Auto Finance’s Forecast Winter 2009
has good news and bad news for the coming 12 months.
Lenders expect originations,
delinquency levels to hit flat note
The good news and the bad news for the
auto finance industry in 2010 is that performance will be flat.
Though financiers expect to ease underwriting guidelines this year,
still-stricter-than-normal criteria and a recovering economy will
keep origination volume at bay. On the flip side, after more than a
year of increases, loan and lease delinquencies should finally
Those were some of the core findings in the Auto
Finance Forecast Winter 2009, an exclusive survey conducted by Auto
Finance News and sister web site, AutoFinanceNews.net. The forecast
gauges activities and sentiment in the automotive lending and
“Production volumes will be challenged as retail
sales remain in a flat-to-low growth range, and more lenders [old
and new] enter/re-enter the marketplace,” wrote one of the survey’s
bank respondents. “Portfolio performance will improve overall for
the industry, with 2008-2009 origination vintages driving the
Overall, though, the outlook for 2010 is much more
upbeat than it was for 2009. Lenders used terms like “challenging”
and “uncertain” to describe the anticipated year of “little or no
growth”, an improvement from descriptors like “dismal,” “awful,”
“pretty grim,” and “survival mode” offered in a survey at year-end
“The auto business will continue to be challenging
until unemployment – including underemployment – begins to
decrease, incomes stabilise and/or increase, and the ability to
obtain credit loosens up,” wrote a finance company respondent.
For the second straight quarter, lenders expect
loan and lease originations to increase as much as 10 percent in
2010. Even the outlook for floorplan originations has steadily
improved; volume for 2010 is expected to remain flat, compared with
predictions for 10 percent and 20 percent declines in the autumn
and spring surveys, respectively.
Meanwhile, though most financiers anticipate that
underwriting terms will remain unchanged this year, the percentage
that expects loosening has dramatically increased, to 23.5 percent
from 5.9 percent in the September forecast.
Financiers have finally put the brakes on
expectations for worsening credit performance, a situation that
should bolster returns. For more than two years, lenders have
anticipated increased delinquencies and losses – in some cases as
high as 20 percent.
For 2010, though, the bulk of survey respondents
expect repayment trends to stabilise, which should open the door
for higher profits.
“I expect margins to increase slightly and loan
delinquency and charge-offs to slowly improve over the next 12
months,” wrote a credit union respondent.
“This will result in profit increases in 2010 for
lenders that are committed to prudent, established lending
The caveat, the respondent added: “It will be
difficult to stick to this strategy as competition in the
new-vehicle finance market intensifies in 2010. Captive finance
sources will re-establish market dominance with increased pressure
on dealer franchises that are highly sensitive to manufacturers’
heavy-handed actions that can threaten retail viability.”
Lower cost of capital should also contribute to
improved profitability, respondents said.
Overall, the recovery will be sluggish.
“The industry will slowly move in a more positive
direction, making more loans while still focused on profitability
and comfortable margins,” wrote one respondent.
“Generally the prognosis is good,” wrote another
respondent. “I expect [annual sales of] new cars to be in the 11
million-unit range, while used cars remain strong.”
Credit, alliances and used cars
to feature in 2010
After being shaken to the core last year,
the auto finance industry faces the slow task of rebuilding in
Last year started off with Chrysler and General
Motors on life support, barely originating loans as they petitioned
for government funds. Three months later, the two manufacturers
filed for bankruptcy protection and targeted the elimination of a
combined 1,800 dealerships that would lose franchises.
Meanwhile, vehicle sales continued their downward
spiral, as the threat of unemployment kept consumers out of dealer
The ray of sunshine for vehicle sales came midyear,
when the government launched the ‘Cash for Clunkers’ (C4C)
programme to reward consumers who traded in their low-MPG vehicles
for $3,500 to $4,500 [£2,100 to £2,800] in credits to be applied to
new-vehicle purchases. In its 29-day lifespan, C4C generated
690,114 new-vehicle sales. For financiers, this translated to
increased volume, higher borrower credit scores, lower
loan-to-value ratios, and better approval rates.
Another bright spot came from the government’s Term
Asset-Backed Securities Loan Facility (TALF), a programme devised
to revive the stalled credit markets. Without TALF captives and
banks would have been hard-pressed to secure funding to originate
new loans. In fact, TALF was so successful that by year-end, most
auto loan-backed securitisations were bought by investors without
That leads us to 2010, a year in which the industry
will revert to core lending principles. Financiers will be forced
to maintain strong underwriting procedures as competition slowly
returns to the market.
These are the top three trends we should expect
• Strong credit fundamentals. For the
past 18 months, lenders have been clamping down on credit quality,
often at the expense of volume. Because capital was hard to come
by, some financiers stopped lending to consumers in lower credit
bands. In 2010, those efforts to reposition borrowers into more
appropriate loans will flourish. Loan terms will inch lower, and
down payments will rise. Plus, this year, dealership F&I
managers will be on board with the efforts, working together with
lenders to get loans approved.
• Partnerships. There are two components
to this issue: mapping integration efforts for previously arranged
deals, like Wells Fargo- Wachovia and Santander-Triad-HSBC, and
scouting out new alliance partners. Start-ups will be limited
because capital is still constrained, but look out for acquisitions
in which stronger players scoop up troubled companies or existing
firms develop unique arrangements.
• Used-car shortage. Used-car values were
strong throughout 2009, largely because the lower sales volume
translated to fewer trade-ins. As manufacturers keep production
levels in line with demand and consumers shy away from big-ticket
purchases, the supply of used cars might fall short. One result:
used-car prices will remain strong all year.