Podcast: ‘Weekly Wrap’ on credit tightening, performance
Listen as AFN editors break down top stories from the past week
The auto finance industry continues to face a tightened credit environment, worsening credit performance and recoveries, and shrinking subprime market share as affordability concerns persist.
High interest rates and inflationary pressures have prompted several auto lenders to tighten underwriting standards, contributing to smaller subprime share even as demand from subprime borrowers remains strong.
Delinquencies and net losses also rose across securitized prime and nonprime auto loans in January as recoveries decreased amid falling vehicle prices and rising repossession costs.
Meanwhile, elevated interest rates have cut into potential savings for consumers who refinance their vehicles, limiting demand at some lenders while application volume remains robust at others.
In this episode of the “Weekly Wrap,” Auto Finance News Deputy Editor Amanda Harris and Senior Associate Editor Riley Wolfbauer discuss the top trends during the week ended March 1.
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Transcript:
Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain.
Amanda Harris 0:17 Hello everyone and welcome to the road map from auto Finance News. Since 1996, the nations leading news intern, automotive lending and leasing, it is Monday, March 4th, and I’m Amanda Harris, joined by Riley Wolfbauer. This is our weekly wrap and what happened in auto finance for the week ending March 1st, 2024, an Automotive News Evie maker Fisker is in talks with Nissan Motor Company as a company looks to secure capital as they struggle with liquidity challenges. Exasperated by production issues and technical glitches, Nissan may invest as much as $400 million in fishers, our platform, without which this court said it doubted the companies ability to continue this year had expected to deliver more than 20,000 EV this year but deliver just 4929 vehicles in all. The 2023 holster also raised $950 million in debt fining financing through a three year loan facility from a syndicate of 12 banks. As EV company faces model delays and waning consumer demand, Honda, meanwhile, plans to introduce a hydrogen fuel cell vehicle that can also be recharged with the 5C crossover expected to be sold in North America this spring and imported to Japan this summer. Lots going on in the EV World and Auto Finance News, Wells Fargo Commercial Auto is planning enhancements to its dealer Floorplan platform to address areas such as executing payoffs on vehicles sold, transferring vehicles back and forth from floorplan lines or across dealerships and adding unit spot at auction or received from trade. Wells Fargo began piloting the updates with five dealership clients at the end of 2023. Let your vehicle front Evie Finance or EV life last month expanded into used EV financing as a $4000 federal tax credit went into effect in January, and then Tick began beating testing loans for used EVs in about mid February. After offering newly refinancing since it was a founded in 2019, the volume of used EV’s continues to climb, driven by a larger number of new EV S sold more Events coming off lease and things like rental company Hearst. Offloading a number a large number of movies from as you think it was like 20,000 EVs. So that’s a big number hitting the used market. So these markets can expected to continue to grow and EVs and everyone’s kind of keeping a close eye on that and consumer demand for used’s turning to Auto Finance performance, the lances and that losses also rose across securitized prime and nonprime auto loans in January as recoveries decreased amid falling vehicle prices and rising repossession costs, recoveries fell to 45.7% for securitized prime auto loans in January, which is down 4.5 percentage points to the potentially and 2.5 percentage points year every year. And this is from data from Kroll Bond rating agency. Recoveries reached their lowest level since at least 2017 as the Manheim used Vehicle Value Index decreased 10.2% year over year in January. Recoveries are expected to remain down for the first half of the year as rising repo costs also cut into recovery rates. Lenders are having to pay more for repo agencies to pick up assets, high rates and inflationary pressures have also prompted several auto lenders to tighten underwriting standards, contributing to smaller subprime share. Riley has the details there, right?
Riley Wolfbauer 3:27 Yeah. So as you said, subprime share has fallen due to tighten underwriting, but pretty much all lenders across the board have tightened underwriting, but it really gets down into the subprime market because those consumers are already thin credit or very low on the credit spectrum. And then once lenders tighten that up, there’s no one’s falling behind to pick up the lower credit tiers, because if someone who’s lending to the higher credit tier pulls back, then the lender below has a little bit of more opportunity to pick up what the high tier paper lender is no longer underwriting. So some of those consumers know don’t really have anywhere to go to get a loan. So that has caused subprime and deep subprime market share to be 14.5% of all total new and used loans and leases in the fourth quarter. That is a decrease of 70 basis points year over year. Uh, for reference, in 2019, the share of subprime in that same segment was just below 20%. So it’s come down between 5 and 6% since 2019. And as I said before, a lot of that reasoning is because of the tighten underwriting and when the credit box is unlimited, then those consumers have nowhere to go. So I spoke with consumer portfolio services, Mike Lavin, President and Chief Operating Officer, and he said that there’s actually been a lot of subprime interest still, even though those consumers, their budgets, are squeezed, they’re feeling inflation more, but they’re still in the market for a vehicle because consumer portfolio services actually received more credit applications in 2023 than they did in 2022. And then so far in 2024, comparatively to the first two months of 2023, they’ve received greater applications in that timeline as well. Umm. So really, consumer portfolio services tighten their underwriting in LTV’s to manage the risk. They limited their Ltvs down to the average is now 119%, which is down from 125% in 2022. They continue to like Mike said that they adjust their underwriting every couple weeks. They just did a little bit of tightening again last week, so it’s something that they continue to look at to manage margins and keep profitability up. He did say that they have lost market share, but they don’t care that they’re losing market share because they’re keeping the same margins as they had before. Uh consumer portfolio services.
Riley Wolfbauer 6:21 In light of that, had 500 million less in originations in 2023 compared with 2022. So it would be interesting to see going forward how much more tightening there is, especially as there is expectation around the Fed to lower rates later in the second half of the year. So we’ll see how much more lenders tighten up or if they begin to loosen up once we get to the halfway point of this year. And then last week, I also did a little update and the refinance market in light of the potential Fed rate changes because once rates change, just the consumers who are locked in at the seven, eight, 910% rates, they might have the opportunity to lower their rate in refinancing and save a little bit on that monthly payment because as the consumer, if they’re 12 months into their loan, their credit score and stayed consistent, their credit score can improve to then get that lower rate. So I spoke with Brian Jones from gravity lending. He said that consumer interest has been pretty consistent. They receive about 20,000 applications per month and just as a reminder, gravity lending is a platform for lenders to be a part of to. Underwrite refinance contracts for consumers. So they have, I believe, he said about 75 lenders on their platform and in the last year he had some large credit unions stop originating loans on the platform because they had some liquidity issues. And just to manage their risk, but now those large lenders are back on and originating refinance contracts again. So there’s a little bit of an appetite for the consumer. There’s more of an appetite for lenders as well.
Amanda Harris 8:13 Yeah, definitely. And we know that, you know, there’s quite a few factors that go into when lenders do change their rates, kind of like you talked about, I’ve heard as well from lenders too. It’s not necessarily just about what the Fed does, right? It’s also about their own. Umm, you know, risk appetite as well as if they’re prioritizing. I talked with one lender. Uh, that recently told me they they kind of look at their profitability too. So it’s not just about remaining competitive, but also where they’re comfortable with their profitability and they’re, you know, the research of value and some of the risks that goes into some of those changes. So it definitely be interesting as rates come down to see how lenders respond to that and which lenders kind of try to compete on right. We know captives do that a lot with with incentives and things like that, but they worked a little differently than banks and credit unions. So I’m sure we’ll see an even kind of wider gap between what what lender types are doing as rates kind of even out the rest here. So we’ll keep a close eye on it for sure, but that does it for today’s episode. We do have more industry News to come this week. Of course. So stay tuned and then of course. Thank you for joining us on the road map. Be sure to follow us on X for me, known as Twitter and LinkedIn, and we will see you online at autofinancenews.net and here next time.
Riley Wolfbauer 3:27 Yeah. So as you said, subprime share has fallen due to tighten underwriting, but pretty much all lenders across the board have tightened underwriting, but it really gets down into the subprime market because those consumers are already thin credit or very low on the credit spectrum. And then once lenders tighten that up, there’s no one’s falling behind to pick up the lower credit tiers, because if someone who’s lending to the higher credit tier pulls back, then the lender below has a little bit of more opportunity to pick up what the high tier paper lender is no longer underwriting. So some of those consumers know don’t really have anywhere to go to get a loan. So that has caused subprime and deep subprime market share to be 14.5% of all total new and used loans and leases in the fourth quarter. That is a decrease of 70 basis points year over year. Uh, for reference, in 2019, the share of subprime in that same segment was just below 20%. So it’s come down between 5 and 6% since 2019. And as I said before, a lot of that reasoning is because of the tighten underwriting and when the credit box is unlimited, then those consumers have nowhere to go. So I spoke with consumer portfolio services, Mike Lavin, President and Chief Operating Officer, and he said that there’s actually been a lot of subprime interest still, even though those consumers, their budgets, are squeezed, they’re feeling inflation more, but they’re still in the market for a vehicle because consumer portfolio services actually received more credit applications in 2023 than they did in 2022. And then so far in 2024, comparatively to the first two months of 2023, they’ve received greater applications in that timeline as well. Umm. So really, consumer portfolio services tighten their underwriting in LTV’s to manage the risk. They limited their Ltvs down to the average is now 119%, which is down from 125% in 2022. They continue to like Mike said that they adjust their underwriting every couple weeks. They just did a little bit of tightening again last week, so it’s something that they continue to look at to manage margins and keep profitability up. He did say that they have lost market share, but they don’t care that they’re losing market share because they’re keeping the same margins as they had before. Uh consumer portfolio services.
Riley Wolfbauer 6:21 In light of that, had 500 million less in originations in 2023 compared with 2022. So it would be interesting to see going forward how much more tightening there is, especially as there is expectation around the Fed to lower rates later in the second half of the year. So we’ll see how much more lenders tighten up or if they begin to loosen up once we get to the halfway point of this year. And then last week, I also did a little update and the refinance market in light of the potential Fed rate changes because once rates change, just the consumers who are locked in at the seven, eight, 910% rates, they might have the opportunity to lower their rate in refinancing and save a little bit on that monthly payment because as the consumer, if they’re 12 months into their loan, their credit score and stayed consistent, their credit score can improve to then get that lower rate. So I spoke with Brian Jones from gravity lending. He said that consumer interest has been pretty consistent. They receive about 20,000 applications per month and just as a reminder, gravity lending is a platform for lenders to be a part of to. Underwrite refinance contracts for consumers. So they have, I believe, he said about 75 lenders on their platform and in the last year he had some large credit unions stop originating loans on the platform because they had some liquidity issues. And just to manage their risk, but now those large lenders are back on and originating refinance contracts again. So there’s a little bit of an appetite for the consumer. There’s more of an appetite for lenders as well.
Amanda Harris 8:13 Yeah, definitely. And we know that, you know, there’s quite a few factors that go into when lenders do change their rates, kind of like you talked about, I’ve heard as well from lenders too. It’s not necessarily just about what the Fed does, right? It’s also about their own. Umm, you know, risk appetite as well as if they’re prioritizing. I talked with one lender. Uh, that recently told me they they kind of look at their profitability too. So it’s not just about remaining competitive, but also where they’re comfortable with their profitability and they’re, you know, the research of value and some of the risks that goes into some of those changes. So it definitely be interesting as rates come down to see how lenders respond to that and which lenders kind of try to compete on right. We know captives do that a lot with with incentives and things like that, but they worked a little differently than banks and credit unions. So I’m sure we’ll see an even kind of wider gap between what what lender types are doing as rates kind of even out the rest here. So we’ll keep a close eye on it for sure, but that does it for today’s episode. We do have more industry News to come this week. Of course. So stay tuned and then of course. Thank you for joining us on the road map. Be sure to follow us on X for me, known as Twitter and LinkedIn, and we will see you online at autofinancenews.net and here next time.
