Amid all the worst-is-behind-us sentiments being tossed about these days, auto loan delinquencies are still on the rise, TransUnion says.
In data released yesterday, TransUnion indicated that the year-over-year national 60-day auto delinquency rate increased 27.69% in the first quarter of 2009 to 0.83%. While that is not a terribly high number, TransUnion expects the 60-day delinquency to continue its march higher:
TransUnion’s national 60-day auto delinquency rate forecast for the first quarter of 2009 was short by about 2%, as a slightly more favorable vision of the economic environment prompted some downward revisions to our forecast through the end of the year. Our current forecasting models indicate that the national 60-day auto delinquency rate will rise to about 1% by year-end, about the same level as that experienced at the end of our last recession. However, the overall economy, weak labor market and lower disposable income levels will continue to negatively impact the consumer well into 2010.
That is no small increase. The 17 basis points of additional delinquencies means an increase in the past-due rate of nearly 21% by yearend. And I was just starting to feel good about the economy.
Over the years I have been through a lot of auto industry ups and downs. At one point, I was a partner in a Chrysler/Ply/Dodge/GMC truck store in a small river town in IA. This was 1978 – 1980. We floor planned all inventory through a local bank but financed most deals through GMAC, even the Chryslers. GM was buying deals hot and heavy and we had a real advantage over competitors who only had local banks or Chrysler Credit for financing options. The Chrysler Credit financing was “limited repurchase” as opposed to “WOR” (without recourse) which meant the dealer had to stand good for repossessions and losses to a large degree. Limited repurchase is a lengthy explanation. They also had to have an entry on their books called “Allowance for Doubtful Accounts.” Then one day GMAC issues in edict that they will no longer finance new vehicle deals that are non GM products. It had a devastating impact on our business. We were still profitable through it all but with a possible impending Chrysler bankruptcy we had an opportunity to sell the store and took it.
In today’s auto world, this dealer could floor plan his BMWs through BMW Credit and some of his other inventory through a local banks or through another manufacturer’s captive. Capital loans are a different story. Most of the capital loans are through local banks, but the captives have been engaged in that business as well. Keep in mind that new vehicle floor plans floor plans are based on a manufacturer buy back guarantee that is included in the franchise agreement. If a dealer terminates his franchise, or is terminated by the manufacturer, OR goes bust, the manufacturer agrees to buy back all new inventory that is current year AND unmodified and under a stipulated odometer mileage. Capital loans are for the entire business. Multi franchise stores will typically have one capital loan through a bank, whereas a single point dealer might have a cap loan through the OEM captive.
The answer to the question; I have a friend who has multiple franchises under many roofs. Under one roof, his original flagship store, he has Chrysler/Jeep/Dodge/BMW. If Chrysler disappears he has no “buy back” option for his Chrysler inventory which now must be sold for a song. Who knows what the market might be on new but unwarrantiable vehicles? On the flip side, the BK manufacturer can’t arbitrarily come in and demand that he pay off his inventory. If the dealer had cash, he COULD pay off the inventory, but why do it? He would hope they came and “repossessed” the new vehicle inventory OR any late model pre-owned inventory. (Captives will sometimes floorplan late model inventory as an inducement for the dealer to buy off daily rental and lease units.) As a practical matter, the dealer might sell of inventory and refuse to pay the floor plan source for the vehicle if the floor planning entity is the manufacturer’s captive. Trying that with your local bank would get you shut down. Local banks would want to be instantly paid off for new inventory that is no longer covered by a manufacturer buy back guarantee, or at least have those vehicles curtailed as used vehicles.
In the meantime the upheaval from all of this would be catastrophic. The loss of business, the fact that the manufacturer wouldn’t be paying monies owed to the dealer (holdback, warranty reimbursement, carry over allowance, rebates, etc.) might put the dealer’s operation and balance sheet so out of whack that it might throw his other financing out of compliance with his other underlying lending agreements. The flip side of this is the dealer probably wouldn’t pay his parts account statement to the manufacturer. As a practical matter, a multi franchise dealer would be left with the challenge of angry customers who would expect the dealer to do warranty work without reimbursment from the factory on the BK lines. He would try to sustain his overhead through pre-owned sales, fixed ops, and his remaining viable lines. So its a mixed bag, depending on the dealer, and a huge mess. Its very difficult to quantify.
Those numbers are too general to understand what is really happening and to whom.
There is a big difference bewtween indirect lending and direct lending, sub-prime,
re-aging policies, subvention, etc. and eventual losses. Not too worry – with our finally formalized ‘TOO BIG TOO FAIL” policy, the Wall Street crowd will keep the lending avenues open in some way or fashion. All the key Washington decision makers are from Wall Street and we know how that club works.
It will be tougher for the legitmate community bankers that do good underwriting to source good credits in an economical process unless they are heavy into relationship banking or really understand that “marketing” is not just “advertising”. I wish those good bankers only the best.