Will looser underwriting prove troublesome in the long term?
During the 1990s, stiff competition among lenders led to poor underwriting that drove up losses. In 2008, 2009, and even 2010, lenders tightened up, resulting in extremely low loss rates through mid-2012. However, the current subprime market bears a striking resemblance to that of the 1990s. Capital is easily accessible and the auto asset-backed securities market is strong. Should this be cause for alarm? Lenders and dealers seem optimistic that the industry has learned its lesson, but there is always room for doubt.
Lenders have been reporting historically low credit losses for several quarters, according to Fitch Ratings. The trend could be attributed, in part, to seasonal consumer loan payment patterns and still-resilient used-vehicle values. According to TransUnion, the national auto loan delinquency rate has twice this year hit its lowest level since it began tracking the data in 1999. The improved record comes despite lenders having written more loans to high-risk borrowers.
Tightening the lid
Lenders could take a page from the history books and start to tighten underwriting, but is it too soon?
“We are satisfied with the way [our loans] are performing,” says Bruce Newmark, president at MarkOne Holdings. “They are consistent with what we priced for. The real key is to try to stay disciplined in the face of competition and not get too far away from your model — to not have competition in the heat of the battle sway you.”
Newmark believes loss rates are ticking slightly upward. He expects that trend to continue for the next few months as more people lose their jobs again or get their hours cut back at work.
The tough economy is compounded by a smaller pool of dealers. Add to that a current used-vehicle shortage and the recent abundance of available credit, and the outcome is a highly competitive marketplace. “It’s a big challenge,” Newmark says. “There’s a lot of interesting pressure on the industry.”
For dealers, looser underwriting standards make it easier to arrange financing for new- and used-vehicle purchases.
“It feels like we are back in 2007 again, just the fact being that anybody can get a car loan,” says Lisa Copeland, general manager at Fiat of Austin.
Meanwhile, Taylor Chevrolet General Manager Jody Lee Smith says that even with some loosening, the industry won’t see the hardships it faced a few years ago. “I don’t think it’s stupid lending,” he says. “I don’t see it going back to where it was.”
Lenders are starting to recognize that customers that fall into the subprime category may have had issues with credit cards or mortgages, but were on time with paying their vehicle loans. “It’s easier today to get [subprime customers] financed, to get them accommodated,” says Robert Cochran, president and chief executive at #1 Cochran Automotive, a dealership. “And there’s a growing level of confidence to get back in the space. To me, these are encouraging trends.”
Despite the rational lending of late, Fitch Ratings predicts that loan performance will weaken somewhat next year, with further declines in used-vehicle values and a normalization of credit trends.
“Although it is too early to predict whether today’s subprime lending market will deteriorate as it did in the 1990s, the similarities between the early stages then and now suggest that losses will climb as competition intensifies,” Moody’s analysts Peter McNally and Joseph Snailer predict.