Weekly Wrap: Riots, credit performance and inventory

JJ Hornblass 00:00
Hi, everyone, I’m JJ Hornblass and welcome to the roadmap from auto finance news, the nation’s leading newsletter on automotive lending and leasing. Welcome to the podcast. This is our weekly wrap for what’s happening in auto finance on December 21 2020. Before beginning I want to thank auto finance news, advertisers defi solutions, FiS and CCC Information Services for their continuing support. And I want to welcome Joey Pizzolato, the deputy editor of auto finance news and Amanda Harris, Associate Editor of auto finance news to program welcome. Let’s start with some news out in the world. Congress yesterday or late last night, I guess, agree to a $900 million stimulus package. The deal will provide for $600 in direct payments to millions of Americans, as well as three as well as $300 a week in supplemental federal unemployment benefits for 11 weeks, a new COVID-19 strain in the United Kingdom has led to a full travel ban there. And this as a second vaccine that this is the maternal vaccine has started to roll out in the United States as reported extensively by our sister publication Air Cargo world. The aviation industry began rushing to deliver COVID-19 viruses worldwide last week. And that in that effort continues. On Wednesday of last week, the NASDAQ advanced point 5% this was its 52nd record close of 2020. And finally, NASA named blue origins new Glen rocket as one of its potential launch providers for scientific missions. Later in the decade. Blue Origin is of course owned by Amazon founder Jeff Bezos, in auto finance. Meanwhile, flagship entered into a partnership with a guy up, which is an interesting technology company. Joey, do you want to tell us a little bit about the guy and why this deal deserves our attention?Joey Pizzolato 02:38
Sure. So PR guy is an artificial intelligence powered asset management firm. And basically what they do is they use artificial intelligence to identify mispriced assets for investment so so with flagship what they’re doing, and the details of the program are pretty hush hush as to like the nitty gritty but high level what it does is flagship or I’m sorry, but Gaia has identified certain loans that are outside of flagships credit box that they think will perform well, especially in the economy right now. And they provide that to flagship and then flagship underwrites those loans, and then a guy will purchase those loans directly from them much in a way, you know, a normal auto lender would securitize into the capital markets, a buyers just already secured. So. Essentially, what it does is it allows a flagship to to increase their, I guess, scope of originations without having to take up extra real estate on their balance sheet. And I think what the reason this is significant is kind of twofold. One, you know, we are seeing it, increase in lenders have meaning on different technologies, whether it be loan origination systems, artificial intelligence, powered underwriting and servicing. And this is just another step in that direction. The second thing I think that this is significant, is the fact that that guy is directly buying these funds from flagship, as I just mentioned, you know, that frees up a lot of capital on their balance sheet flagship has, you know, they securitize about 1.1 billion this year in the market. Um, so that that just offers more opportunity to continue to grow, especially in our environment that had seen a lot of auto lenders kind of tighten their credit box.JJ Hornblass 04:37
Is there a sense? Is there a sense for how much a guy might buy through flagship I mean, what kind of volumes that we’re talking about.Joey Pizzolato 04:50
So I believe, right now, I’m Robert McDonald, who most people will know as auto head of auto finance from gold. He was at Staples Capital Management, I think they are looking to have. I want to say maybe a you know, I don’t have the number right offhand, unfortunately. But I know a guy who manages about 2 billion assets. Sorry, it is. Amanda, do you have that figure?Amanda Harris 05:27
They said, so they wouldn’t provide, you know, very specific numbers. This is a very new program. And of course, flagship was, was also didn’t provide any extra details really much at all on this so far. But they did say that, between flagship and their other investor was foresight, capital, they both invested, they said hundreds of millions of dollars into this so far. So that’s, that’s kind of the ballpark that we’ve been given as far as like how much they really got involved with this, and how much they could be looking to, to be involved with it. But that’s, that’s really the only specific kind of number of all heart brains that we’ve been given so far.JJ Hornblass 06:08
There. Are there others? I mean, do you see this kind of animal analytics driven? Pass through originations? And we’ve already we’ve only always had kind of third party pass through lending arrangements? But do you see more of these kind of analytics driven passer arrangements? advancing? I mean, there are other other players in the space? I mean, what, you know, what’s the prognosis for?

Joey Pizzolato 06:39
Well, you know, I would say, poor guy, and definitely has their eyes on expansion. Um, you know, really kind of growing that business, I would imagine, um, you know, this is going to become more popular in the industry, I’m not aware of any current kind of pass through purchase agreements, that that rely very heavily on, you know, kind of artificial intelligence and machine learning yet.

Amanda Harris 07:05
And I’ll just add, this kind of speaks to so pick, I have really only exists to do this, like, there’s a lesser, kind of entire, you know, purpose is to, you know, help them say, this is what we want you to originate, and we’ll buy them from you, and that their whole purpose is basically to buy these loans. So I think, saying that something like that exists, does point to that these could be, you know, popping up more in the future. I mean, the fact that an entire, basically, you know, fin tech was created for the sole purpose, says that, you know, I think says that this could be a potential thing that we see more in the market, especially as you know, with the pandemic, and everything, everyone’s kind of tightening their underwriting standards, but there are gonna be people who need a car who may not fit in that normal, like we talked about credit box, are in their, in their risk appetite that look riskier than maybe they are, when you factor in a few more things that normally wouldn’t be looked at without the AI and all the technology that can really dive deep into their history and figure out a couple other metrics. So we are seeing that more we’re technologies coming in to say, we can help you identify whether or not they’re actually as risky as they look, and then maybe help you reach some consumers that you wouldn’t have normally reached and get them into horse.

JJ Hornblass 08:22
I mean, this looks like a little different, a different approach, in the sense that and correct me if I’m wrong, there’s not really a fixed underwriting criteria. It’s more of a dynamic underwriting criteria, kind of based on a multitude of factors and also a multitude of evolving analytics. I mean, does that make it you know, there? What’s the Is there a potential downside to that in the sense that you’ve got a bar where that comes through, and you can aren’t really as sure as you used to be, if they’ve got a, you know, a 650 credit score that, you know, you can get it funded through x and now there’s a bit of a variableness to 2d underwriting?

Joey Pizzolato 09:16
Well, absolutely, there’s definitely an inherent risk, and that’s why credit box credit boxes exist. Um, but you know, I think I think if you look to to auto lenders, say like tricolour auto acceptance, who is entire program is kind of based around this alternate not alternative data, but artificial intelligence machine learning model, that that takes into account, you know, other details about the borrower other than what we’re really, you know, used to looking at, that’s been wildly wildly successful for them. And I think, you know, as we kind of get more data about the borrowers in the industry, I think it gets smarter. So, you know, I think the more the industry participates in this trend, or whatever you will want to call it, I think the this, the more I don’t want to say more safe, but the less risky it becomes.

JJ Hornblass 10:18
Let’s go to another development in the market, which is of rooms expected acquisition of car story, which also kind of has a an analytics bent to it. Is this just a function of room trying to utilize some excess IPO cash? having to put that money to work? Or is there? Is there some real strategic? Is there a really good smart strategic angle to this?

Joey Pizzolato 10:50
Well, I’ll jump in again. Today is my day. Ah, so you know, I, I can’t I can’t speak whether they’re just trying to spend money. I know, it’s the holiday season, I’m, you know, my money is burning a hole in my pocket. But uh, you know, I think I think if you look at it, kind of, you know, what we were just talking about, room is looking to expand, they’ve said that they’re going to invest in their technology stacks. That’s one of their primary goals. Moving forward. And what car story does is use AI powered analytics, again, to just analyze data from from car listings across the country, as well as consumer shopping habits. So to better harness and figuring out what are consumers doing? What kind of cars are they? Are they looking for? What kind of cars are they buying, and then tailor their product offering to that?

JJ Hornblass 11:43
When is that deals supposed to close?

Joey Pizzolato 11:46
The deal is supposed to close in January of 2021. So couple days, Well, a couple days plus or minus 30.

JJ Hornblass 11:54
So you have more money burning a hole through somebody’s pocket? Speaking of which vehicle affordability is where is that at this point in the consumer affordability cycle?

Amanda Harris 12:12
Yeah, so I’ll jump in on that one. Um, so we know that car prices have been high. Like really, really high for the last couple months, some, especially as inventory was, was, you know, tight end. And all that supply was was pretty tight during the pandemic, especially coming out of the closures and everything. But it looks like they’re starting to kind of get back to more normal levels, when you look at, you know, seasonality and all that. So coming off of those record highs, it looks like in November, it started actually a more where it was compared to where this time last year. So they are becoming more affordable. And they’re kind of becoming more of the average price that we would typically see. So normalizing would be the kind of overall gist of where that stands right now.

JJ Hornblass 13:01
Just some good news coming into 2021. Before we go, I wanted to ask both of you for maybe just one market expectation for the coming year. What should auto lenders be thinking about? as they head into 2021? Joe, you want to start that?

Joey Pizzolato 13:29
Absolutely. Um, well, you know, first and foremost, I think this despite kind of the strong performance we have, I do believe that, you know, credit performance will deteriorate further, um, you know, it’s great news that we’re getting a vaccine, um, you know, I have a friend in Arkansas, who works, he got his first visor last week. But that’s going to be slow going. And I do think with the holiday season and people traveling, we already seen spikes and COVID cases from November, we’re going to see that again in January, potentially into February, really, through quarter one. And hopefully, you know, everybody continues to be responsible and say safe, but you know, if if they don’t, you know, we are looking at another round of shutdowns we’re seeing in California already. That’s gonna have implications for the auto finance market. So I guess, to sum that up, um, I would say, walk before we start running, you know, I think 2020 will be a good year, but I think we still need to, you know, you know,

JJ Hornblass 14:50
Amanda? Yeah,

Amanda Harris 14:51
so I’ll give them a little bit of a teaser to our January issue. So we’ve been talking a lot about how leasing has been down this year. But that vehicle demand has been kind of up, you know, now they’re becoming more affordable. So that should continue. And we do you kind of have this back to ownership trend that you’ll read a lot more about when we release our January issue of our magazine. So stay tuned, I won’t give everything away our work away just yet. But we are seeing that trend. So I do think that lenders need to keep in mind some of the the shift back to, you know, years ago when, when leasing and all that, you know, wasn’t the popular thing. I think we’re kind of getting back to that now. So you’ll see when you read more about it, but

JJ Hornblass 15:38
I would offer one myself, which is I think the name of the game in 2021 is going to be inventory inventory on the new car side inventory on the used car side, I can’t recall in all the years that have been in the auto finance industry. And and that’s 20 it’ll be 25 years, in 2021. I can’t recall a time when inventory was so central to everyone’s success or lack thereof. And so that’s really the, the fundamental, to me the fundamental factor to be keeping focus on for all auto lenders and last wars in 2000 in the forthcoming year. I want to thank all our listeners as we head into the holidays. This is our last roadmap of 2020. We want to thank all of you for listening and rating us on your podcast platform if you’ve done that, and we certainly look forward to seeing you on auto finance news dotnet and here at the roadmap in the forthcoming year. Happy Holidays to everyone