Lenders face steeper deficiency balances as repo levels climb

With auto repossessions nearing a record 2 million units this year, the influx of vehicles at auction will likely pressure used-car prices and lead to higher deficiency balances for lenders. Vehicle repossessions hit 1.73 million units last year , the highest level since 2009, when the widespread job losses and severe credit crunch of the Great Recession prevented people from making their car payments. In the three years between 2006 and 2009, repos shot up 46% to 1.77 million units, according to Cox Automotive . But repo volume is rising at an even faster clip now . In the three years that will end in December, repo volume could top 2 million units, a 63% jump, according to industry estimates. Repo software provider Recovery Database Network predicts a much steeper yearend volume of 3 million units, which would be a 144% spike since 2022. Whereas repo equilibrium after the Great Recession was largely restored — with the number of repos plunging 44% to 986,013 units by 2012 — repossession volume in the coming years will likely continue to rise. Economic conditions are worsening; higher interest rates, oppressive negative equity and ballooning monthly payments are placing a greater financial strain on borrowers, leading to more loan defaults and subsequent repossessions. Lower used-car prices to come As this influx of vehicles flows through the auction lanes, used-car prices will inevitably decline. This trend of lower auction prices has been playing out for several years. The Manheim Index, a used-car pricing indicator, averaged 235.5 in 2022. It dropped to 218.7 in 2023 and to 202.0 last year. In dollars, vehicle values have followed suit. The average wholesale price per unit for cars and trucks combined was $16,026 at yearend 2021, according to Adesa ’s Kontos Kommentary, a monthly report analyzing the auction market by vehicle class. The average wholesale price fell to $14,136 in 2022 and to $13,776 in 2023. At midyear 2024 — the final month in which Kontos Kommentary was published — the average wholesale vehicle price had inched back up to $14,036, still a 12% decline from the yearend 2021 price. The more saturated the market becomes with used vehicles, the lower resale values fall. Eyeing deficiency balances Here's where the situation gets sticky for lenders. Many of the vehicles being repossessed nowadays were originally purchased during the pandemic, when vehicle prices were artificially high because of factory shutdowns and chip shortages in the new -car market. And these repossessed vehicles are being sold at a time when the wholesale market is being pressured by increased supply and decreased demand . That combination of factors widens the gap between the remaining loan balance and the sale price for cars at auction, exacerbating lenders’ deficiency balances. Here’s an example of how the numbers might play out. A consumer paid $38,000 for a new car in 2019. By 2022, the six-year loan had been paid down to $21,000, and the repossessed vehicle sold at auction for $14,000. Assuming the lender shelled out $2,000 for repossession and remarketing costs, the consumer would be on the hook for the remaining $9,000. By comparison, a consumer who bought a new car in 2021, at the peak of the market, might have paid $47,000. By 2024, the loan balance would have been paid down to $27,000. Adding $2,000 for repo and auction fees and applying a $14,000 resale value, the deficiency balance would be $15,000 — a $6,000 per-unit difference versus three years ago. At these levels, the industrywide total for deficiency balances could top $30 billion this year, compared with $10.8 billion in 2022. Lenders could get bogged down Should this scenario play out, lenders will soon be bogged down trying to collect billions of dollars in outstanding balances from consumers who were too strapped for cash to make their monthly loan payments in the first place. Collection strategies will likely take center stage as financers battle to contain losses and encourage overleveraged consumers to repay the outstanding balances on cars they no longer own. Meanwhile, consumers with damaged credit will be forced to navigate their auto finance futures knowing they lack the financial wherewithal to purchase another vehicle anytime soon. The auto finance market appears poised for a bumpy ride, so buckle up.

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