The Subprime Seesaw: Looser Credit vs. Advanced Analytics
Increasingly relaxed credit underwriting standards in the subprime auto world are helping lift auto sales across the country, according to a report today from Bloomberg News.
Bloomberg checks in on Houston auto dealer Alan Helfman, who tells the story of a customer who drove away with a new Dodge Dart-despite a credit score south of 500.
“A year ago, with a credit ranking in the bottom eighth percentile, I would’ve told her don’t even bother coming in,” said Helfman, who owns River Oaks Chrysler Dodge Jeep Ram, where sales rose about 20 percent this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs and bring me some down payment.”
That scene confirms a lot of what we’ve been hearing about an increasingly competitive subprime market that’s led some lenders down the credit scale ― but has also strengthened data analysis of consumer creditworthiness.
It’s clear that having a job in what’s still a brutally tight job market is a good sign. Put simply, the borrower depends on a set of wheels to get to work each day.
But Bloomberg points out that Fed stimulus-inspired low interest rates have encouraged yield-hungry private equity capital into what seems like easy-peasy returns. Clearly, only time will tell whether lenders have figured out how to minimize losses and max out returns.
Bloomberg cited an Oct. 10 Citigroup report that said:
The successful companies will be those that can underwrite and collect on loans while holding costs and defaults to a minimum.
On average, finance amounts are growing. Yet to keep down monthly payments, some lenders are extending terms. And when one lender moves into the longer term space, the entire market becomes more competitive and, eventually, there’s a battle on for marketshare. To boot, the longer the term, the lower the recovery, typically.
How will these dynamics play out? I’m not sure. So far, it doesn’t seem like any red flags have been raised. But if loan performance starts to sour rapidly, I’m guessing we’ll be in for a very bumpy ride.
