View from the US

2008 Forecast: Dealers predict flat sales.

Marcie Belles 

Strong incentives and low down payment requirements will do
little to lure car buyers to the table in 2008. “I don’t foresee a
very easy 2008,” said Luis Estrada, president and owner of Trader
Vic’s Used Cars. If sales volume at the dealership “can just stay
status quo,” Estrada will be happy, he said.

Some dealers expect slight increases in volume in cases where
nearby stores closed up shop because of tough times in 2007. That
scenario would open the door for sales volume to be spread among
fewer dealers.

 The trend toward declining down payments will continue in
2008. “People are coming to the table with less and less money,”
said Victor Smith, finance director at Advantage BMW.

Competition among lenders for volume will fuel that trend. “You can
go anywhere with $500 to $1,000 [£250-£500] and buy a brand new
car,” Estrada said. “We’ve been forced to sell cars with zero

 As much as manufacturers would like to eliminate incentives,
they are here to stay — despite “shrinking profits and inventory
levels that are too high,” Smith said.
 “Car buyers are looking for [incentives],” Estrada said. Some
lenders may get more “gimmicky” with their incentives, like offers
of $500-worth of fuel with vehicle purchases, rather than cash-back
or low interest rate programs, Smith said. 

Split decisions

Though dealers were largely in agreement about downwards sales
trends for 2008, they were split about the direction underwriting
guidelines will take. Some, like Estrada, expect lenders to
“tighten the noose all around.” Higher delinquency rates will
likely drive the move toward tighter guidelines.
 “All lenders will look at their buying practices a little
harder to make sure they’re doing the right thing,” Smith said. On
the flip side, though, the struggle to generate volume may spur
some financiers to loosen underwriting criteria. “More lenders are
stretching further” in order to increase originations, said one
dealership finance manager, who declined to give his name.

Small lenders eye growth
Leanne Graves 

Some smaller, independent lenders have set their sights in 2008
on higher sales volume and its corresponding loan growth. “With
credit quality deteriorating and used cars a focus, we are
anticipating more people will be in subprime,” said Ian Anderson,
senior vice president of production at Westlake Financial

Compound that scenario with the fact that some larger players are
tightening their underwriting reins, and the smaller, usually
used-car, lenders are poised for growth in 2008. Westlake and
Service Finance Co., among others, expect to continue hiring binges
begun in 2006.

 For companies on shaky financial footing, though, 2008 may be
the year of their demise. “Many smaller businesses that struggle
with access to capital or suffer from performance issues will
likely depart the sector,” said Erik de Witte, chief executive of
VFC Inc. With less competition, remaining loan volume will be
spread among fewer players.

 Some smaller lenders seem confident they can dodge the bullet
of higher delinquencies and losses by implementing more stringent
verification procedures, said David Freyberger, Service Finance
Co.’s vice president of auto operations.

 However, small lenders will undoubtedly be met with
challenges this year, lenders said. For one thing, the federal
government will likely have more of a hand in the auto finance
sector, particularly with regard to affordable and fair lending

 The lenders agreed a true market turnaround will not occur
until 2009. “It’s a big ship,” said Jonathon Levin, chief executive
of Turner Acceptance Corp. “You have to turn it and work the
changes in slowly to make sure it is done right.”

Big lenders size up 2008 challenges
Kevin Smith

The big lenders in auto finance are shaky in their faith of the
market for this year. But while they expect things to get worse for
most of the year, they hold out hope that the market will start to
rebound before 2009.

“It’s going to be a challenging economy,” said Steve Smith, vice
president of American Honda Finance Corp.

 The cycle of deteriorating credit will likely push
delinquencies and losses to historic levels — at least for the
first nine months of the year, said Robert Janning, a vice
president at Fifth Third Bank. Then they will begin to move down
“very slowly,” he said. The caveat: one “sputter” in the economy,
and performance will deteriorate even faster than it did last
summer, said Mike Buckingham, president and chief executive of
Hyundai Motor Finance Co.

 The difficulties in the lending environment may be
perpetuated if financiers become aggressive on pricing in order to
increase volume. “We fear that pricing will be the weapon or tactic
of choice for lenders to hold [market]share,” Buckingham said.

Capital calculations

Though predictions for a tougher lending environment are pretty
commonplace among lenders with multi-million-dollar portfolios, the
direction of the capital markets is less clear. “Capital will be
available, and pricing premiums will get back to more normal
levels,” Buckingham said.
But Janning disagreed. “Our belief is that accessing capital,
particularly through asset-backed securitisation issuance, will be
a major challenge throughout 2008.”
 Smith, meanwhile, took the middle road. “The price and access
to funds will likely be volatile” in 2008, he said.

Lenders predict better margins in ’08

Despite dreary predictions for credit performance this year,
auto lenders expect to record higher net interest margins because
of falling interest rates.
 In all, 52.6 per cent of respondents to a survey conducted
last month expect net interest margins to increase in the 1 per
cent-to-10 per cent range this year. Another 10.5 per cent of
respondents anticipate 10 per cent to 20 per cent growth.
 Yet, even as financiers tighten their underwriting, predicted
by 89.5 per cent of respondents, originations should inch up for
loans and leases. Respondents largely anticipate 1-10 per cent
growth in lease and direct loan originations, and 10-20 per cent
growth in indirect loan originations.