Automotive News F&I Special Sections of 2008 - (Page MAY40) 40 • MAY 5, 2008 INSIGHT Corporate Car Trainer www.corporatecartrainer.com Consulting and Training Mr. Dealer, why Wait? Where have all the investors gone? Big bucks to back subprime loans are going begging Jim Henry autonews@crain.com The Next Level Now! 30 Years of Automotive Experience 1 800-955-7934 Dealers are working harder than ever to get subprime customers financed. Not only do economic hardships make it more difficult for consumers to qualify for financing, but subprime auto lenders find it harder to borrow money to make new loans. “We have fewer lenders and it is more difficult, but we seem to be doing the same amount of business,” says Tom Downer, COO of the Fletcher Jones Management Group of dealerships, based in Las Vegas. “The lenders seem to be pickier on what they’ll take,” Downer says. “They verify more stuff, and it takes longer.” The situation is likely to get worse. Write-offs and delinquencies are rising on existing loans — across the credit-risk spectrum. That puts pressure on auto lenders to raise standards for both prime and subprime lenders. Lenders get tough Among subprime specialists, Capital One Finance Corp., of McLean, Va.; and AmeriCredit Corp., of Fort Worth, Texas, are making fewer such loans, according to a report from Lehman Brothers Inc. The two publicly traded lenders have raised standards or started enforcing existing standards more strictly, the Feb. 19 report said. Prime-risk auto lenders also have their problems. Captive finance companies and major banks — such as JPMorgan Chase & Co. and Citigroup Inc., both of New York; and Bank of America, of Charlotte, N.C. — report deteriorating performance for auto loans. That could mean both will tighten standards, Lehman said. Lenders could raise minimum required credit scores, increase interest rates and raise minimum required down payments. Wells Fargo & Co., of San Francisco, reported that its auto loan delinquencies fell in the first quarter from the year-ago quarter. The lender originated fewer auto loans and applied stricter collection practices. One regional bank, Sovereign Bancorp Inc. in Reading, Pa., announced in January that it would stop originating auto loans outside the mid-Atlantic and Northeast states where it has branch offices, effective in the first quarter. Florida and other states in the Southeast and Southwest had accounted for about 38 percent of Sovereign’s auto loans. “ Securitization is just one tool in our tool kit. We don’t need to do it. MARC SHEINBAUM Chase Auto Finance ” - Why so dry? The credit situation is tough for prime-risk lenders, but it’s potentially even worse for subprime lenders. Here’s why. Subprime lenders’ main method of raising funds to make new loans is through securitization, or selling asset-backed securities. Potential investors in subprime asset-backed securities may be seeking higher rates of return from other investments, such as precious metals, or even buying distressed subprime real estate. As a result, some asset-backed securities backed by subprime loans are going begging. Subprime drought While the credit situation is serious for prime-risk lenders, it’s potentially worse for subprime lenders. That’s because the market has gotten tougher for asset-backed securities backed by subprime auto loans. “The market has dried up for everything except prime business,” says George Halloran, program manager of the auto finance practice at BenchMark Consulting International in Atlanta. An asset-backed security is a debt security in which an auto lender bundles a group of consumer loans and sells the ongoing repayments to investors, rather than collecting the money for itself. Instead of waiting for the loans to be repaid to get its money back, the lender gets money right away from investors and can use the funds to make new loans. Investors accept a lower interest rate than some other investments in return for ironclad guarantees from the auto lender that the investors will get paid. Despite the guarantees, some asset-backed securities backed by subprime loans are going begging. AmeriCredit is an example. Historically, selling asset-backed securities has been the primary way that AmeriCredit and other subprime lenders raised money to make new loans. But AmeriCredit hasn’t sold any asset-backed deals since last fall. The subprime specialist planned a sale in the first quarter of 2008 but withdrew it because the market was so poor. On April 17, AmeriCredit announced it had secured more expensive financing from Deutsche Bank, which agreed to buy as much as $2 billion worth of loans from AmeriCredit. Cutting back Until it can get asset-backed financing flowing again, AmeriCredit took several steps to reduce its business: Cut back on the amount of new loans the company will buy from dealers to an annual target of about $3 billion, as of an April 24 conference call. A year ago, AmeriCredit expected $10 billion in originations. It already had cut the target to around $6.5 billion in January. Bought loans from fewer dealers. AmeriCredit reported that it bought contracts from 13,935 dealers in its third fiscal quarter, which ended March 31. That was down from 19,114 in June 2007. The figures encompass independent used-car dealers and franchised new-car dealers. Cut its sales staff by one-third and reduced the number of branch offices from 67 a year ago to 45. Prime-risk auto lenders also sell asset-backed securities but are not as dependent on them. On April 24, Ford Motor Credit Co. reported that securitized funding made up about 54 percent of its funding structure at the end of the first quarter, up from 51 percent at the end of 2007. Chase Auto Finance did zero assetbacked transactions in 2007, down from $2.4 billion in 2006 and $3.8 billion in 2005. “Securitization is just one tool in our tool kit,” says Chase Auto Finance CEO Marc Sheinbaum. “We don’t need to do it.” Halloran of BenchMark Consulting says investors who might have been interested in subprime, asset-backed securities are probably chasing higher rates of return from other investments, such as precious metals, or even buying distressed, subprime real estate. “Where have all the investors gone?” Halloran says. “It’s difficult to find investors who want even to talk about asset-backed.” c http://www.corporatecartrainer.com http://www.corporatecartrainer.com http://www.unitedcarcare.com http://www.unitedcarcare.com
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