SubPrime Auto Finance News January/February 2017 : Page 3

Sifting through the ‘fake news’ in auto fi nance By Nick Zulovich, Senior Editor CARY, N.C. — During his presenta-tion at Used Car Week this past November, Equifax auto nance leader Lou Loquasto showed a slide to SubPrime Forum attend-ees that included screen grabs of headlines that appeared up to that juncture just before anksgiving. SubPrime Auto Finance News circled back with Loquasto a few weeks lat-er to ask why that piece of his presentation summarized what happened in 2016. “ e biggest surprise was all the fake news out there from the general media about an auto bubble and out of control auto lend-ing,” Loquasto said. “ rough the election cycle, people kept talking about fake news and putting out narratives without a lot of facts. ey ignore — especially in subprime — that we’re here to help customers get transportation to get to work, or maybe help a family get an SUV so they can more com-fortably take their kids around. “It surprises me because it ies in the face of common sense,” he continued. “Subprime customers aren’t buying investment vehicles or third or fourth cars. ey a lot of times drive delinquencies up, but auto lenders know how to risk-based price. I think we’ve proved our-selves through the Great Recession. ey know when make a subprime loan that four or ve out of 100 are going to go bad. It’s the same way that an insurance company knows that some customers are going to have an accident. “Companies like Equifax, Experian and TransUnion and others, we’ve explained this over and over,” Loquasto went on to say. “We’re the ones who have the data and un-derstand it best. We certainly put that kind of since now nearly 1 percent of all new-mod-el nancing (0.98 percent to be exact) has terms lasting 85 months and longer. On the used side, analysts didn’t mention terms stretching beyond 85 months, but Ex-perian did point out that contracts lasting between 73 and 84 months represented 17.7 percent of deals in Q3, up from 16.2 percent during the same quarter in 2015. While components such as negative equi-ty and stretching terms could be ingredients for poor performance, Loquasto explained how auto nance companies o en respond. “ ey’re ne-tuning around their dealer strategy. ere are 40,000 dealers out there. You can’t expect the performance of all the dealers to be the same,” he said. “We see more lenders creating programs or looking at data to help them treat the best deal-ers better than they ever have before. If you’re a good dealer that performs and gets a lot of paper and has a sincere two-way relationship with the lender, these types of dealers are being treated better than ever,” Loquasto continued. “ e dealers whose performance isn’t as good, I think lenders are going to continue to be more careful,” he added. And while terms are stretching, Loquasto pointed out that Equifax’s latest data showed only about $69 billion of the $1.1 trillion in outstanding auto debt currently has more than 72 months le on the contract. Mean-while about $752 billion in outstanding bal-ances are connected to a contract with less than 60 months le . “Lenders are understanding risked-based pricing and understand longer terms. You can’t give it to everybody, only to the lowest risk customers,” Loquasto said. Equifax’s Lou Loquasto at Used Car Week. Photo by Jonathan Fredin. data out there, but week a er week you con-tinue to see more of this fake news about an auto bubble. I gure at some point they’re go-ing to try to understand our industry a lit-tle bit. Who knows? Maybe 2017 will be the year they work to understand it as well as our lenders do.” While there might not be a bubble, there are certainly some challenges auto nance companies must overcome to be pro table. According to Edmunds data, an estimat-ed 32 percent of all trade-ins toward the pur-chase of a new model through the rst three quarters of 2016 were underwater. is is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehi-cle purchases from January to September of last year. ese “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record. e phenomenon of upside down trade-ins is not limited to new-model purchas-es. According to Edmunds’ Q3 Used Vehicle Market Report , a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. ese shoppers had an average of $3,635 of nega-tive equity at the time of trade-in, also a Q3 record in the used market. “It’s curious to see just how many of to-day’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a signi -cant nancial hit to get into a newer vehicle.” As Drury indicated perhaps negative eq-uity isn’t posing a problem nowadays since contract terms continue to stretch. Experian Automotive indicated in its latest State of the Automotive Finance Market report released in November that 30.7 percent of all new-ve-hicle nancing in the third quarter stretched to 73 months to 84 months, up from 27.5 percent a year earlier. Analysts even added a new segment to its collection of bar charts Why delinquencies could reach 1.4 percent in 2017 By Nick Zulovich, Senior Editor CHICAGO — Casual observers might panic when they see TransUnion’s expec-tations for 2016 to close with a 7.0 percent year-over-year increase in the 60-day delin-quency rate along with that reading set to ap-proach the highest level in eight years by the time 2017 nishes. However, TransUnion’s Jason Laky is con dent that nance companies and close watchers of the auto nance market will examine TransUnion’s 2017 consum-er credit market forecast that was released in mid-December and not only won’t pan-ic, but will use the projections to reinforce portfolio examinations. “Obviously when you start to see delin-quencies go up a little bit, it’s good to be con-cerned,” Laky told SubPrime Auto Finance News during a phone conversation ahead of January | February 2017 60-Day+ Auto Loan Delinquency Rate and Average Auto Loan Debt per Borrower Q4 2009 1.59% Q4 2010 1.27% Q4 2011 1.11% $15,377 Q4 2012 1.15% $16,061 Q4 2013 1.23% $16,781 Q4 2014 1.19% $17,456 Q4 2015 Q4 2016* Q4 2017* 1.27% $18,004 1.36% $18,435 1.40% $18,840 $14,922 $15,031 *Q4 2016 and Q4 2017 include projections. Source: TransUnion the forecast release. “It’s good for every lend-er to take a look at their portfolio and see if the delinquencies they’re experiencing are in line w ith expectations. “Generally, we’ve said for the past few years that lenders are continuing to buy deeper and make more subprime loans,” continued the senior vice president and au-tomotive and consumer lending business leader for TransUnion. “You would expect that as lenders make more subprime loans their portfolios and subsequently the entire industry’s portfolio would experience high-er delinquencies. “It’s a little harder for us to see this part of it but hopefully lenders are making up for it through higher interest rates or higher pay-ments to overcome any delinquencies their getting,” Laky went on to say. TransUnion indicated that the auto de-linquency rate is projected to close 2017 at 1.40 percent, the highest level since 1.59 per-cent that analysts reported at the end of 2009. TransUnion expects the auto delinquency rate will reach 1.36 percent in Q4 of this year, a 7.0-percent year-over-year increase from 1.27 percent registered in Q4 2015. “Greater access to auto loans for non-prime consumers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfo-lio,” Laky said in a news release that accom-panied the TransUnion forecast. “An in-crease in delinquency is the natural conse-quence of that strategy. “If lenders are compensated for the addi-tional risk in the portfolio, a modest increase in delinquency should not disrupt the auto nance market. We do not expect to see a surge in auto delinquency unless there is an economic shock,” he continued. During our conversation, Laky mentioned that as of the third quarter, TransUnion’s data showed just a 12-basis-point rise in the rates DELINQUENCIES continued on page 22 subprimenews.com 3

Sifting through the ‘fake news’ in auto finance

Nick Zulovich

CARY, N.C. — During his presentation at Used Car Week this past November, Equifax auto finance leader Lou Loquasto showed a slide to SubPrime Forum attendees that included screen grabs of headlines that appeared up to that juncture just before Thanksgiving. SubPrime Auto Finance News circled back with Loquasto a few weeks later to ask why that piece of his presentation summarized what happened in 2016.

“The biggest surprise was all the fake news out there from the general media about an auto bubble and out of control auto lending,” Loquasto said. “Through the election cycle, people kept talking about fake news and putting out narratives without a lot of facts. They ignore — especially in subprime — that we’re here to help customers get transportation to get to work, or maybe help a family get an SUV so they can more comfortably take their kids around.

“It surprises me because it flies in the face of common sense,” he continued. “Subprime customers aren’t buying investment vehicles or third or fourth cars. They a lot of times drive delinquencies up, but auto lenders know how to risk-based price. I think we’ve proved ourselves through the Great Recession. They know when make a subprime loan that four or five out of 100 are going to go bad. It’s the same way that an insurance company knows that some customers are going to have an accident.

“Companies like Equifax, Experian and TransUnion and others, we’ve explained this over and over,” Loquasto went on to say. “We’re the ones who have the data and understand it best. We certainly put that kind of data out there, but week after week you continue to see more of this fake news about an auto bubble. I figure at some point they’re going to try to understand our industry a little bit. Who knows? Maybe 2017 will be the year they work to understand it as well as our lenders do.”

While there might not be a bubble, there are certainly some challenges auto finance companies must overcome to be profitable.

According to Edmunds data, an estimated 32 percent of all trade-ins toward the purchase of a new model through the first three quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehicle purchases from January to September of last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.

The phenomenon of upside down trade-ins is not limited to new-model purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used market.

“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”

As Drury indicated perhaps negative equity isn’t posing a problem nowadays since contract terms continue to stretch. Experian Automotive indicated in its latest State of the Automotive Finance Market report released in November that 30.7 percent of all new-vehicle financing in the third quarter stretched to 73 months to 84 months, up from 27.5 percent a year earlier. Analysts even added a new segment to its collection of bar charts since now nearly 1 percent of all new-model financing (0.98 percent to be exact) has terms lasting 85 months and longer.

On the used side, analysts didn’t mention terms stretching beyond 85 months, but Experian did point out that contracts lasting between 73 and 84 months represented 17.7 percent of deals in Q3, up from 16.2 percent during the same quarter in 2015.

While components such as negative equity and stretching terms could be ingredients for poor performance, Loquasto explained how auto finance companies often respond.

“They’re fine-tuning around their dealer strategy. There are 40,000 dealers out there. You can’t expect the performance of all the dealers to be the same,” he said.

“We see more lenders creating programs or looking at data to help them treat the best dealers better than they ever have before. If you’re a good dealer that performs and gets a lot of paper and has a sincere two-way relationship with the lender, these types of dealers are being treated better than ever,” Loquasto continued.

“The dealers whose performance isn’t as good, I think lenders are going to continue to be more careful,” he added.

And while terms are stretching, Loquasto pointed out that Equifax’s latest data showed only about $69 billion of the $1.1 trillion in outstanding auto debt currently has more than 72 months left on the contract. Meanwhile about $752 billion in outstanding balances are connected to a contract with less than 60 months left.

“Lenders are understanding risked-based pricing and understand longer terms. You can’t give it to everybody, only to the lowest risk customers,” Loquasto said.

Read the full article at http://browndigital.bpc.com/article/Sifting+through+the+%E2%80%98fake+news%E2%80%99+in+auto+finance/2684541/375579/article.html.

Why delinquencies could reach 1.4 percent in 2017

Nick Zulovich

CHICAGO — Casual observers might panic when they see TransUnion’s expectations for 2016 to close with a 7.0 percent year-over-year increase in the 60-day delinquency rate along with that reading set to approach the highest level in eight years by the time 2017 finishes.

However, TransUnion’s Jason Laky is confident that finance companies and close watchers of the auto finance market will examine TransUnion’s 2017 consumer credit market forecast that was released in mid-December and not only won’t panic, but will use the projections to reinforce portfolio examinations.

“Obviously when you start to see delinquencies go up a little bit, it’s good to be concerned,” Laky told SubPrime Auto Finance News during a phone conversation ahead of the forecast release. “It’s good for every lender to take a look at their portfolio and see if the delinquencies they’re experiencing are in line with expectations.

“Generally, we’ve said for the past few years that lenders are continuing to buy deeper and make more subprime loans,” continued the senior vice president and automotive and consumer lending business leader for TransUnion. “You would expect that as lenders make more subprime loans their portfolios and subsequently the entire industry’s portfolio would experience higher delinquencies.

“It’s a little harder for us to see this part of it but hopefully lenders are making up for it through higher interest rates or higher payments to overcome any delinquencies their getting,” Laky went on to say.

TransUnion indicated that the auto delinquency rate is projected to close 2017 at 1.40 percent, the highest level since 1.59 percent that analysts reported at the end of 2009. TransUnion expects the auto delinquency rate will reach 1.36 percent in Q4 of this year, a 7.0-percent year-over-year increase from 1.27 percent registered in Q4 2015.

“Greater access to auto loans for non-prime consumers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfolio,” Laky said in a news release that accompanied the TransUnion forecast. “An increase in delinquency is the natural consequence of that strategy.

“If lenders are compensated for the additional risk in the portfolio, a modest increase in delinquency should not disrupt the auto finance market. We do not expect to see a surge in auto delinquency unless there is an economic shock,” he continued.

During our conversation, Laky mentioned that as of the third quarter, TransUnion’s data showed just a 12-basis-point rise in the rates for 60-day delinquencies into the 90-day rate when finance companies move into the charge-off and recovery processes. He explained why a sharp jump in that metric reinforces the general assessment of TransUnion’s forecast.

“One of the things I think lenders learned through the recession is how to better pick who they lend to from a subprime perspective. Lenders have gotten much better at using data and analytics both at origination and through servicing and collections,” Laky said.

“As a result, the most sophisticated lenders can make decisions at origination that flow through into possibly higher delinquencies but then not all the way through to higher charge-offs. They can assess those consumers that it may be they get a little bit late but then they’re likely to catch up,” he continued.

“The strength in the economy certainly helps prevent these delinquencies from rolling through all the way to charge-offs,” Laky went on to say. “When we have a good economy, many of these borrowers, including subprime borrowers, are employed and getting paid on a regular basis. Even though they may have trouble managing their debts on occasion, they still need their cars to get to work. Even if you do get behind a little bit, you do find ways to make things work out to get caught back up on your payments so you’re continuing to get to your jobs and the things you need to support whatever lifestyle you have.”

In Q3 of this year — the latest data TransUnion has available — there were 74.8 million active auto finance accounts. Non-prime customers — individuals with a VantageScore 3.0 of 660 and below — grew 7.5 percent to 25.1 million auto accounts in Q3, up from 23.3 million in Q3 of 2015.

“We’re hitting our stride in terms of employment and wage gains in the economy. We’re adding 100,000 to 200,000 jobs per month and wage gains are at 2 percent to 3 percent per year. Those things are really good. It’s really good for subprime auto lending,” Laky said.

“Even though (new-vehicle sales) might slow down, there’s still a good market for used and a lot of folks who are coming back into the market who are now employed after being in a period of unemployment or shifting jobs into something that’s right for them, they may tend toward used or maybe non-prime or subprime credit. I think there’s still room for growth in subprime,” he went on to say.

As the annual growth rate of new vehicle sales is expected to taper and interest rates are expected to rise, TransUnion expects vehicle sales to still grow, but at a lower rate than experienced in recent years. Analysts added that growth in average auto balance per consumer is expected to slow to levels last observed in 2011.

The average balance is projected to grow at a 2.4 percent rate between year-ends 2015 and 2016, compared to the 3.1 percent growth rate between Q4 2014 and Q4 2015 and 4.0 percent growth between Q4 2013 and Q4 2014. Average auto balances are expected to reach $18,435 in Q4 of this year and $18,840 in Q4 of next year.

“Average auto balance growth began to slow at the beginning of 2016, and we expect this more moderate growth to continue through 2017 if wage growth continues,” Laky said.

Read the full article at http://browndigital.bpc.com/article/Why+delinquencies+could+reach+1.4+percent+in+2017/2684555/375579/article.html.

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