on to mention GM Financial has also demonstrated a track record of community engagement in the city, as the company and its team members support many philanthropic organizations that benefit Arlington and its residents. GM Financial also offers each full-time team member 32 hours of paid time off each year to volunteer (part-time team members receive 16 hours per year), which equates to potentially thousands of volunteer hours in service to the Arlington community each year.
“GM Financial’s announcement in Arlington is another example of the economic growth we are seeing in the American Dream City,” Williams said. “In the last year we have seen major announcements like DR Horton moving its company headquarters to Arlington, incredible growth in our entertainment district, and General Motors investing $1.4 billion dollars in its assembly plant. Now, GM Financial is expanding with a $35 million investment.
“And perhaps even more importantly, all of these moves are bringing quality, high-paying jobs to our city. With a track record like that, it is clear dreams are getting done in Arlington,” Williams added.
Both Credit Acceptance Corp. and Prestige Financial Services each recently received honors for how great their workplaces are.
Credit Acceptance was among the 2016 Top Workplaces honored by The Detroit Free Press, having been named the No. 2 workplace in the large company category. This accolade marked the fifth year in a row that Credit Acceptance has won a Detroit Free Press Top Workplace honor.
Additionally, the finance company was one of five companies to receive a Circle of Excellence award for consistently ranking among the top workplaces in Michigan.
“Credit Acceptance was selected from among hundreds of companies vying for a place on the list,” the company said. “Our ranking was based solely on the results of a team member survey administered by WorkplaceDynamics, a leading research firm that specializes in organizational health and workplace improvement.
“Several aspects of our workplace culture were measured, including alignment, execution, and connection, just to name a few,” Credit Acceptance added.
Meanwhile, Prestige Financial Services was named a Top Workplace by the Salt Lake Tribune’s annual ranking of Utah businesses. Prestige placed No. 1 on the list of large companies in northern Utah. Nearly 100 businesses were surveyed with 20,624 employees completing anonymous questionnaires.
Prestige employees have rated it among the region’s best workplaces for three years in a row.
Prestige was founded in 1994 as an affiliate of the Larry H. Miller Group of Companies. Today, Prestige manages a portfolio of more than $1 billion contracts and does business with dealerships across the country.
In recent years, the Larry H. Miller Group has emphasized its founder’s vision of being the best place in town to work and the best place in town to do business. Prestige scored high marks as a happy, satisfying and rewarding place to work, according to an in-depth study conducted by WorkplaceDynamics.
“They treat you like family and really care about you and your personal growth,” one employee told WorkplaceDynamics pollsters. “I have been with this company for 15 years, and I could not imagine working anywhere else.”
Others at Prestige praised its caring environment, flexibility, sense of purpose and emphasis on learning — in an industry with a reputation of being hard-driving and focused only on results.
“The job is stressful; however, the atmosphere makes it easier to deal with the stress,” another Prestige employee said in the anonymous survey. “Managers care. You are treated like a human being, not just another employee.”
Prestige employees also stated they had the ability to work their way up in the company and were appreciative of special personal gestures by managers and its president, Bryant Henrie, a top executive with the Larry H. Miller Group of Companies.
“We try to live by the values exemplified in the lives of our founders, Larry and Gail Miller,” said Henrie, who tries to live and teach the company values are core to the group's culture which includes integrity, hard work, stewardship, service to others and enriching lives.
“We try to keep our focus on the individual, whether that's an employee or a customer," Henrie continued. “If our employees feel appreciated and valued, that translates directly to how our customers are treated.”
Prestige has grown to nearly 575 employees, up from 249 when Henrie took over Prestige at the request of chief executive officer Greg Miller in 2009. During the same period, turnover has dropped from 60 percent yearly to about 20 percent.
This spring, Prestige will relocate into a new 130,000-square-foot office in Draper, Utah, designed with employees in mind. The facility will include a fully equipped cafeteria and rooms devoted to wellness, games and quiet time.
We’re beginning 2017 by engaging the industry again with one of our most successful projects — The CEO Issue.
In an ongoing effort to recognize the chief executive officers who are flourishing in today’s competitive marketplace, SubPrime Auto Finance News is asking the industry to nominate the CEOs of subprime auto finance companies and their critical support service providers to be included in the January/February print edition that’s being dubbed, “The CEO Issue.”
Between now and 5 p.m. (ET) on Dec. 13, nominations along with a high-resolution photograph and explanations as to why the CEO is successful can be sent to SubPrime Auto Finance News senior editor Nick Zulovich via email ([email protected]).
Here are some example questions to be answered to enhance nominations:
— What moves has the CEO made to place the company into position to be successful?
— How does the CEO cultivate a productive environment that inspires the organization at all levels?
— Why is this CEO an example of successful leader who lifts the value of not just the company but also the entire industry?
To review the rundown of CEOs honored in last year’s issue, the digital version can be found here.
SubPrime Auto Finance News publisher Bill Zadeits explained why we’re starting the New Year with this endeavor.
“As we noted a year ago, CEOs literally are the face of the organization and have a tremendous responsibility to their companies, employees, stakeholders and the industry as a whole. For those reasons and countless more, we are dedicating the next print edition to showcasing these outstanding businesspeople,” Zadeits said.
“Our first collection of highlighted CEOs included some of the brightest executives our industry has, and we’re looking for more talented leaders to be nominated this time, as well,” Zadeits went on to say.
Along with it being, “The CEO Issue,” the January/February edition of SubPrime Auto Finance News also will focus on both Vehicle Finance Conference hosted by the American Financial Services Association as well as the National Convention & Expo orchestrated by the National Automobile Dealers Association — signature industry events that run from Jan. 24-29 in New Orleans.
So if you have a longstanding relationship with or report to a CEO who should be included in “The CEO Issue,” send your nominations, images and responses to the sample questions listed above to SubPrime Auto Finance News editor Nick Zulovich ([email protected]). Nominations will be accepted through Feb. 17.
And be sure to get your copy of “The CEO Issue” delivered your mailbox or grab one at the AFSA or NADA events. If you don’t already have one, get your free subscription by going to www.autoremarketing.com/subprime/subscribe.
To all the auto financing executives and experts who came to Las Vegas for Used Car Week, we thank you for making this year’s SubPrime Forum and Re3 Conference the most engaging and successful industry gatherings Cherokee Media Group has hosted.
For segments of the auto financing community that couldn’t join us, here are some of the many highlights from the events:
—SubPrime Forum presenting sponsor Digital Recognition Network kicked off the discussion with an insightful and thought-provoking presentation by chief executive officer Chris Metaxas, who explained how critical location data can be not only during the recovery process, but also to enhance underwriting. Imagine knowing if the applicant actually spends significant time near the home and work addresses noted in the paperwork. Mitigating risk on the front end can help reduce the risk on the back end, according to DRN’s top executive.
—Experian Automotive’s Melinda Zabritski returned to the SubPrime Forum to share third-quarter data that was finalized just before she traveled to Las Vegas. Zabritski gave a rundown of the Q3 data that Experian will widely distribute soon in a presentation you can watch here.
—Whether it was during a presentation or networking times, the result of this year’s presidential election percolated throughout the session ballrooms and Used Car Week exhibit hall. Chris Stinebert, who oversees the American Financial Services Association, gave a wide-ranging recap of what’s ongoing within the Capitol Beltway. Stinebert touched on how regulations associated with auto financing, healthcare, taxes and more are likely to be modified when President Trump enters the White House. A portion of what Stinebert shared can be viewed here.
—And speaking of regulations, another cohort of auto finance executives and managers completed the National Automotive Finance Association’s Consumer Credit Compliance Certification Program in Las Vegas. More than 90 individuals finished the in-depth training offered by the NAF Association and orchestrated by Hudson Cook partners Patty Covington and Eric Johnson. It’s a program I’m looking to complete, too, as I detailed previously here and here. Throughout both the SubPrime Forum, which was put together in collaboration with the NAF Association, as well as the Re3 Conference sponsored by MBSi Corp., the importance of having trained employees and compliant service providers kept being repeated often by experts and other leaders in the field. The NAF Association is hosting another opening session of the certification program on Feb. 2-3. More details can be found at nafassociation.com.
—Cort DeHart of MBSi led one of the highest-attended sessions within the auto finance space. The Re3 Conference panel discussion focused on improving recoveries took on even higher importance as delinquencies and defaults tick higher as regulatory compliance demands intensify at an even greater rate.
—Along with the sessions already available online that I previously mentioned, Auto Remarketing senior editor Joe Overby also hosted several sessions that might be of interest to auto finance executives, too. Joe connected with Steve Kapusta of SmartAuction about how the wholesale market continues to evolve. Furthermore, our friends at the National Independent Automobile Dealers Association — who also played a huge role in making Used Car Week successful — recorded select sessions throughout Used Car Week, and those videos will be available online soon.
—You also might be able to see who from your firm — or the competition — traveled to Used Car Week via the wonderful photo gallery assembled by Cherokee Media Group photographer Jonathan Fredin, whose collection of images can be viewed here.
In summation, to the all of the attendees of Used Car Week, a sincere thank you for carving out time on your busy calendars to travel to Las Vegas — in some cases for the fifth, sixth or umpteenth time in 2016. We hope you found the content to be informative and useful, the resort to be comfortable and enjoyable and the networking time to be fruitful and productive. Mark your calendars now as the next Used Car Week returns to southern California; this time at the La Quinta Resort & Club, a Waldof Astoria Resort, in La Quinta, Calif., on Nov. 13-17, 2017.
Happy Thanksgiving to you and your family and friends!
Nick Zulovich is senior editor of SubPrime Auto Finance News and BHPH Report and can be reached at [email protected].
According to a document referenced in recent reports and also shared with SubPrime Auto Finance News, Chase Auto Finance named Mark O’Donovan as chief executive officer.
O’Donovan succeeds Thasunda Duckett, who was named CEO of Chase’s consumer bank last month. O’Donovan will shift over from being the bank’s controller to his new post where he will report to consumer & community banking CEO Gordon Smith, who announced the decision along with Chase chief financial officer Marianne Lake.
“He is a 20-year veteran of the firm and brings a strong set of experiences to his new role,” Gordon and Lake said in the document first distributed to Chase employees. “He has outstanding financial credentials, experience across a broad set of businesses and a proven track record on people leadership.
“Among his many skills, Mark is known as a great manager leading large global teams. He will make an excellent CEO for Auto Finance,” Gordon and Lake continued.” We will now begin a search for Mark’s successor, and he will help us manage through the transition.
Along with being global controller for the investment bank and treasury and securities services, Chase mentioned O’Donovan has spent time serving the bank in New York, London and Singapore.
Gordon and Lake touched on the current status of Chase’s auto financing endeavors.
“Our auto business has been performing very well, delivering 20 consecutive quarters of loan and lease growth,” they said. “During that time, the team has consistently improved client satisfaction and was recently named the top-rated bank in J.D. Power’s 2016 Dealer Financing Satisfaction Study.
“We look forward to Mark hitting the ground running and building on their success,” Gordon and Lake went on to say. “Please join us in wishing him great success in his new role.”
Officials announced this week that Matrix Warranty Solutions is now a part of the F&I Express network of more than 130 aftermarket service providers.
Matrix Warranty Solutions highlighted that its programs are backed by a contractual liability insurance policy issued by a property casualty insurers rated excellent by A.M. Best.
“We are excited to partner with F&I Express," Matrix Automotive Dominic Sansone president said.
“Not only is F&I Express the winner of the 2016 Dealers Choice Awards, I am confident they will make it seamless for our agents and dealers to generate substantial income by marketing the Matrix suite of unique products,” Sansone continued. “We are looking forward to a long-term relationship with F&I Express.”
F&I Express president and chief executive officer Brian Reed added, “I am impressed with this organization and honored to welcome them to our provider network.”
