When it comes to bolstering car sales, Cash for Clunkers did its job. The federal program sparked 690,000 sales, pushing up August volume to 1.2 million units at a time when monthly volume averaged 860,000 units.
I know a good percentage of those sales were paid for in cash, and the overall credit quality of the buyers was relatively high. But might we start to see higher-than-normal delinquencies among car buyers who financed their C4C purchases?
“This seems like a good thing; the government subsidizes car sales to allow people to buy cars they would not normally be able to afford. The problem is that the majority of these people have never had a new car before, they’ve never made monthly car payments, and the insurance spike is surely substantial.”
I’m not sure where the author got his information about whether C4C participants had previous auto loans, but when the program ended, I read an interesting stat from CNW Research about buyers’ remorse: Of nearly 1,000 C4C participants, 17% had “some” or “serious” doubts about their new-vehicle purchases. Typically, buyers’ remorse affects 6% to 8% of buyers.
What are your expectations for delinquencies and defaults on C4C-originated loans?
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.
As a percent of the total I do not expect to see a higher incidence of delinquencies and defaults. From what I understand, the quality of paper was above what it normally is. A spike in unemployment might have an impact, but I don’t expect unemployment to get much higher until it begins to recede. I’ve seen no evidence that C4C buyers were inordinately skewed toward first time buyers. A larger than normal percentage might have been folks who bought new vehicles for the first time, but that doesn’t necessarily indicate their payments were appreciably higher than for pre-owned buyers. Their conservative nature might have caused them to feel guilty about using taxpayer money for their purchase and/or for purchasing new instead of pre-owned. I don’t think it is a big deal at all. I don’t understand the part about the insurance spike. In many cases, the additional safety and anti theft systems on new vehicles moderates insurance premiums. At any rate, I don’t see that as a big deal either. I suspect Mr. Hoppe wrote his piece based on his own perceptions rather than on any real data or personal experience.
I would have to agree with David and Michael. I do not believe we will see any statistical difference in delinquency from the program. The buyers remorse that people are talking about is probably more to the fact that people went onto the dealerships not really knowing what qualified and ended up buying a differnet vehicle than they first wanted. The remorse they will get is when they all get a 1099 from Uncle Sam for their C4C rebate!!
Most of the lenders I chat with routinely did not loosen their underwriting standards for the C4C wave of sales. That said, the loans should perform reasonably well if the economic recovery continues. I anticipate the captives may have loosen the reins more so that the regional or local lenders who were under scrutiny from the likes of the FDIC and others. In short, I expect regional and local banks and CUs to be fine, but the captives may see a dark cloud in their future.
I agree with others. Many banks saw the highest credit quality customers come through their doors with this program and non that I know of loosened their credit policy criteria.