“On the volume impact, we expect Harvey and Irma to [negatively] impact volume in September by less than 10%,” Chuck Jones, head of national indirect lending at SunTrust Banks, told Auto Finance News.
However, overall it appears the brunt of the impact “is behind us,” Jones said. “There may be a short-term increase in delinquencies and net charge-offs, but no long-term impact,” he said.
After Hurricane Irma, Deerfield Beach, Fla.-based World Omni Financial Corp. made a temporary shift in its collection strategy to cater to affected borrowers. The lender also flew half of its underwriting associates to the lender’s office in St. Louis, away from Florida, “to ensure business continuity for our dealers,” a World Omni spokeswoman confirmed.
While World Omni declined to offer specifics, the spokeswoman said “collection and repossession activities have been altered in impacted areas,” and “customer care and collections prepared to handle call volume and unique challenges of impacted customers.”
Specifics on how the market — and auto lenders –— have been impacted following Hurricane Maria could not be collected for this story by press time. Maria hit land in late September.
SunTrust Banks also implemented a temporary change in collections by suspending outbound calls in the Federal Emergency Management Agency-impacted areas, Jones said. “We made [and are still making] customer service calls to let borrowers know what’s available, to help with insurance claims, and to offer them the ability to defer up to three payments and waive late charges — in addition to answering any questions they have,” Jones said. “That’s the focus on it; once we help customers, we will be back to normal. However, there is no long-term change in our collection policy.”
Gauging Supply and Demand
Analysts estimated more than a half-million vehicles in the Houston area are a total loss following flooding damage. To put that in perspective, the entire Houston designated market area (DMA) has seen 325,000 new-vehicle sales in the past 12 months. Additionally, some 500 dealers have been impacted in Houston, which accounts for 2.3% of total U.S. new-vehicle sales, Cox Automotive Chief Economist Jonathan Smoke said in a statement. The initial flooding could delay the sale of 20,000 to 40,000 new vehicles. Additionally, Hurricane Irma destroyed as many as 400,000 vehicles, according to Cox Automotive.
However, on the heels of the devastation, the industry is also anticipating a medium-term uptick in sales. At 91%, Houston has the second-highest rate of vehicle ownership in the country, after Dallas’s 95%. “Sales of new and used vehicles typically fall during the month of a hurricane in the impacted area, but then spike in months following,” Smoke said. “NY DMA saw a 49% increase in new-vehicle sales in November , the month following [Hurrricane] Sandy.” Back then, a short supply of used vehicles following the recession limited the gains on the used market, he said. But, today there is an excess of used vehicles on the market.
“In a disaster scenario when vehicles are scrapped, the market simultaneously has a spike in demand corresponding with a decline in supply and potential supply,” Smoke said. “We saw wholesale prices strengthen in the three months following Sandy. The vehicle damage in total in Houston is likely to be just as severe, if not worse.”
Scrambling for Inventory
There is “definitely going to be an uptick” in sales and loan volume, which is expected to last through the fourth quarter, said Steve Garcia, director of auto claims at Dallas-based Dimont, a specialty insurance and loan administration service provider.
However, there might not be enough inventory in Texas to satisfy the demand for new vehicles to replace the units lost during Hurricane Harvey, Jerry Liudahl, chief credit officer at Oregon Community Credit Union, told AFN. “With the natural disasters that are occurring — with the terrible experience in Texas and with what just happened in Florida — those vehicles [destroyed in the storms] are all going to have to be replaced, either with new or used units,” Liudahl said.
Lenders have been concerned about residual values recently given the persistent, fast rate of depreciation in the used-vehicle market due to an overabundance of volume. Now, the lack of vehicles after the hurricane “might have an effect on neighboring states’ inventory” and could increase prices, Liudahl said.
“I talked to several lenders [in mid-September], and I think the biggest thing they will be doing right now is focusing on their remarketing strategy,” Dimont’s Garcia said.
Dealers in Texas are now buying cars in Georgia because they cannot find vehicles in their area, according to the latest Black Book Market Insights report. “Dealers are actively looking to buy inventory and ship vehicles to the Houston area, anticipating strong demand due to replacement of damaged units,” Anil Goyal, Black Book’s senior vice president of automotive valuation and analytics, said in the report.
In mid-September, volume-weighted, overall car segment values decreased 0.27%, an improvement from the average weekly decrease of 0.49% over the previous four weeks. The market was expected to soften after Labor Day, the report stated; however, values for some segments were “moving upward sooner than expected as demand picked up due to hurricane damage.”
But analysts predict the industry is “well prepared to meet the increased demand due to replacement as used vehicles are shipped to the impacted areas,” Black Book’s Goyal said. “We expect the buying spree to last a couple of months.”
Changes in Company Culture
Several auto lenders, including SunTrust Banks and World Omni Financial, had to shut down operations or evacuate employees from hurricane-affected areas.
“From operational situations in Texas and Florida, we are back to normal,” Jones said. “However, Florida is not as far along as Texas in terms of applications, as Texas is back to normal [volume] production.” SunTrust had evacuated a handful of sales team employees in Southeast Texas, per direction from local authorities. But there were more significant alterations in Florida, where SunTrust has a “significant” underwriting center located in Weston.
“We shut down the Weston office [for a week and a half], and had our team get out of Dodge and get to safety, to make sure they were taken care of,” Jones said. “The Weston facility opened back up in a soft launch on Sept. 16, and was back to full operation by Sept. 18.”
Deerfield Beach, Fla.-based JM Family Enterprises — parent of World Omni and Southeast Toyota Finance — closed its doors Sept. 14 through Sept. 18, a company spokeswoman confirmed.
Additionally, lenders are “striving to put more focus on ensuring their portfolio isn’t centric to one region, eliminating that risk of being too heavy in a certain area,” Dimont’s Garcia said. “You might see a more concerted effort from lenders to ensure their portfolios are more spaced out from a region perspective.”
Despite any impact caused to volume or business by the hurricanes, auto lenders are prepared to help both consumers and dealers. Nearly all lenders in the space are offering forms of financial assistance — from payment deferments to halting repossession activity — but they are also taking action to aid dealers.
“After each storm, our initial focus was to connect with our dealers to determine if they were safe,” a spokeswoman for Ally Financial told AFN. “We are now working to evaluate the impact of both storms on our dealers’ businesses on a case-by-case basis, and determining how we can help with recovery efforts moving forward. Ally has navigated weather incidents like this in the past, and can offer flexibility and financing options to help dealers get back to business as quickly as possible.”
From a enterprise-wide perspective, it is “amazing to see the strengthened culture within the bank,” SunTrust’s Jones said. Texas and Florida are big markets — the bank’s top two states, in fact — members banded together. It’s a “really humbling experience” to put down day-to-day operational duties and pull together in times like these, he added.
This article originally appears in the October issue of Auto Finance News. To view the full digital issue, click here.
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