in Subprime Auto Finance

Cash for Clunkers Program May Blow the Roof Off

 I write this month’s column while on the plane back from the Non-Prime Auto Finance Conference hosted by the National Auto Finance Association. While this conference is oriented towards the non-prime auto finance companies and the industry vendors that serve them, I do recommend it to dealers who desire a better understanding of the challenges finance companies face on a day-to-day basis.  I always find my time spent there valuable, as it helps me better advise dealers. This year was no different.


With the Chrysler and GM bankruptcies and the associated turmoil dominating the auto industry headlines, my take-away from the event this year was basically all positive.


First, this always gives me a chance to spend time with executives from the most significant auto finance companies serving the special finance market. While they and their companies generally take differing routes to obtain their end results, after lunches, dinners and back-corner discussions, it is relatively easy to get a good market feel. Last year, when the conference occurred we were in the depths of the free fall of the SF market. For all intents and purposes, subprime securitizations had ended for 2008, and the tightening of capital was amping up the credit crunch. A year ago, I still remember Mark Floyd, then of AmeriCredit, commenting that they were hoping to see a light at the end of the tunnel soon, and equally hoping it wasn’t a train.


Certainly, the doom and gloom was gone this year and the mood was much more upbeat. While securitizations are not yet flowing, everyone seems to feel it is just a matter of time. With TALF money moving into the money stream, investors are actually making calls to finance companies, and while pricing for subprime may still not yet be attractive, prime securitizations had dropped dramatically in price and money should be available for the SF market as early as the end of the third quarter of 2009.


Additionally, the market share by the top finance companies has remained stable for the first five months of 2009. Almost all finance companies are reporting excellent performance for the second-half 2008 portfolios, and many for all of 2008—another reason to believe that money will soon be available for the market. This stability, along with the likeliness of securitizations, causes me to feel that my predictions last fall about 2009 SF and new car volume – a gradual increase every month throughout 2009 – should hold fast.


There still remains some concern—in particular over (un)employment and credit card defaults, as well as over some  very threatening laws being proposed (with good chances of passing) that would really change everything with regards to interest rates and fees. That could then very well have the impact of once again stopping originations (keep an eye on Tom Hudson’s columns). That said, the general feeling was that the SF business was going to be stable, solid and consistent. All good news.


The Wild Card

It appears that Congress and the Senate are getting close to passing a Cash for Clunkers bill to stimulate the removal of older, higher-mileage vehicles from the roadways and the sale of new (and depending on how the law is passed, maybe late-model used) vehicles. I was amazed at Thomas Webb’s (Manheim) comments that he felt it would have little impact on the wholesale value of older vehicles and the sale of new(er) vehicles.


I spoke up and totally disagreed. Should this bill pass, I see a couple of things happening immediately. I was sitting next to Matt Fitzgerald of Drive Finance/Santander USA when Webb made the comment, and Iimmediately wondered  if it would change their down payment requirements. Drive – especially with their Solution program – has always been known for requiring strong equity positions. Down payments of $3,000 are the rule. One of the biggest barriers of entry for customers in that segment has always been the down payment.


Given the fact that any vehicle traded in on a new(er) vehicle with a to-be-determined improvement in fuel economy would earn a credit from the government of up to $4,500, I predict that this will blow the roof off of the SF market. Suddenly, every $100 trade in is now worth up to $4,500. BHPH customers often in negative equity for the first 18 to 24 months of a 24- to 30-month note would now be in equity. Owners of clunkers with no debt will have unheard-of amounts of equity. Even with a tightening of underwriting standards, the equity will make deals happen. You think tax season can be big; you haven’t seen anything yet.


As a sidebar, while great for SF, not all dealers will be happy about this. For those dealers who are involved in dealer-controlled finance – BHPH, LHPH, or Rent T’Own – the “clunkers” as defined (and being bought off the streets ) by the government have another name … inventory. Their sources of inventory may well disappear. I wish I was smart enough to predict what could happen to used car prices in the current $3,000 to $6,000 wholesale price range, but if this legislation passes (and I feel some form of it will), it is going to get crazy. The other downside for dealer-controlled finance is that there will likely be an attrition of accounts (and customers). After 12 months in the dark, the pendulum may well be ready to swing the other direction for SF.


That brings me to the 2009 SF Convention. The separation between the elite and average SF dealers may be wider than ever. It is clear that the elite SF dealers understand the direction the SF companies have moved and have adapted to maintain (or grow) deal volume and gross profits. Much of that is truly involved in understanding exactly what the finance companies are looking for.


I am happy to announce, while in Ft. Worth I confirmed the participation of the top executives from all the top SF companies that participated in the 2008 SF Convention, plus the addition of a few others. For 2009, dealers will have nearly five hours of breakout session time with finance companies, not to mention time available in the expo hall.


Additionally, with the low credit tiers becoming so difficult to structure profitable and approvable deals, dealers are looking to dealer-controlled financing for the solution more than ever. As a result, for the first time ever, the 2009 SF Convention will include more than 10 hours of breakout sessions just for the BHPH, LHPH, Rent T’Own and Lease T’Own dealers. Sessions will be moderated by 20 group moderators from the best BHPH and LHPH 20 groups serving this market, along with dealer experts as well.


All in all, with a stable SF market report, money expected to begin flowing, and a once-in-a-career Cash for Clunkers program near, the clouds that have been hovering over the SF industry are parting. My word of caution – if you wait to see the market come back, you may miss hundreds of thousands of gross profit dollars in opportunity. Get yourself and your department ready. The adage, “If you do what you always have done, you’ll get what you’ve always gotten,” is NO LONGER TRUE. The market has shifted. The best place to ensure you are on target is at the 2009 SF Convention, held August 9th through 11th in Dallas, Texas. I hope to see you there!


Until next month,

Great selling!

Vol. 6 Issue 7