guzzler glut
Auto financiers are bracing for higher losses — and there’s little
they can do about it. High-priced fuel has all but dried up the
sale of sport-utility vehicles and light-duty trucks, causing
resale values to tank. The glut of gas guzzlers “has ruined the
year for us,” said David Pallin, a senior vice president at
Brookline Bank. “There’s no market for SUVs and trucks.”
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Lenders are racking up increased losses on these vehicles. “If we
were losing $8,000 (£4,250) on a Suburban before, we might be
losing $12,000 (£6,400) now,” said Chuck Smith, senior vice
president of lending at San Antonio Federal Credit Union. “It’s
supply and demand.”
To Pallin, at least, the writing on the wall went unheeded.
“The primary problem is that the US ignored all warnings about the
price of fuel,” and now lenders are facing the consequences.
Compounding the problem is that some financial institutions are
“still paying for the aggressive underwriting in 2006 and 2007,” he
added.
Might some banks consider exiting the auto finance space? Though
the answer depends largely on senior management and its appetite
for risk, there are few lines of business that offer attractive
returns right now.
Contrary to the dynamic in the mortgage market, subprime lenders
may be better positioned to weather the current auto finance storm.
While SUVs and pickup trucks may comprise 50 per cent of a prime
lender’s portfolio, the ratio is lower at subprime companies, as
compact cars are a more economical choice for the subprime
demographic.
A waiting game
Compass Bank continues to underwrite loans using existing
guidelines, but it has reduced use of exceptions. “Earlier, we had
latitude on loan-to-value or on scorecards,” said Chuck Noel, risk
manager of indirect lending. “Now we don’t.”
Other lenders have beefed up scrutiny of borrower characteristics
like occupation, considering whether the job is one that may face
downsizing in the near term, and of loan-to-value and
payment-to-income ratios.
And in terms of portfolio composition, the product mix “has taken
care of limiting itself,” Noel said. “If we were one-third large
SUVs and trucks before, we’re 10 per cent or less now.”
For the most part, buyers of SUVs and pickups are consumers with
strong credit profiles for whom $4- or $5-per-gallon gas is an
“inconvenience, not an insurmountable hurdle,” Noel said.
Meanwhile, loan volume for cars, especially compacts, is up across
the board. “Dealers can’t keep [Ford] Focuses on the lot,” Smith
said. “Camrys, Civics, Corollas, Priuses — people are standing in
line with their chequebooks for those.”
Marcie Belles
