By Mike Antich
An average end-of-service fleet sedan is three years old with60,000-plus miles. The resale market for these used vehicles encompasses diversedemographics. However, in most cases, the dealers who buy fleet vehicles atauction will ultimately resell them to someone of limited financial means. Inmany cases, these buyers have less than stellar credit and may only qualify fora subprime auto loan.
Since the onset of the subprime crisis, loan approvalsfor these customers are more difficult. In fact, for all levels of new- andused-car buyers – prime, near prime, and subprime – the share of loan applicationseventually approved are down versus a year ago.
“Hardest hit, not surprising,are subprime buyers whose loan approval rate fell from nearly 68 percent toabout 57 percent,” said Art Spinella of CNW Marketing Research. Or phrased anotherway, almost one out of two subprime buyers were unable to get an auto loan. Independentdealers are finding it more difficult to fund subprime buyers due to the numberof institutions they need to shop to find a lender. “For subprime borrowers, ittook 5.6 institutions compared to 4.2 a year ago,” said Spinella. “There is nodoubt that CY2008 will be a tough year.”
Skittish Asset-Backed Securities Market
Today’s credit crunch was a hot topic at the American FinancialServices Association (AFSA) 12th annual Vehicle Finance Conference heldlast February in San Francisco.The source of today’s challenges is skittish investors in the asset-backedsecurities market, which started in the subprime mortgage market, but has sinceexpanded to the automotive retail finance market. If the asset-backed securities market isn’tdoing well, there is a decreased appetite for loans.
Banks are reluctant tolend, even as their cost of funds declines, because they are short onliquidity, are more risk averse, demand a higher risk premium, and need toincrease profits to rebuild balance sheets. Also, more lenders are putting capson how low a FICO score they’re willing to fund, often above the threshold ofsubprime borrowers. Turner Acceptance Corp., which finances auto loans to subprimeborrowers, is now “increasing its review of loans by requiring additional crosscheckingon all parts of a loan, including references,” said CEO Jonathon Levin.
The unknown is long-term impact on lower-priced, high-mileagefleet units. “These vehicles are often sold with some sort of dealer-providedfinancing and, thus, escaped some of the turmoil caused by lenders tighteningcredit 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 theprice point within their inventory mix to accommodate the less-than-favorableretail financing terms available to their customers.”
An even graver concern is the unemployment rate. If the unemploymentrate increases and consumer credit worsens, Fitch Ratings expects repossessionsto rise as well. So far this year, repossessions are at a 10-year high. Theseadditional vehicles in the automotive wholesale market put additional downwardpressure on used-vehicle prices, which Fitch anticipates to continue throughout2008. However, this is a two-edged sword. “For example, average auction pricesfor midsized commercial cars were pushed higher in March as some companiesde-fleeted relatively new units as a result of employee layoffs,” said Webb.
Another market force is constrained household budgets. “Energycosts of gasoline, home heating, and cooling will continue to drain money fromconsumer budgets and slow consumer spending,” said Paul Taylor, chief economistfor the National Automobile Dealers Association, at the NADA’s annual conference.
In addition, the ongoing slowdown in new-home construction broughton by the subprime crisis has softened buyer demand for used pickups andfull-size vans. Trucks, work trucks in particular, have been affected by thehousing slowdown, which is hurting contractors who generally buy these used vehicles.
With softer resale prices, there is increased emphasis to sellused vehicles to employees. Companies are expanding sales beyond drivers toother employees, family members, friends, and the surrounding community. Somefleets market used vehicles to the employees of other companies. The competitivebidding 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 pricedabove wholesale, help to mitigate market softness.
Allowing the Correction to Occur
There are still plenty of buyers of used fleet vehicles, but thebuying pool is contracting, which puts downward pressure on resale values. Thegood news, according to Standard & Poor’s, is the challenges facing the autolending 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 akeynote address at the Vehicle Finance Conference. “We’re going through a majorcorrection. The important thing is that the correction be allowed to occur.”
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