No Pot of Gold at the End of the Rainbow with TALF for Subprime Auto

With the Federal Reserve’s announcement today that Term Asset-Backed Securities Loan Facility (you wonder why they call it TALF?) would begin making loans on March 25th, my phone and e-mail went crazy. Auto dealers that had heard assumed (or at least hoped) that this would be a signal for money loosening up – capital starved auto finance companies (especially subprime) would suddenly have the spigots opened and business might finally return to “normal.” Field personnel for auto finance companies even contacted me hoping that I would know something.

I didn’t know for certain what this meant, but I had a suspicion and it wasn’t good. (First, as I have stated before, what was perceived to be “normal” in 2006 and 2007 is likely gone forever.) After querying the top execs of many of the subprime auto finance companies the verdict was almost unanimous. Don’t get your hopes up – it likely won’t positively impact the subprime business for now.

Reasons varied, but most pointed to the fact that in order to receive TALF loans the Asset-Backed Securities would have to be AAA rated. (As I read the news announcement I looked at that criteria and envisioned the disclaimers that I used to write for my dealership’s advertising for 0% financing. ) Most agreed that it will be unlikely that subprime auto loan pools will be able to achieve that high of a rating in the short term.
An additional obstacle is the pricing of such loans. Projections for some of the companies were that the costs of the funds may well prove to be to expensive for subprime loans, especially in states that have interest rates capped in the high-teens to low-20s.

Time will tell, and certainly the ability to get pools of loans to achieve a AAA rating will improve over time, but in the short term, it certainly doesn’t appear that March 25 will bring any additional capital to the subprime auto finance companies.

(As posted on Greg Goebel’s blog on AutoDealerPeople.com)