After being shaken to the core last year, the auto finance industry faces the slow task of rebuilding in 2010.
In a nutshell, 2009 started off with Chrysler and General Motors on life-support, barely originating loans as they petitioned for government funds. Three months later, the two manufacturers filed for bankruptcy protection and targeted a combined 1,800 dealerships that would lose their franchises.
Meanwhile, vehicle sales continued their downward spiral, as the threat of unemployment kept consumers out of dealer showrooms. For those who bucked the trend and sought out new cars, credit was limited as lenders tightened underwriting guidelines and exited certain markets to keep delinquency and loss rates in check.
The ray of sunshine for vehicle sales came midyear, when the government launched the “Cash for Clunkers” program to reward consumers who traded in their low-MPG vehicles for $3,500 to $4,500 in credits to be applied to new-vehicle purchases. In its 29-day lifespan, C4C generated 690,114 new-vehicle sales. For financiers, C4C translated to increased volume, higher borrower credit scores, lower loan-to-value ratios, and better approval rates.
Another bright spot in 2009: the government’s Term Asset-Backed Securities Loan Facility, a program devised to revive the stalled credit markets. Without TALF, which ultimately restored the securitization market, captives and banks would be hard-pressed to secure funding to originate new loans. In fact, TALF was so successful that by yearend, most auto loan-backed securitizations were bought by investors without TALF guarantees.
That leads us to 2010, a year in which the industry will revert to core lending principles. Put simply, financiers will be forced to maintain strong underwriting procedures as competition slowly returns to the market. They will be tasked with maintaining profitability despite minimal growth in origination volume.
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