How is your portfolio performing? If some of the recent auto finance data that arrived in June is any indication, your portfolio might be on a track to satisfy management and other stakeholders.
Last week, the expert who oversees the S&P/Experian Consumer Credit Default Indices explained how May’s auto default movement should put discussions about a “crisis” in subprime auto financing “behind us.”
S&P Dow Jones Indices and Experian released data through May and reported that the auto finance default rate dropped 5 basis points from the previous month to settle at 0.85 percent. The latest reading also is 7 basis points lower compared to the same month last year.
The May reading also tied for the lowest market analysts have seen during the past 10 years. In June 2015, the auto finance default rate also stood at 0.85 percent.
“Default rates for auto loans have drifted down in the last four months. At the beginning of the year there were reports of a subprime crisis in auto loans; these concerns seem to be behind us,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
Earlier this month, Experian Automotive’s State of the Automotive Finance Market report indicated 30-day delinquencies dropped and subprime auto financing reached a 10-year record low for the first quarter. Analysts noticed the 30-day delinquency rate dropped from 2.1 percent in Q1 2016 to 1.96 percent in Q1 2017, while the total share of subprime and deep-subprime installment contracts dropped from 26.48 percent in Q1 2016 to 24.1 percent in Q1 2017.
“The truth is, lenders are making rational decisions based on shifts in the market. When delinquencies started to go up, the lending industry shifted to more creditworthy customers. This is borne out in the rise in customers’ average credit scores for both new and used vehicle loans,” Experian analysts said.
So there’s no need for your collections department, right? As they say, not so fast my friend.
When delinquencies and defaults do happen, the severity of the charge-off and the diminishing return on recoveries are giving finance company leaders reasons to be concerned. Recently retired Cox Automotive chief economist Tom Webb explained why earlier this spring.
“Clearly if you inflate your loan-to-value ratio to 130 percent, your severity of loss will increase. But it’s even more than that,” Webb said. “Just how squishy is that quote value in the loan-to-value ratio. Value is an editorialized guidebook assumption at the time of the contract origination, not the market value at the top of repossession.”
To mitigate risk, auto finance companies are leveraging providers such as Digital Recognition Network (DRN), which again is serving as the presenting sponsor of Auto Fin Con during Used Car Week. Back in May, I had the chance to reconnect with one DRN’s many thought leaders for an episode of the Auto Remarketing Podcast. DRN vice president of financial services Jeremiah Wheeler reiterated about the value of location data not only can help when that contract goes into default, he also explained how some finance companies are leveraging the information to make better decisions during the underwriting and origination processes.
Defaults and delinquencies might be trending lower for the time being, but experienced auto finance participants know how the changes in the cycle can develop, requiring providers to pivot their strategies. To arm you with the best information and strategies available, Auto Fin Con is gathering experts who can explain not only what’s just happened, but also can project what’s in store for the industry in the near-term and beyond so those portfolios can continue to look positive.
Be sure to join us beginning on Nov. 13 for Auto Fin Con presented by DRN. It’s all part of Used Car Week at the La Quinta Resort & Club in Palm Springs, Calif. The data from May and the first quarter was quite positive. But the time we starting thinking about Thanksgiving turkey, it could be significantly different.
You want to succeed. We can help you get there.
Nick Zulovich is senior editor of SubPrime Auto Finance News and BHPH Report.