The Future of Auto Finance

The auto finance industry is going through some dramatic changes. Auto finance has always been a cyclical business with periods of prosperity and periods of challenges. Over the last year, there has been a significant change in the market relative to having auto finance as a key strategic growth area for many financial institutions. Many of the major non captive auto finance companies have either exited the business or determined to move forward as a niche player with much lower originations. The change of heart by some of these players is due to high losses, funding concerns, and just the shear volatility of the auto finance business. It seems as if no one likes the auto finance business today or its prospects in the medium term. Where is the industry going and how/who will make up the volume of loan originations that has been lost over the last year? Will a new national auto finance company emerge that has funding and that a strategic desire to make a commitment to auto finance?

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Permalink Reply by Tim_Cleveland on October 13, 2008 at 9:51am: Michael:

I just deleted a long tirade in favor of brevity, understanding this is a finance and banking website and not an automotive website. I agree that the US Manufacturers are comeptitive with the ebbs and flows of the finance market. No quarell there. My beef is with the product itself. Down to warranty, service and ease and cost effectiveness of repair long after the warranty is over. But if we want to chat on that basis, maybe we should take it private and do it off the site. Maybe we should invite Scott McKim as he seems to be more on you side of the argument there. Just understand that I have a bug in my butt over the issue. We just replaced my wife's Pontiac minivan with a Kia as much as I have always sworn to stay American. Financing went through two local banks, not KMAC. But I was also very impressed with what Kia had to offer in their vehicles. My grandfather is rolling in his grave.

Best Regards,

Tim; ▶ Reply to This

Permalink Reply by Victoria Fierson on October 13, 2008 at 10:42am: At this year's Auto Finance Summit, panelist Paul Kramarz, risk manager from American Honda Finance said, "Risk management is not all science, there's an art to it." Kramarz pointed out that going through an application manually rather than focusing mostly on technology based assessments to make the decision allows lenders to really go through and assess each applicant individually. More personal attention to applications may increase loan approval. Do you think dealers are pushing for manual approval by lenders to increase sales due to tighter underwriting and lending standards?; ▶ Reply to This

Permalink Reply by Tim_Cleveland on October 13, 2008 at 11:19am: Sorry to jump in on this thread. I think putting human eyes could actually cause there to be fewer loans made in some cases. When we recently replaced my wife's van, the Finance guy said they couldn't get a guy with a 750+ financed the week before because he had declared bankruptcy several yerars ago. I think nobody wants to have their name on the file that goes bad and they are erring on the side of extrreme caution.

Just my personal experience, may not be typical.

Tim; ▶ Reply to This

Permalink Reply by Michael Gibb on October 14, 2008 at 8:44am: In yet another sign that the credit crisis is strangling the auto finance sector, GMAC yesterday announced that it would only lend to borrowers with a credit score of at least 700. Full coverage of the news is available here.

GMAC is 51% owned by Cerberus Capital Management. Cerberus also owns 80% of Chrysler, including its captive financing operation. Chrysler earlier this year stopped originating leases.

There was no word on how the decision by GMAC would impact its 2005 agreement with Bank of America Corp., in which BofA agreed to purchase $55 billion of auto loans from the captive financier through 2010.; ▶ Reply to This

Permalink Reply by Scott J McKim on October 14, 2008 at 4:03pm: You will see more lenders pulling back until the ABS market shows some signs of life. Its pretty dead right now. The last deal I saw was ACF's and they paid dearly for that block of funding.

It is interesting that Toyota is offering 0% financing. They do benefit from a parent that is flush with cash, but it also shows they have a lot of cars to move.; ▶ Reply to This

Permalink Reply by Michael Gibb on October 14, 2008 at 4:24pm: Scott -- many lenders portfolio their loans, so I'm not so convinced that the ABS market is as tied to the market's outlook as say the mortgage market, but funding certainly does seem to be an important issue.

As long as the car sale numbers continue to look as bleak as a Chekhov winter, that's what will ultimately keep the auto finance market in the doldrums.; ▶ Reply to This

Permalink Reply by Brian Reed on October 14, 2008 at 9:42pm: To Scott's comment - the MAJOR issue facing auto lenders today is funding via the ABS market. ACF did a deal at very much a premium. Recently at teh Auto Finance Summit, the CEO of ACF said they needed to payoff/elimate three loans in existing portfolio to fund 1 new loan. The auto finance market place is tied up in knotts and liquidity in the market needs to change soon to keep many of the existing auto finance players in the market. Not to over react - the current situation is serious.; ▶ Reply to This

Permalink Reply by Tim_Cleveland on October 15, 2008 at 4:43pm: Can I ask an ingnorant question? It sounds like ABS and ACF are secondary markets for securitizing auto loan portfolios, no? What is the distinction between the two markets?

Thanks in advance for the education.

Tim; ▶ Reply to This

Permalink Reply by Michael Gibb on October 15, 2008 at 5:21pm: Tim -- ABS is the asset-backed securitization market. ACF is the stock ticker for Americredit, the Dallas-based auto financier.; ▶ Reply to This

Permalink Reply by Tim_Cleveland on October 15, 2008 at 8:13pm: Got it. Thanks, Michael.

Permalink Reply by Victoria Fierson on November 6, 2008 at 11:42am: Marketwatch reports that Auto Nation, one of the nation's top car dealerships, which operates through 320 new vehicle franchises in various states and online sales, suffered a $1.41 billion third-quarter loss. For the same quarter last year the company reported a $72.1 million dollar profit.

The third-quarter credit crisis "escalated in September into a full-blown credit panic," says Mike Jackson, chairman and chief executive of Auto Nation. "This created a credit freeze that broke consumer confidence and, along with a continued housing depression, accelerated the decline in the U.S. economy and auto-retail market."

How many more quarterly losses is the automotive industry in store for?; ▶ Reply to This

Permalink Reply by Victoria Fierson on November 12, 2008 at 9:03am: The Democrats are pushing for the auto industry bailout. Though he doesn't take office until January 2, 2009, presidential-elect Obama does not want to wait until then to address the problem.

House Financial Services Chairman Barney Frank [D - MA] is working to create a bill along with the House and Senate leaders and the Administration that could be completed as early as then end of this week, the Journal reports. The current terms of the TARP program -- the suggested funding method for the bailout, do not account for the auto industry. White House spokesman Tony Fratto says, "If Congress wants to change the law, we'll see how they intend to do it."; ▶ Reply to This