The looming increase in repossessions is top of mind for the industry as deferral programs come to an end and government stimulus talks have stalled, despite President Donald Trump’s executive order signed Saturday to extend benefits. This uncertainty, coupled with fears that the repossession industry, which was decimated by the coronavirus, will be unable to handle the flood of repos, leaving lenders reeling as to the best path forward to maximize recoveries. Yet, it may behoove lenders to think of our current economic environment as more like Hurricane Katrina than the Great Depression or Great Recession.
In this webinar, the third in a quarterly series presented by Auto Finance Excellence, Charles Sutherland, chief strategy officer at defi Solutions, and Daniel Parry, co-founder and chief executive at TruDecision, discuss market trends and strategies going forward to help lenders minimize losses as recovery efforts begin to ramp up.
Hello, everyone, and welcome to our third quarter webinar presented by auto finance excellence, a sister service to auto finance news and industry source for best practices and actionable advice for auto finance professionals. I’m Joey Pizzolato, interim deputy editor of auto finance news. And I’d like to thank you for joining us. Auto Finance excellence, through the generous support of defy solutions provides members with an unparalleled opportunity to gain professional, developmental and networking resources in this competitive industry. We intend for auto finance excellence, not just guide industry executives, but to inspire them to greater success. We have two very special speakers and a topic of discussion for today’s webinar, which is focused on maximizing recovery in a post shutdown environment. In this respect, COVID-19 is more like Hurricane Katrina than the great depression or great recession and many borrowers that would have seen vehicles replaced I have been granted forbearance to speak our two speakers today we’ll be exploring how that might play out. So it’s my pleasure to introduce our two guests, Charles Sutherland, Chief Strategy Officer at defi Solutions. And Daniel Parry, co founder and CEO of TruDecision, Inc. Charles Sutherland has more than 25 years in technology management and strategy with companies such as sagent lending technologies Pfizer, and Accenture. At defy Charles leads strategy, Product Management and Marketing with a focus on improving the experience of lenders and consumers. Daniel Perry is a FinTech company specialized or true decision, excuse me, Daniel Perry. And true decision co founder and CEO is a FinTech company specializing analytical risk solutions for auto lenders. Formerly he was co founder and chief credit officer for edit Exeter finance and senior vice president of credit risk management for GM financial America credit he specializes Developing analytical tools that seamlessly integrate into operational strategy. Gentlemen, thanks so much for joining us. I leave it to you.02:09
Thank you. Thanks, Jerry.Charles Sutherland 02:17
And Rob, and so, Joe is is you give us a great intro, just reprise the title here, we’re going to be talking about maximizing recoveries in a post shutdown environment. And Daniel is going to take the lead on many of these and then provide some insights and those will come from a combination of what he’s seen working with real time in real time analytics with clients across the auto lending spectrum. And then from our perspective on defy what we’re seeing both on origination servicing and particularly for our clients who we do outsourcing and remarketing work for and see how these trends and and this, these insights are playing out from a variety of real world perspectives. We have a fairly light set of structured topics and a lot of discussion here this morning, that we’re going to look at the current state of market, what we can learn from the past. Give a little preview of where we think there’s a coming storm as a result of everything that’s happened with the pandemic, and then talking about risk mitigation strategies that are available to vendors in this time. So Daniel, are you kick us off in the current state of the market?Daniel Parry 03:34
Thank you, Charles. And thank you everyone for joining us today. We’ve seen a lot of interesting things develop over q2 in the beginning of q3. As Charles mentioned, defy is connected to many clients and, and true decision we have clients up and down the credit spectrum as well. And we’re in close contact with them. We’re seeing quite a number of things take place. Like many of you at the outset of the shutdown, really was really occurred early to mid March, we saw all of our lives flash for our eyes, like most of you, are businesses uniquely connected to people buying cars, and finance financing them. So we really didn’t know where this was going to go. And it really hit home when everything shut down. What we saw immediately looking at are we have API’s or web applications that run scoring models for clients. And we have applications going through this all the time, just like define us. And what we saw with our clients, particularly in kind of mid tier subprime, is that volume dropped about 15 to 20% almost immediately, and it stayed down there for most of March. What lenders were doing doing during that time was really preparing for a protracted period of no money coming out. And what I mean by that is when when we go into a situation like that This, if we know that we’re going to be offering consumers forbearance, which everybody knew they would, we’re going to be different. People are in a tough situation a temporarily tough situation. And we’re not going to be repoing cars. So you don’t have the money from from all those repos going through the auction, and then you have a certain percentage your clients not paying you. Well, that creates a problem for many lenders as they have covenants in their debt facilities, about about their cash position, tangible net worth of company. And so without that money coming in, lenders are going to be cash strapped, they’d certainly be limited on volume. And some people were looking at layoffs when people were looking at contracting volume, some combination of those as well as other cuts. What we saw though, was we saw that bounce back pretty strong in April, and may, we saw about a 15 to 20% drop, and then we saw it bounced back and say it’s almost like as the government provided subsidies to consumers. You had a delayed seasonality what would have happened in early March, as a buying season ramped up was put off a little bit. You had a lot of consumers with cash in hand, some that were on unemployment were making more than they were at their, at their regular jobs. And so clearly not a great situation. But people were finding ways to buy cars. And so what we saw and you can see in this slide it people say, Well, what is it? What is the magnitude of non payment? You’ve seen some slides from the credit bureaus that say, auto losses are great, everything’s doing fine and auto let that’s a nonsense type of graphic because nobody’s repoing cars right now. So when you look at charge off rates, it’s a meaningless number. But if you look at these slides, where you can add the slide here on prime and subprime, you see that the percentage of the portfolios that are not amortizing from mid March, typically it’s about you know, 17% for subprime and Seven, six to 7% for Prime that’s gone up about 50%. Not all of those will flow through the charge off but that’s a good product. For how many deferments are taking place, so that gives you an idea of the magnitude, particularly when you’re looking at something like what will the defaults be? Well, we know not all of those incremental deferments are going to roll with a charge off a portion of the will. So it really puts in perspective what’s going on. What we are seeing right now is recovery rates are high, but that’s on a very small number. You don’t have a lot of cars coming through auction because most lenders have put those off, some of the larger ones are starting to repo again. But right now you just don’t have a lot of volume and dealers are paying a lot for for cars and inventory when they go to auction. CharlesCharles Sutherland 07:37
had no similar thoughts. Daniel on Wi Fi we look we have clients across the spectrum from captives to banks with auto finance divisions, banks, credit unions, dented and kinkos. And right early on in this we switch from sort of tracking volumes weekly, across the credit spectrum down to daily tracking both credit Finding deals and then what was happening in terms of on the servicing volumes, where what was happening to clients and where they were seeing spikes and non payment and call center volumes. So as we track these every day, we saw that same thing timelines bike, I’d say a couple things changed. Earlier for us, though, within that, which was the auction volumes started to ramp up pretty quickly again, you know, they they shut down fast when the main auction lines shut their physical auctions, but very quickly, sort of the numbers of vehicles that were coming in, not so much from, as you said, from involuntary repossessions. But we did see a spike from sort of voluntary returns for a period and then it’s a federal stimulus checks came through, you know, that’s when we saw the spike again and the rebound particularly on applications but also funded Contracts at the near prime level climb, took a little bit longer to recover. But then when it did, it’s been particularly strong since I’d say that third fourth week of April all the way through to the present. So similar trends that we’re seeing across just operating on different timelines, it’s when you pattern them all out. It’s not like one consistent dip and recovery. But more, you know, prime does one thing near prime subprime. And then on the collection side, those same payment side the same segments splitting off and coming in at different periods, as well.Daniel Parry 09:42
Yeah, before we move on, Charles, I just want to point out some interesting anecdotes I’ve had from clients. Generally, people are maybe cut 10 to 15% of their volume, they’re operating in a more constricted manner. But you’ve got others that are being opportunistic, that you know, there’s when everybody is running after the same paper, there’s not a lot of opportunities for yield. And there’s not a lot of cherry picking that goes on. Well, we all know in 2009 and 10, at the, at the bottom of the Great Recession. The paper was the best we’ve ever booked in auto, lowest loss rates were cherry picking on a lower number, great yielding paper, because the there were a few financing sources available. And so some folks have been able to take advantage of that. We’ve seen some clients that are up 15% they’re getting better volume, I’m sorry, they’re getting better pricing, and they’ve got a better position in the vehicle. So lower ltvs that won’t last very long, of course, when everybody jumps back in, but for the short term, there’s a there’s been some opportunities and there are some lenders that are being able to take advantage of that.Charles Sutherland 10:49
Oh, absolutely. You know, it’s a fascinating thing was we would look at the numbers in aggregate each day, but then we we knew certain clients who were in different positions right in terms of their cash on hand sources of funding, you know where they have where they people that were able to buy off their their own reserves versus you know, quite more dependent on securitization or another Capital Group. And and you began to see different segments appearing and those with cash. In many cases, those lenders have been a lot higher volumes, and in some non traditionally high for the period of the year that it is right. So, they may be back to their peak of February or March or better, but compared to a normal May, they’re way ahead of their volumes. And it’s so it’s been it’s been a case where on one hand, the the impact is fairly consistent to all of us, at least at a state level, and even arguably, at a national level. But the opportunities presented I’ve been very, very different. So where we’ve given ourselves some leeway to some clients who were more challenged right to get them through This period as a partner, you know, in other cases, people have been, you know, damn the torpedoes full steam ahead kind of type of approach on taking advantage of this market. So it’s, it’s a great case where one rule doesn’t, you know, define everything that there’s lots of nuance in the in the subtleties of the current market.
Daniel Parry 12:23
Alright, so, you know, we, we received a lot of calls from our clients, a lot of calls from industry expert networks, where investors are asking questions about how to think about the market, how to think about this and the first thing everyone tends to jump to is the great recession. So we’re probably not going to see anything worse than that for a while. Hopefully we don’t. I think we’ve all had enough once in a century events the past two years to last us for a while. However, it’s common to jump to the recession and say, Okay, we’re going to model this like the recession because what Number one as right now, how long will this last? What if there’s a second wave? Is there going to be another shutdown? probably unlikely. But, you know, they want to think about what does this mean in terms of unemployment, delinquencies, losses, and all the other things that go into portfolio performance. And what I’ll tell you from from my perspective, and Charles shares, his point of view, is that what we’re seeing is far different than a recession. Now, I’ll tell you, if you look at the headline news, you’ll see Bloomberg, the times the journal all rushing to declare that we’re in a recession, despite the fact that you usually need a couple of quarters of GDP decline, but that’s alright. We’ll, we’ll call it a recession, Bloomberg declared it’s the worst and in eight decades, it’s okay that we see that kind of thing, but that’s not very helpful. It’s just worst case scenario. So when you look at this recession, if you look at this as the unemployment rate from the Federal Reserve, and you have Federal Reserve is a great site called Fred data. It’s the St. Louis Fed economic data. And it’s got a ton of ton of series like this. So if you’re a data junkie, and are interested in this type of thing, it’s a fantastic site. But what you see in the shaded area is the great recession. And then you see the unemployment layered on top of that. And if you look at that, you see that we went from about 5% unemployment and oh seven, and it took till mid 2009 for that to go to 10. So it’s, it’s you’re talking about a two year ramp up, and then a four or five year decline for a variety of reasons. But the point of this graphic is that recessions are protracted events. We know that vehicle values went up 30% from 2009 to 2011. You had in the recession, the major manufacturers were shutting down production, and if so much so many Chrysler dealerships have their franchise tags pulled us we had a massive cut back and production. And then in 2010 hurricanes or tsunami hit Japan. And so you had two giant events that put a dent in new car production, which a couple of years later leaves a giant hole in US vehicle supply. So that drove the prices up. But again, that didn’t happen overnight. And so you see, these things are usually caused by a fundamental weakness, we did not have a fundamental weakness of the economy was raging prior to the COVID event. And so what we have now is more like a hurricane Katrina, where you have massive devastation in a compacted period of time. This is not something that’s going to be a five or six year event, so you really don’t want to look at it that way. You want to look at a giant shock in a narrow period of time. The reason that’s important is because, you know, most of the loans out there averaging 60 to 72 months unless you’re a deeper subprime, but the vast majority of loans are in that 60 to 72 month window. You may have six months of devastation. Each portfolio, each vintage of your loans that are active are at a different stage in their lifecycle. Most of the losses and most of the run off for two plus year old portfolios already happened. So there’s less exposed to this. Your newer vintages. Yeah takes up things that you booked right now it’s going to take six months before you really see where the credit losses are going on that portfolio. You’ve got some season pools that are probably most exposed, but it’s a narrow window of time over a pretty long term. So you have to put regardless of the sky’s falling headlines, you’ve got to put it in perspective and say I’ve got a plan for six to eight months of worse recoveries, possibly worse. default rates and so it’s likely to be a V shaped. Now, nobody believed that back in March and April when we were all talking to clients on this but we’re starting to see that now. I will point people to go Goldman Sachs website. They did great research in late March. And the reason this is impressive is if you turn on the news, which I try not to do, they were predicting 30% unemployment. And some are 2530 35% unemployment just obscene levels. Goldman Sachs in March predicted that it would peak out this year about 14%. And then taper off to about nine toward the end of the year. Well, we saw that happen. Exactly. So I’m very impressed when people call things way ahead of time. And when you call it, your typical economic modeling, is to say everything gets worse, at best, it stays the same. Well, they went out on a limb and said it’s not going to be as bad as you think it is. So 14 and then it tapers off and we’ve seen that 14 1311 and we’re expecting tomorrow or in two days to do have numbers or the unemployment rate for that report for August. To be in the nine to 10% rate. So that’s, that’s positive. And so when you think about this, you got to think about a lot of shock in a compact period of time. And that’s what are your what’s your take on this? Charles?
Charles Sutherland 18:12
Yeah, no, I align with you on this view of the past I think an interesting adjacent compensation to a fairly early on and this is the the pandemic move from China into the United States. And we saw the the difference in what was happening in China, we got a lot of questions and and so a lot of commentary about hey, you know, is what is going on in China going to reflect itself in an in in Europe, particularly Southern Europe and auto sales going to affect us? And how does that relate to 2008? And similar to, you know, your description, we had to separate all those things out and go. These three things are not the same on one level, they’re impacted by the same global trend. The reality is that you can’t look to what happened. And in China or in the Italian Spanish car market and make an inference about the United States. People buy cars in different ways have different usage, they lock down in economic impacts have been very, very different in all three, right. And arguably, you know, the Chinese was a particularly dramatic drop off right 90% reduction in car sales during the period, we didn’t see that level of decline, nor did we see that level of initial immediate bounce back, right, we saw not a very sharp v like that, but as he said, a more slower slope, and a slightly slower recovery out of it, and I think, is down to the fact of recognizing that even the national market masks a lot of things that are going on at an individual level. Yeah, we, we, we were looking at, you know, state by state level and try looking at state closures and how that was impacting and you know, with different rules about dealerships, right. And with it online selling, was it appointment based selling, and you began to see very different patterns related to what happened in the regulatory environment, all of which is, in turn, going back to this key point, very different from 2008. In 2009, you know, this ability to read it well, first of all this requirement that people want vehicles because the public transit system isn’t necessarily the desired alternative choice for those who who need to get to work. And you know, the fact that some people don’t need vehicles so much because you’re staying at home and then throw into that the availability of the online and the internet world for to continue supporting both the sourcing of vehicles and the funding of them. You know, I think it makes it very difficult to say that there’s the the 2008 2000 Nine period has a lot of parallels to what we’re doing here. And I do think the shorter nature of it and the tools available to us have changed the dynamic such that it, it’s not really a fair comparison at this point there, there are lessons, but it’s not the lesson to learn. Well,
Daniel Parry 21:18
for me that, you know, the reason this is so important to lenders, is that what we did see there’s a lesson to learn from the great recession is that the prime buying period was when nobody else was in the market in 2009, and 10. And many lenders cut so deep, they couldn’t take advantage of that opportunity. So one of the challenges is if you have to, you know, do too negative of you on the impact and the duration, lenders can cut too deep, where they can’t return fast enough to take advantage of good opportunities in the market.
Charles Sutherland 22:01
Daniel Parry 22:03
All right, well, so this is an interesting title of the slide. If any of you have read my articles, I tend to be somewhat optimistic when everybody else is negative. But there are there I get accused of being Pollyanna. Our market, it’s the auto finance business is a fantastic industry, and I love this industry. And so I probably do tend to take a positive view, but that’s because I’ve seen it do very well over time. And so many of you keep hearing reports on subprime bonds and delinquencies and they say the delinquency is as high as it was in the recession will auto did pretty well during the last recession. And the one before that, so I don’t know what that comparison means. But, but let’s look at the real risks that we do have. And that’s what we’re going to talk about what you can see in this slide. Now, this is a forecast. You know, this is from true decision data. As a forecast, but what we’re looking at here, is there two things that are going to impact your bottom line, that is an incremental number of defaults. And then what you’re going to get on those defaults when you pick up those cars and take them to auction. And so one is not as bad, the other has the potential to be bad. And that’s the the point of this presentation is really how do you prepare for what we think is going to be the larger risk. Now, when we talk about default, in the earlier slide, we showed that you know, you have subprime non amortizing portfolios was at about 16 17%. So, if you think for most subprime portfolios, I’m just these are very general numbers, but you’ll typically have about 25% of the portfolio that is, is less than 30 days past due, and then not current but less than 30 days past due. And then when you think of your 31 Plus, it ranges Depending on the lender anywhere from, you know, 6% up to 10, or 12%. So on average, you’re seeing about a 17%, non amortizing non paying, and that went up about 50%. It’s not going to stay there indefinitely. And when these charts get updated, I think you’ll see that come down. But there’s a couple of things that happen. You can put a you can, you can handicap, so to speak, the size of your default rate. So, for subprime, when you see a 17% default rate, typically only about half a percent are charging off in that same period. So if a lender if you if you had 70%, non amortizing a subprime lender, for example, we’ll have about half a percent charge off. You know it for for Prime it’s less than a 10th of a percent. And so those wrap up if you annualize that to a six, six to 7% annualized net charge off rate, you’re gonna have less than half a percent typically and you’re super prime. But the point is, I’ve got a number of That’s at 17 on my non amortizing, but I’ve only got half a percent charging off. net, right? So double that, let’s assume you’re getting 50% recoveries, that’s that’s 1% of the 70%. They’re charging off. So when you look at that number, you can say, well, delinquency went up 15%. Therefore, all those people are going to charge off into a much smaller number than that. So I think what we’re likely to see are two things. We’re going to see a incremental default. But think about what happens most of you that use deferments in a responsible manner. You’re giving them to people who are on the fence, if you get a little bit of forbearance they’ll recover. Far better not to have to take the car, right? So when you offer those deferments, maybe, maybe those people fewer. And so there is forbearance being given to customers, you’re going to have two things happen. Some of the people that would have defaulted anyway, lenders are getting card launched and tougher than some of those people will recover. For. For most lenders, they’re looking at three to 4% of their activities. volio battlelands that they may differ on a monthly basis. And so, you know, typically, and so lenders are boxed in on how many of those deferments they can give, but now in a hurricane katrina scenario, and having lived through this, at one of my prior companies, we got, you know, four bearings from our Capital Partners to defer everybody that went through a problem that area, and plus you think about the optics externally, it doesn’t look good when you’re, you’re forcing a charge off on someone that’s going through an event that they didn’t cause. So that’s happening right now. So you’re going to get consumers that would have defaulted that won’t now because they got forbearance they may not have done. In addition, you’re gonna have people that are in an unemployment situation that’s not permanent, that will may have defaulted that loan default. Now, one thing happens in addition to this, that, that you’ve got to think about, is that the defaults that you see over the next six months What we see in recessions is that two things happen, you get incremental defaults, you get people who wouldn’t have defaulted. But then you get a pull forward defaults that would have happened at a later state that you pulled forward, because they’re in a stress situation. So when you see your incremental number of charge offs over the next few months, some of those are from future periods that were pulled forward. So not even all of those defaults are COVID. Related there, they were accelerated, they would have happened anyway. So it’s net neutral to you. And so when you think about that, you’re likely to see a modest increase in charge off rate. And so what you see on this graph is a net charge off rates, we’re really looking at the severity vehicle, you are likely to see your recoveries take a big dip over the next few months. So you’ve got all of the repos that you would have picked up and put through option in q2, a number of those in q3 that you didn’t pick up then you have The incremental repose. So there is a glut of inventory that’s got to be picked up and put through the auctions. And it’s going to depress vehicle prices. So that will give you an example back in 2003, there were two shocks that we’ve seen. As you can see, if you look at the Mannheim index, one was in January, February of oh three, you had the residual effects of the recession, demand was down, and you had the OEMs pushing all these incentives, employee pricing, and then you had rental car companies dumping their fleets all at the same time. So if the company I was at we were in a spot where we saw recoveries at about 45%, and they dropped to about 37, or 38, for about two or three months, but that’s a supply and demand shock, it recovered very quickly. You saw another shock in the third and fourth quarter of 2008, where the capital markets were shut down. dealers weren’t going to the auction because they didn’t have any financing sources or that was drastically cut. So without people going to the Option, people values drop. So again, we saw similar thing that we saw up to 2003, where you saw about a seven or 800 basis point drop in recovery, we are likely to see it a similar effect. But it’s just a bubble that has to work its way through that the supply and demand will equalize. So you may be talking about a six month period of depressed rates. It’s not all going to happen at once. But you’re probably likely to see your recoveries go down at least 500 basis points temporarily. So that’s a real situation. We’re looking at subprime and prime, annualized net loss rates. If you take that or your net charge off rates per month, the light blue subprime and dark blue is prime. And so you’re not likely to see giant spikes in default rates. You’ll see modest spikes in default rate that will flow through the bigger head is going to be that recovery piece, Charles.
Charles Sutherland 29:52
Yeah, no, no, a couple points I want to build on from there. I think what you imply Leave reminded everyone of his that patience is the virtue at the current moment. And that, you know, it’s it’s actually a fundamental moment to brace yourself in the world for behavioral economics where just because you see the chart itself, maybe masking a variety of behaviors that are going on. And when you talk about, you know, pulling forward defaults that were going to happen anyway, it’s, you know, seeing that this wave is actually comprised of a number of different phenomena happening at once, not many which are not permanent, or which are temporal in the sense of you, they would have happened anyways, or happened three months later, they just all happen to arrive at the moment, you know, this idea of multiple shocks at once. And I think patience is sort of the virtue as we go into the second half of this year and probably through even into the first quarter of next year, where these different types of search but these searches will occur and you know, seeing Get from what’s really going on. And that’s why, you know, place like true decision and with your analytics capability and analytics tools we provide an all across the board, you know, are really important because if you just view this as an undifferentiated phenomena, or just say, when one trend, you’ll miss actually what’s going on. And it’s a couple times now we’ve talked about being prepared, being patient. And I know in a moment we’ll talk about more risk mitigation strategies that fall on that same line. I think the other point that I want to build on that it’s really important is this idea of the shocks. Right? And they are similar shocks, there’s a supply and demand shock, there is a financial liquidity shock at the moment, but they’re very different in nature to the shocks that occurred before but going back to a previous slide, you know, we’re already seeing you know, some of the manufacturing capability Come on, we saw you know, even with a dip now, we see This massive push on CPOE volume over the last couple of months, you know, some of these things are occurring that weren’t phenomenas before. And yes, some, certainly some lenders are facing, you know, liquidity challenges or their, their existing sources of funding may not be as available to them as it were six months ago. But it’s not the structural financial liquidity challenge that the global economy face in 2008 2009, you know, interest rates near zero, there’s cash on hand there are people willing to invest into these markets who have the patience and can see where this is going to be heading, you know, in the latter part of this year and beyond. And I, you know, a big fan of reading books on on behavioral economics and never has it felt more relevant than now because we’re really understanding a combination of human nature and patience as the sort of the sense of how we will get through the next wave of this coming storm that you see And have described
Daniel Parry 33:03
great points. Charles, there is a, I think there is a herd mentality in the industry, where there’s an impulse to overreact. And like Charles said, patience is a virtue, you know, slow and steady wins the race, and there are things that lenders can do that can really help buffer some of the impact that we think is going to be coming down the pike.
Charles Sutherland 33:26
Yeah, in closing that idea, yeah, definitely. What we’ve seen is for instance, those lenders that didn’t do a shock CUT TO THEIR origination staff and their funding staff and their support staff over the last couple of months have been well more positioned to take advantage of things. Then, you know, those that went okay, we just got to cut it down to everything to extreme because opportunities presented themselves that weren’t initially visible in the fog of the early days of this pandemic. When it was hard to glide, you don’t look at the news all the time. I’m not quite as as much of a saint on that. But you know, when you watch that all the time, you just get pulled into this vortex of bad news and seeing the good news is that much harder or seeing where they are, more importantly, where the opportunity exists is that much harder, because it’s all negative all the time, starting with the morning news and going on till the evening news. So, on that note, let’s carry this topic forward around risk mitigation strategies that are available to lenders right now. And as we look into this coming storm,
Daniel Parry 34:40
certainly, thanks, Charles. This is this is really the meat of the presentation. It’s nice that we have these protections. I think everybody probably prior to this. This webinar had come to the conclusion that there’s something that’s coming coming through the blank and but the key issue is what do you do about it? What can you do about it? There are a lot of sophisticated lenders in our market that are doing many of these things, and there are folks that may not have considered some of the tools that are available, but we just want to lay out what we think are some of the key factors that that that lenders can use to mitigate these, of course, you know, defy solutions has a fantastic business process outsourcing function that is already doing these at a very grand scale for many lenders. And of course, this is the business we’re in a decision. But the first thing is collections prioritization, the better getting a good recovery on a vehicle is fantastic. But the better thing is not to have to get a recovery on the vehicle, you know, stop the flow into into the later stages and that means prioritizing collections, many lenders are doing this. Most lenders understand the role of credit scoring and models on the front end as you’re selecting loans, but there’s a huge benefit to get from collection. prioritization where you can see I’ll give you an example, that typically, in mid tier subprime paper, you’ll see about a 20% roll rate from one payment past due to two payments faster every month. But with collections prioritization with behavioral models, what you get is you’ll have scores that will rank that paper from a 60% roll rate down to a 5% roll rate. And so it’s not a one size fits all approach. And what that what that does is it takes very low risk paper where you may only have to make three calls to get a payment out of them. You can make one pass on that you can make three, four or five passes on delinquent paper that it might take 20 calls to get a result out of them. So that that type of math is impossible for a dialer manager or collections manager to do in their head on thousands of accounts. But these tools are critical because they can improve three to 400 basis points your roll rate, so if You can get in front of the right people get a positive result, you can, you can stem the flow into into the later stages of delinquency. So that would be the better thing is to keep it from getting there. The next thing would be to acquire vehicle data. And so there are a number of great sources out out in the marketplace, vehicle valuation data and forward looking vehicle valuation data. The reason I say this is the data you have may not be the data you need. And so there’s a number of good sources we can refer you to. But the reason is this, even large lenders there are such a large combination of makes and models, your historical data about how those vehicles depreciate over time. That is on a limited number of vehicles. And it’s on a period of time that may not repeat in the future. So the the folks are producing value Guys, a number of them, you know they are have fantastic data sources and projections on where these things are headed supply and demand and where those people values are headed. So acquiring that data, it’s not that expensive. But it can really help you prioritize when which vehicles and the timing of when you send those to auction to minimize your exposure. So this goes into the third point, which is manage your auction timing by vehicle risk. So many of you are doing this now. But what you don’t want to do is show up at the auctions when everybody else on the planet is there with your your best vehicles that will hold their value. You want to be able to push those to a later period where you may get more for it right, the vehicles that are appreciating rapidly losing value rapidly, put them through now take the hit, but those that are higher quality, higher value that will hold that value over time. Want to delay though, so this goes back to Charles point earlier, which is to to be patient. And so this leads to another facet of that. And the fourth point, which is load balance your auction inventory geographically. All of you know that different auctions you’ll get different values for depending on where you are in the country, it may be worth the logistic cost to load balance that to different regions to get better, better auction values. And so those are all important things. The last thing is really deals with Capital Partners. So most lenders out there are working with senior lenders, warehouse lines of credit. Many are bond issuers, and there are restrictions on what you can do, and you’re held to policies and so many of those policies have to do with how long you can hold a repossessed vehicle and inventory. For most lenders. It’s between 90 and 180 days. You may want to ask for For forbearance on those policies, and you may want to revisit changing some of those policies. The reason that’s frowned upon is historically, capital providers fear that lenders are playing games and trying to push, push charge offs down the road, so that they don’t break covenants. And but this is a little bit different of a situation. And it may be worth exploring, getting forbearance on some of those limitations on how long you can hold repo inventory, so that you’re not sticking it all through at the same time. Charles,
Charles Sutherland 40:34
thanks, man. I really like that last point of five because that’s sort of hunting through the haystack and finding something that’s really could be quite important to to lenders specifically, you know, to help them you know, back to this idea we keep talking about today, which is this idea of patience, while patience is great, but it helps when it has a few facilitators and that would definitely be one that removes You know, some stress and some challenge operationally, what to pick up? You know, because I’ve talked a lot about originations and Human Services and collections, data and volume, I really want to pick up on this idea of that sort of the remarketing data as well, because that is something that we look at remarkable 100,000 vehicles a year through the various auction chains on national basis. And all these second, third and fourth points that we make here, really are important for what we’re seeing right now. You know, that being on top of more data than ever, and understanding not just the traditional way of thinking where you put a vehicle and when, but how things are changing. It’s so important because, you know, when you look at the types of vehicles you’ve got versus ones that are coming off some of the rental fleets versus what’s selling at dealers, both depot and other use vehicles today and the chain In buying behavior, now even even the great data sources are being put under some stress right now individually because there are behavioral changes, you know that the light truck market is different now than it was six months ago, the sedan market is different, you know, the, the things that we could have assumed had been sort of trends or for 2019 and 2020, about valuations have been all over the place. I know in last couple weeks we’ve been seeing in auctions, 100 and 708%. sale prices 110% versus the values that we expect it whereas, you know, back in late March, early April, it’s 53 or 65%. You know, there’s been so much fluctuation there that, that the more data you can have and the more thoughtfulness but where you place a vehicle when you place it and what you’re competing against really does make a difference in terms of the value that you’re able to capture and ultimately as a lender, your own economics and And it’s interesting, we keep looking for as much data as we can, from all the different sources just for our business and you know, that just represent some lenders to make this happen. Because if like all the things we’ve talked about, there are great moments in this market. Now it is not pollyannish to say that you can make, you know, good returns, if you’re thoughtful, and you’re placing things in the right moment. It doesn’t it’s not all doom and gloom and these things like having 100 1100 and 12% value returns in some of the auctions. With the auctions being it’s limited Still, if they are right in their ability to process volume through the through the shutdowns and, and the social distancing at the physical lanes is, is quite a phenomena like and it’s not like that’s happening on 10% of the volume that we used to have in auctions. It’s happening at the at 90 to 100%. And so it’s all about timing. It’s about being thoughtful and and there is real risk mitigation available to people out there if they take advantage of it.
Daniel Parry 44:10
Charles Sutherland 44:12
So I think we’ve covered an awful lot of ground here over the last half hour and plus any sort of key closing thoughts, Daniel, that you want to leave people with.
Daniel Parry 44:25
But, again, I think the key is, you know, don’t overestimate risk based on worst case scenarios. And, you know, watch, watch the ramp up of delinquency and loss, make reasonable assumptions. And then I think just with, like I said, a little bit of patience, good data sources. And embracing some of these strategies. Lenders can go a long way to, to buffer against the impact of the glut of inventory that’s likely to be going through auctions.
Charles Sutherland 45:00
I think you know, we’re both sitting here in desk maybe we should be shipping back everybody in their in their home offices or in their offices, you know, a little sort of don’t panic button, right? Like, I want hand, you know, you want to do the right thing at the right moment. And that can feel like doing it today. But in many cases, what we’re seeing is tomorrow, the next day, a week later or longer, might be the right moment to do things by this business said that, you know, it isn’t just a dumping run moment that there’s real returns and opportunities available by being thoughtful and and as for one last time being patient, so we probably could have renamed that the whole session here today. You know, just be patient has our title, but that is one of the key themes. So hey, if thanks for everyone who’s been watching, we appreciate the opportunity to work with the auto finance excellence venue to bring our message yes on behalf of defy solutions and wishing you all the best in this moment and That you take advantage of all the opportunities that are out there and give it to you, Dan, for a final closing thoughts from you as well.
Daniel Parry 46:08
Oh, well. Thank you. Thank you, Joey and Royal media and JJ, for allowing me to do this webinar. Thank you, Charles. And if you have any questions, we went through a firehose of information in the fall in a fairly narrow span of time. So if you have any questions, feel free to reach out to either us, either of us have emails on your screen.
Charles Sutherland 46:30
All right, as always, yep. happy to take questions. So thanks again, Dan. As always a pleasure and we’ll see again soon. Thank you. Thank
Joey Pizzolato 46:40
Thank you both. And that does conclude our webinar for the quarter. I just want to thank again Daniel Perry and Charles Charles Sutherland for joining us and remind everybody that if you do have any questions about anything that was discussed in this webinar, please email either Daniel or Charles Thanks and join us next time.
Daniel Parry 47:03
Charles Sutherland 47:04
Thanks again. Bye now.