1 Collateral Insight Critical to 84-Month Auto Loans May 13, 2015

1

Collateral Insight Critical to 84-Month Auto Loans

May 13, 2015

Black Book Lender Solutions White Paper:

Collateral Insight Critical to 84-Month Auto Loans

Despite a slower-than-normal sales pace to start 2015, mostly due to coldweather patterns, the industry is again on pace for an overall sales increase for the sixth-straight year. 2015 is expected to mark the first time in more than 50 years that the industry has seen a sales increase for six years in a row1, signaling the continued positive growth permeating across every facet of the automotive landscape.

The good news for manufacturers and dealers, especially, is that profits are healthy. One reason for this is that car prices overall continue to increase. According to J.D. Power, transaction prices currently demonstrate the strength of today's auto industry. The company said recently that the average transaction price on a new vehicle stood at $30,530 during March, the highest recorded price for that month2.

Auto lenders aren't lost on the industry's positives, either. Lender portfolios benefit from consumers' willingness to pay more for vehicles, and the continuously improving economy has kept credit scores and delinquency rates healthy.

Several factors underscore the strength of today's economy. Mainly, U.S. employers have added 200,000 or more jobs in each of the past twelve months as of March, a feat that hasn't been achieved since 1977. What's more, economic observers are expecting the U.S. economy to grow 3% this year, which last occurred more than ten years ago3.

While much of this economic progress has increased the appetite for consumers to purchase and lease cars and trucks, auto lenders have sweetened the pot even further. Consumers are taking advantage of 72- and 84-month loans as a way to keep monthly payments lower and afford more vehicle.

The rise in transaction prices have also encouraged lenders to extend terms out to 72 or 84 months in an effort to keep monthly payments below an average of $400 for most budgets. This strategy has been effective, especially since household incomes have remained relatively flat as opposed to the gradual increase in vehicle transaction prices.

It's easy to see signs of growth for loans of this length. According to Experian, loans with terms of 73 to 84 months represented roughly 26% of new-vehicle originations during the fourth quarter of 2014, an increase from 20% during the same time a year earlier. These loan terms rose from 13% to 15% for used vehicle purchases during that same time4.

Additionally, new lenders are entering the space for loans of 72 months or longer. Ally Financial Inc. recently announced an 84-month loan package to well-qualified customers this past February. Collateral insight can bring longer loan risk into focus. Timely and accurate data, tracking the residual values of segments and even vehicles, allow risk personnel to be at ease with their portfolio.

2

Collateral Insight Critical to 84-Month Auto Loans

May 13, 2015

Collateral Insight & Longer Loans

To be sure, lenders are warm to the idea of longer loan terms as they present the opportunity for additional risk. In Ally's case, CEO Jeffrey Brown "said recently that Ally had `underachieved' for the past two or three years by not taking on enough credit risk," as reported by Automotive News.

Chrysler Capital also recently announced an expansion of its appetite for longer-term loans, as well. The company's percentage of loans with terms of 73 to 75 months increased from 19.9% to 20.1% during the first quarter of this year, up from 9.8% in March 20145

Four considerations when determining risk levels:

? LTV ratio ? Rate of vehicle depreciation ? Credit profile ? Risk adjusted return on capital

Whether a lender's portfolio strategy is to mitigate or take on additional risk, access to collateral data performance and insight can help identify the right vehicle or segments for a loan with 72-month terms or longer.

When a lender is looking to evaluate the amount of risk tolerance in a long-term loan, there are four things to consider: How much initial loan-to-value they want to establish; the rate of annual depreciation of the collateral; credit profile of customer, whether subprime or prime; and determine if the Risk-Adjusted Return on Capital is sufficient.

Collateral data can help bring the right decision into focus. Data can help determine the loan-to-value ratio during origination, historical depreciation patterns and the projected residual forecast based on the desired time frame for the loan term.

Profitability on loans underwritten to traditional standard terms lack the desired loan margin at current low rates. Increasing risk is the common method to profitable growth in a market exploding with competitors. Many lenders seek the opportunity to enhance their portfolio margins through the portfolio management via increasing loan terms vs. relaxing credit criteria.

3

Collateral Insight Critical to 84-Month Auto Loans

May 13, 2015

Collateral Data Helps With Vehicle Selection

Which segments or vehicles are right for a portfolio? Collateral trends can amplify insight into the decision-making process. As an example, pickup trucks have performed well in recent history based on collateral patterns. These vehicles are expected to continue to outperform the market over the next several years. However, as supplies continue to increase, this outlook may change.

Gas prices can also have an impact on vehicle depreciation patterns. As such, pickup trucks are expected to perform well in the near term against the backdrop of moderate fuel prices, which are expected to remain stable through the remainder of 2015 and into 2016.

Conversely, compact cars have been under more stress, and their depreciation patterns have reflected this pressure. More car shoppers have opted for larger cars, crossovers and SUVs, and as a result, smaller car segments have felt larger depreciation outside of the spring tax-buying season.

Luxury car segments have been stable at the higher end of depreciation. Mid-size cars equipped with more luxury features have captured more car shoppers who have become content-loyal as opposed to brand loyal. Mid-size cars in segments not traditionally known for luxury now offer features such as in-car Wi-Fi and safety technologies, stealing market share from luxury-heavy segments.

Collateral data trends, along with analytical insight, continuously illustrate the segments that perform differently. The right collateral data can help lenders make the right decision to satisfy specific and unique portfolio objectives, such as risk management or the identification to take on additional risk.

4

Collateral Insight Critical to 84-Month Auto Loans

May 13, 2015

Keeping Monthly Payments Low

Benchmark axis and site sources of data: US Census and Black Book

Longer loan terms are necessary today to keep monthly payments beneath $400 ? a sweet spot for many consumer auto budgets. In order to accomplish this, lenders must extend out the terms because household income growth has not kept pace with transaction price increases over the last several years.

According to the U.S. Census Bureau, from 2007 through 2012, household incomes rose just 1.6% from an average of $48,729 to $49,486. However, during that same time, the average price of a 2-6 year-old vehicle rose 24.9% from an average of $11,160 to $13,949 according to Black Book vehicle valuation data.

5

Collateral Insight Critical to 84-Month Auto Loans

May 13, 2015

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download