Strong used-car values have been softening the blow of loss severity for the past couple years. Now the trend may be contributing to slightly higher repo rates.
Auto repossessions have bumped up slightly since 2008, to 0.77% in the first quarter from 0.68% in 1Q08, according to data released yesterday by Experian Automotive. Repo rates at finance companies climbed to 2.17% from 1.80%; at credit unions they were up to 0.25% from 0.18%.
While the higher repo rates could indicate an increase in delinquent borrowers, they could also signal a move by lenders to repossess vehicles earlier in the cycle so as to benefit from strong auction prices, said Melinda Zabritski, Experian’s director of automotive credit. For April, the Manheim Used Vehicle Value Index, which tracks auction prices, reached 120.7 — a 13.2% increase from the year-prior period and the highest-ever level recorded in the index’s 15-year history.
The scarcity of credit in the wake of the asset backed securities market collapse has pretty much eliminated the type of buying the author describes–first time buyers.
It still comes down to the fact how to keep your business profitable. Econimic conditions drive your treatment somewhat, but if the LTV’s are done the right way at the origination, the consumer has vested interest to keep paying and not loose the vehicle. At any time you do not want to let the customer add wear and tear if you have minimized you potential loss the right way.
I agree with Daniel. This web site is named Bankinnovation.com but the comments are not discussing innovative ways to help customers and financial intermediaries both win. This repo type of conversation has been around for decades.
Is anyone doing any innovative financial help for slow payers such as using the internet to structure their budget, help them follow a budget, get direct payments from income source quicker to the bank, helping the customer understand the consequences on their credit score through simulation, looking to see if they are overwithholding on taxes, contributing too much to a 401K, loooking to see if they can qualify for a payment program on their credit cards, etc, etc. The innovative banks that will do that can develop customer loyalty. Look at the satisfaction polls that are distributed via this web site and ask the question – How satisfied is a customer when you are repoing their car? Based on the stats at the start of the article, 0.77% will never do business with you again if you just repo without a serious desire to remedy the situation. Granted, sometimes there is no alternative but often ther is. Ideas anyone?
To Daniel’s point, barring skyrocketing gas prices like we saw in mid-2008, I would imagine that lenders would have at least some amount of warning that used-vehicle values are starting to drop. For now, though, the Manheim Index shows that auction prices have been solidly high (in about the 115 range) since mid-2009.
Separate question: Are lenders reducing the amount spent on reconditioning because used cars are fetching such high prices anyway?
Frank, most of the companies I’m familiar with in indirect do try to approach collections from a customer service perspective. My former company even had a group that was designed to help distressed customers work through budgeting issues, etc. It is a fine line though, as you run the risk and liability of taking on the role of a consumer credit counselor.
Marcie, we are not doing anything different on the reconditioning front. Our strategy is to be as consistent as possible from start to finish. I have seen companies overreact to auction trends, which are merely a reflection of what dealers were doing yesterday. On many of these types of issues, the market has changed by the time you can implement an organizational change.
Answers to your questions, in order:
1. Are finance companies picking up cars sooner because of higher auction prices? I highly doubt it. That is a mistake of correlation vs causation. It could well be the higher auction prices are caused in part by higher demand for used cars, which is caused in part by more repossessed consumers needing to buy a car. My guess it has mostly to do with the US Unemployment rate being about 5% in Q1 2008 and over 10% in Q1 2010. People who don’t have jobs have a hard time making car payments.
2. Do you think lenders are spending fewer resources trying to work things out with borrowers? Lenders are spending fewer resources on everything. I appreciate Frank’s comment about at least trying to educate consumers who still have incomes that they may be able to re-allocate their cash outflow.
3. Are lenders reducing the amount spent on reconditioning because used cars are fetching such high prices anyway? I doubt it. Remarketing Department heads are a brittle bunch and usually are able to fend off executive management’s meddling in their fiefdoms. If there is less money being spent, it is more likely due to the fact that more (once) strong consumers are losing their cars now, people who used to actually take care of them. In 2005-2008, the people who got repo’d were super mooches because everyone went nuts giving out ridiculous loans to horrific consumers. One of the consequences of that was that the cars came back in terrible condition. Now, the economy hasn’t just hit them, it’s hitting the higher credit tiers. You see the parallel in the mortgage industry. In 2007-2008, the houses were being repo’d with no plumbing and holes in the walls, if the walls were still there even. Now, the foreclosure rate on PRIME mortgages are at an all-time high. The houses are probably a lot nicer now, too, and will bring more money at sale.
Has anyone considered this from a Repossessor’s point of view? You take the now national average of a standard involuntary recovery fee of $375.00. Only up from a few years ago when it was steady at $325.00 which lasted at least 10 or more years. Now take into consideration that everytime we chase down a debtor at multiple addresses and come home empty. Multiply that by about 30 accounts on a decent night and come home with zero collateral. What did we make on this deal? Take into consideration that the average fuel tank is 20 gallons for diesel and $3.00 a gallon. The trucks we drive at best get about 10 maybe 12 miles per gallon. Then there is the insurance cost of about $900. 00 per month. In order for me to make money and secure my clients collateral. I would have to pop at least 5 pieces of collateral in a standard 14 to 16 hours shift. I need to get each unit on my secured lot (another$1200 per month lot rent) immediately. I have to do this 5 times to move each unit to be secured before the repossession is actually completed in order to move onto other accounts. By the time I drive from point A to point B 10 times round trip. I have used $65.00 in fuel, took 8 hours doing my own transports to my secured location, then I have the amount of time in doing condition reports, complete inventory of any personal property, log and report each repo to its rightful lienholders, complete an invoice for each unit secured. Now that’s 1 person doing all this work in order to get units picked up for clients. Now, I have to put in all of my updates for the accounts that I did get a chance to run. Get about 4 hours sleep, wake up release a car to a debtor who paid current or release a car to the auction for transport. Then I have to answer phone calls for the clients whose accounts I did not run the night before and explain to them why i did not complete my task. Well, most lenders do not know what goes into the daily routines of repossessors who are a 1 man show. They do not know what obstacles that we have to endure day in day out in the field, in the office, in the truck, in the yard and dealing with angry debtors because there was a scratch off lotto ticket in the glove box that wasn’t marked on their inventory list because it was completed by someone who was in severe lack of sleep had missed the lotto ticket. They are always $1000.00 winners by the way!!! All that for 1 car that some one at a collections center decides is too high of a fee for repossession. Now that is what would happen if the day goes according to plan. You take all that and process it and then multiply that by 20 trucks, 20 drivers, 20 separate $65 fuel fill-ups, trucks that break down without warning sometimes, guys who show for work, guys who don’t show up for work, guys that complain about how many addresses they have to run for a single account! Then you have to HOPE that each guy meets the daily quotta of at least 2 cars because the paper sat for such a long time without enforcement by a collections dept. that now would like us to expedite these accounts because they now go into charge off in 3 days time! Well here in the repo world these days almost always go in a manner of disarray everyday. Nothing ever goes smoothly, Murphy’s Law works extra hours on us guys here chasing pre-charge off paper because it sat without proper enforcement, little to no skip tracing done, nothing remotely close to being updated because the debtors had moved 5 times since the day they purchased the car we have to go look for with the utmost due diligence to secure it before charge off day! This process is a losing battle everytime!!! There is no money being saved by not sending a qualified repossessor after collateral that is 120 days plus, past due. There is no money being made or saved haggling over fees because we as repossessors are hired to chase this collateral, skip the accounts before we walk out the door to service the accounts. Here is something that can be taken to heart, you want to save money for your company? Send us out after the collateral no latter then 45 to 60 days defaulted! You want to save more money? Keep in better contact with your debtors, know where they are at all times, update their POE information every 30 days. Make them want to work with you when you realize they are going into default. The very first thing the debtor does is avoid the phone calls. When you cold call them for default, tell them what needs to be done for you to work with them. Collect their simple information like are you working? Where are you working? When can you send in your defaulted amount due? Put the debtor on a trust factor. Make them trust you, make them believe you are their friend and suggest ideas on how to properly catch up. Because here is another scenario I hear almost daily. My bank won’t work with me, the collector called and told me I was fine I could deffer my payment and now you have my car on the hook of your wrecker! Who gets put on the spot here? We do. If a collector is honest and genuine about the process and informative we don’t have to deal with angry debtors. Because the collectors bottom line is in jeopardy, we take the risk going out sometimes misinformed and this is how bad things could happen! Now, another thing is the when does your customer who paid on their loan on time every month for 4 1/2 years had recently lost their job become a debtor? What amazes me is that the past 5 or 6 years now that I have been securing collateral, the loan is within 18 months of being paid off! This is where I find 90% of my charged off accounts. It is within this time frame of payoff. Not every person out there is purposely a deadbeat as some would put it. Today economy is bad we all know it. This is my second go around with some form of a depression. I remember fresh out of highschool in 1986 going to work for my father ( a repoman) and picking up voluntary recoveries. I saw more repos in the mid to late 80’s then I have these past few years. I have seen the numbers slowly dwindle away. Now all that is left to repo is charge off’s, very hard to find skips. Why did these accounts get to this point? A collector that was trying to save a few dollars by not letting us go secure your collateral!!!
Moral of this long drawn out speech, was this. 45 days defaulted, call your local recovery adjuster, pay whatever their fees are for repossession, skip tracing providing that company does skip work and most of all pay them on time. The better the paper we have out here, the better turn around you see at the auctions. When you wait 120 days (charge off period I believe) to send us out to look for that unit, it will be in an unprofitable state. The debtor who knows we are eventually coming to get their car is more likely to not take care or have pride in their car and in most cases literally drive the wheels off it. Example: a 2007 Ford Excursion that sold used for $24K and was loaned for 4 years, has 18 months left on the loan. The debtor has had a run of bad luck, he / she lost their job, lost their home, and now about to lose their SUV. They get into a frame of mind that they do not care anymore about the SUV, they no longer do proper maintenance on the vehicle. The unit depreciates in value by not changing the oil for a year (12K miles), scratches and dents all over what was a beautiful vehicle because any day now the repoman will be here, they drive around with a bad leaky transmission that eventually wears out and breaks down. The debtor can not afford to pay for the repairs and the unit sits at a repair shop for 2 years sitting beside a pine tree that is leaking sap all over the paint. At 60 days past due, that unit would have still yielded $12k at auction. Now the unit after paying storage at a repair yard, paying bail fees, services lien removal fees, repoman to secure unit, transporter to move the unit to auction, the auction to sell the unit (if at all because of poor condition) had only sold for $3500. So our example estimate of $3500 sold at auction, $375 repo fee, $2 years worth of storage at $10 per day, service fee at the repair shop for diagnosis $250, didn’t make any money did it? So is this a sound idea to play marketing strategies with collateral pay off over time? Did finding the cheapest repoman with cut rate insurance save that dollar you wanted to save? The bottom line here is nobody is truly making any money. Not even me at $375 per unit!!!! Now houses are a whole new can of worms. I do these as well and will not speculate on that subject this time around! The waiting game for the collateral to mature doesn’t make all the sense that most people think in the long run.