PLANO, Texas — Auto is getting “stretched,” Mark Floyd, former chief executive of Exeter Finance Corp., told attendees while moderating at last week’s Non-Prime Auto Financing Conference. “Someone is going to get hurt if we don’t do much about it,” he said.
The current loan space does warrant fairly cautious behavior, and a lot less equity is coming in, John Rowan, director of specialty finance at Janney Montgomery Scott LLC, said during the same panel. However, while some parties might call this scarce equity environment evidence of a bubble, that viewpoint “may be a little aggressive,” he added.
“There’s some kind of negative cycle to come,” he conceded, “Whether that’s driven by a liquidity event coming from the bottom of the market up, or credit events coming from lower residual loan values from all fleets of vehicles driving down certain classes of cars; something has to happen to shake out the market.”
The trends the industry is currently seeing cannot keep going, Rowan told attendees. Fundamentally, it is not possible to extend term and move down the credit spectrum – in a bid to drive higher volume — and not have some type of negative outcome in the end, he said.
“I don’t think there’s an ’08-09 situation,” Senior Vice President of Raymond James Financial Services Investment Group Jim Chester, said at the conference. “The Federal Reserve put out a recent study, and if you look at delinquency trends for subprime auto, you’ll see they are in a far better and normalized rate [than the ones found just] prior to the crisis,” said Chester.
Although the “negative cycle” Rowan predicted may be coming, “it doesn’t mean a portfolio manager or someone invested in the space can’t try to turn a profit from what I would call a mini-downturn event,” Chester said.