Equifax determined the total dollar amount for subprime vehicle financing originated in March surged higher than any single month going back seven years.
Credit bureau analysts found that subprime auto loans in March came in at $13.1 billion, marking an 8.8-percent increase year-over-year. Equifax had to go back to March 2007 to find a figure that high. That’s when the market generated $12.5 billion in subprime paper in a single month.
SubPrime Auto Finance News caught up with Lou Loquasto, Equifax’s auto finance vertical leader, on Tuesday to get more information about why the subprime figure climbed so high.
“It’s a continuation of portfolios doing really well both from a frequency of default standpoint and also when there are repossessions. Loss severity has been low because the used-car market has been so strong. That’s the two best scenarios — fewer defaults, and when there are defaults, you get more money back for the car,” Loquasto said.
“You’ve also got this hyper-competitive environment out there,” he continued. “A lot of banks that we talk to, a lot of traditionally prime lenders, they notice low delinquencies, and they notice shrinking yields in prime and superprime so it’s natural for them to migrate downward, especially now as lenders are getting more sophisticated. When they do migrate downward a little bit, they’re doing it with their current customers. If you’re a bank or credit union, they’re actually building into their models a little more leniency when they are lending to their own customers because they know that overall they will perform better than a customer that doesn’t do business with the bank or credit union.”
Loquasto also referenced the retail sales performance the industry posted back in March. CNW Research indicated that retail used vehicle sales jumped almost 50 percent month-over-month in March as severe weather conditions eased.
“We had kind of a perfect storm of a lot good trends all hitting at the same time,” Loquasto said.
While the total dollar amount of subprime financing is at historic highs, Equifax indicated the average loan amount per customer remains lower than the high point established seven years ago. The March level came in at $17,360, much higher than the low point of $14,563 set in March of 2010, but still below the March 2007 reading of $19,292.
Loquasto doesn’t expect lenders will be pushing individual vehicle loans to subprime customers to levels close to $20,000 for a couple of reasons.
“One, income really isn’t growing for these customers so lenders are pretty disciplined when it comes to things like payment-to-income ratios. That’s why I don’t think you’re going to see a dramatic increase in subprime average loan size,” he said.
“Even to mitigate that payment-to-income ratio to keep payments affordable, lenders are more likely as you’ve seen to increase term length than they are the loan size for customers,” he continued.
Equifax’s data showed that the significant amount of vehicle loans — especially to subprime buyers — continues to fall in the range between $10,000 and $15,000. Loquasto emphasized that’s what differentiates vehicle lending from mortgages.
“Auto might have gotten a little aggressive before the crisis,” Loquasto said. “Back then auto lenders still weren’t giving someone a $30,000 car when they couldn’t afford it. By comparison (mortgage companies) were giving someone a $400,000 house when they couldn’t afford it.
“It goes back to overall affordability. Since incomes haven’t increased significantly for customers in this segment, the customers and the lenders are trying to keep loans with their budgetary constraint,” he continued. “They’re buying used cars for the most part. Even the used cars they’re buying now ranging from $10,000 to $15,000 is an upgrade from the 10-, 12- or 14-year-old vehicle they were driving.
“Customers and lenders are doing a good job of staying within budgetary constraints and not trying to get a customers into a $25,000 car when they can only afford a $15,000 car,” Loquasto went on to say.
And one more point about affordability. Loquasto mentioned the workforce solutions division at Equifax is becoming busier as more lenders are using more sophisticated tools to verify income. Equifax currently obtains income and other employment data from 80 percent of Fortune 500 companies, according to Loquasto.
“As we continue to grow our workforce solutions database, and we continue to increase the number of customers that we can tell lenders this is exactly how much this customer makes, it gives lenders more confidence in that affordability component,” he said.
“To a large degree, lenders are more confident that income number they’re underwriting off of is a reliable number versus in the past you’re having to either trust the dealer or having to get paystubs every time,” Loquasto went on to say.
Loquasto wrapped up his conversation with SubPrime Auto Finance News by giving an overall assessment of the market as it nears the second half of the year.
“What jumped out at me is kind of the stabilization of things,” Loquasto said when reviewing all of the March data. “If you look at the swings from 2005, 2006 and 2007 to down being down in 2008, 2009, 2010 and 2011 to being back up in 2012 and 2013, now we’re seeing just a nice steady consistent lending environment.
“Sure, it’s hypercompetitive and we’ve got losses that are historically low and the used-car market that’s historically high. But it seems like a lot less volatility in how the lenders are doing business,” he added.