By Mike Antich
An average end-of-service fleet sedan is three years old with
60,000-plus miles. The resale market for these used vehicles encompasses diverse
demographics. However, in most cases, the dealers who buy fleet vehicles at
auction will ultimately resell them to someone of limited financial means. In
many cases, these buyers have less than stellar credit and may only qualify for
a subprime auto loan.
Since the onset of the subprime crisis, loan approvals
for these customers are more difficult. In fact, for all levels of new- and
used-car buyers – prime, near prime, and subprime – the share of loan applications
eventually approved are down versus a year ago.
“Hardest hit, not surprising,
are subprime buyers whose loan approval rate fell from nearly 68 percent to
about 57 percent,” said Art Spinella of CNW Marketing Research. Or phrased another
way, almost one out of two subprime buyers were unable to get an auto loan. Independent
dealers are finding it more difficult to fund subprime buyers due to the number
of institutions they need to shop to find a lender. “For subprime borrowers, it
took 5.6 institutions compared to 4.2 a year ago,” said Spinella. “There is no
doubt that CY2008 will be a tough year.”
Skittish Asset-Backed Securities Market
Today’s credit crunch was a hot topic at the American Financial
Services Association (AFSA) 12th annual Vehicle Finance Conference held
last February in San Francisco.
The source of today’s challenges is skittish investors in the asset-backed
securities market, which started in the subprime mortgage market, but has since
expanded to the automotive retail finance market. If the asset-backed securities market isn’t
doing well, there is a decreased appetite for loans.
Banks are reluctant to
lend, even as their cost of funds declines, because they are short on
liquidity, are more risk averse, demand a higher risk premium, and need to
increase profits to rebuild balance sheets. Also, more lenders are putting caps
on how low a FICO score they’re willing to fund, often above the threshold of
subprime borrowers. Turner Acceptance Corp., which finances auto loans to subprime
borrowers, is now “increasing its review of loans by requiring additional crosschecking
on all parts of a loan, including references,” said CEO Jonathon Levin.
The unknown is long-term impact on lower-priced, high-mileage
fleet units. “These vehicles are often sold with some sort of dealer-provided
financing and, thus, escaped some of the turmoil caused by lenders tightening
credit standards,” said Tom Webb, chief economist for Manheim Consulting, in the April 2008 issue of Manheim Consulting's Auto Industry Brief newsletter. “In addition,
dealers servicing the subprime market often found it necessary to lower the
price point within their inventory mix to accommodate the less-than-favorable
retail financing terms available to their customers.”
An even graver concern is the unemployment rate. If the unemployment
rate increases and consumer credit worsens, Fitch Ratings expects repossessions
to rise as well. So far this year, repossessions are at a 10-year high. These
additional vehicles in the automotive wholesale market put additional downward
pressure on used-vehicle prices, which Fitch anticipates to continue throughout
2008. However, this is a two-edged sword. “For example, average auction prices
for midsized commercial cars were pushed higher in March as some companies
de-fleeted relatively new units as a result of employee layoffs,” said Webb.
Another market force is constrained household budgets. “Energy
costs of gasoline, home heating, and cooling will continue to drain money from
consumer budgets and slow consumer spending,” said Paul Taylor, chief economist
for the National Automobile Dealers Association, at the NADA’s annual conference.
In addition, the ongoing slowdown in new-home construction brought
on by the subprime crisis has softened buyer demand for used pickups and
full-size vans. Trucks, work trucks in particular, have been affected by the
housing slowdown, which is hurting contractors who generally buy these used vehicles.
With softer resale prices, there is increased emphasis to sell
used vehicles to employees. Companies are expanding sales beyond drivers to
other employees, family members, friends, and the surrounding community. Some
fleets market used vehicles to the employees of other companies. The competitive
bidding environment of an auction is the best way to establish a vehicle’s true market value; however, this is a wholesale value. Employee sales, if priced
above wholesale, help to mitigate market softness.
Allowing the Correction to Occur
There are still plenty of buyers of used fleet vehicles, but the
buying pool is contracting, which puts downward pressure on resale values. The
good news, according to Standard & Poor’s, is the challenges facing the auto
lending market shouldn’t last too long because of the category’s strong fundamentals.
“Don’t panic; we’ve been through credit cycles like this before,”
said John William Snow, chairman of Cerberus Capital Management LP, in a
keynote address at the Vehicle Finance Conference. “We’re going through a major
correction. The important thing is that the correction be allowed to occur.”
Let me know what you think.