Credit VROOMs: Auto Loans in 30 Seconds
Stock Chart for Capital One Financial Corp (COF)
Three years ago, credit was so tight that the owner of a legal firm with a $400,000 salary and a very good credit score of more than 700 couldn’t get financed to buy the car he wanted from Michael Mosser’s dealership.
“The world is upside-down compared to then,” said Mosser, general manager of Chevrolet and Cadillac stores in Ann Arbor, Michigan. “Today, somebody with a 500 credit score, I can get approved and in a Malibu,” which starts at $22,110.
Lenders resisted extending credit to car buyers when the mortgage market collapsed in 2008, helping push General Motors Corp. and Chrysler LLC into bankruptcy and sending U.S. sales to the lowest point in almost three decades. Amid a slow housing market, auto demand is rebounding, spurring lenders from Bank of America Corp. to Capital One Financial Corp. to approve buyers faster and at better rates to compete for a piece of an expanding market.
“Banks have had to look elsewhere for growth opportunities, and auto has been one of the nice spaces over the last couple years,” Curt Beaudouin, a bank analyst for Moody’s Investors Service in New York, said in a phone interview. “The credit experience in terms of losses has been very good in recent times. It’s never gotten out of hand. Right now, it’s basically good for everybody in the industry.”
U.S. light-vehicle sales rose 10 percent to 12.8 million last year. That momentum continued as automakers sold cars and trucks in January at the fastest pace since the U.S. government’s “cash for clunkers” program in August 2009, according to Autodata Corp.
Capital One boosted new-vehicle loan originations by 35 percent in the third quarter and 75 percent in each of the first two quarters of 2011 from the year-earlier periods, according to data provider Experian Automotive. That put Capital One ahead of Bank of America in market share for new-vehicle loan volumes and closer to Ally Financial Inc. and Wells Fargo & Co.
Capital One revamped a program for select dealers late last year that gives them perks such as faster approvals and exceptions for customers with borderline credit scores, said Kevin Borgmann, president of the McLean, Virginia-based lender’s auto-finance unit.
The company’s speed is “a big competitive advantage for us,” Borgmann said in a phone interview. Capitol One decides “the majority of applications for any dealer that does business with us within 30 seconds. Dealers find a lot of value in that because they can go out and sell the next car.”
Capital One is among several large banks creating dealer- specific programs to take advantage of a market with growing sales and still-low delinquency rates, said Melinda Zabritski, director of automotive credit for Experian Automotive.
“You’ve got pretty fast decisioning going on in the market,” Zabritski said in an interview. “When the market pulled back, the instant decisions really slowed down. You had more manual reviews. That’s one of the things you’re starting to see change is you’re going back to the automatic approvals. For a while, you really were only doing automatic declines.”
Lenders also are protected by a strong wholesale market, Zabritski said. Used-vehicle prices, which are near record highs because of short supplies, may increase 1.8 percent this year, according to Jonathan Banks, an analyst with the National Automobile Dealers Association’s Used Car Guide. Higher prices for used-cars reduce the loss a lender takes in the event of reselling a repossessed vehicle.
Faster decisions on auto-loan applications is “clearly something you would expect as credit becomes looser,” Don Johnson, General Motors Co.’s vice president of U.S. sales, said in an interview. “Consumers are deleveraging, their scores are getting better, so those automated systems logically should be turning more positive with more and more yesses.”
The ratio of borrowers who fall behind on their auto loans by 60 days or more will remain the same this year as 2011, according to TransUnion LLC. Delinquencies may have fallen to 0.51 percent at the end of last year, from their peak of 0.86 percent during the recession, TransUnion said in a report.
GM Financial, formerly known as AmeriCredit Corp., the subprime lender that GM acquired in 2010, has provided competition for Ally Financial, GM’s former financial arm under the name GMAC Inc. Wells Fargo also is “aggressively going after our dealers’ business,” Johnson told analysts and reporters on a Feb. 1 conference call.
Subprime borrowers are considered to be a higher-than- normal credit risk.
Ally, the top lender in new-vehicle financing this year, let its market share go to “almost zero” when liquidity dried up in 2008, Chief Executive Officer Michael Carpenter said in an interview.
“There were months in 2009 where our share of retail was zero because we simply couldn’t fund it,” he said. “If you roll the clock forward and get to the middle of 2010, we were back with higher share than we ever had as a captive” lender to GM.
AutoNation Inc., the largest retailer of new vehicles in the U.S., is forecasting U.S. auto sales will rise to about 14 million this year.
Mike Jackson, chief executive officer of the Fort Lauderdale, Florida-based company, said in an interview last month that available financing combined with better selection of cars from Japanese automakers and customers wanting to replace aging vehicles will spur demand.
The average age of U.S. cars and trucks has risen to a record 10.8 years, according to R.L. Polk & Co.
Contrast With Mortgages
“People pay for their cars before they pay for their houses,” Mike Maroone, Autonation’s chief operating officer, said in a phone interview. “They couldn’t afford to lose transportation because it ties right to their ability to work.”
Wells Fargo, JPMorgan Chase & Co. and Bank of America are among the lenders with whom AutoNation works most closely on financing customers with prime and near-prime credit, Maroone said. GM Financial has been among the most aggressive in lending to subprime borrowers, he said.
Bond offerings linked to automobile loans and leases, such as GM Financial’s $1 billion sale announced on Jan. 31, are set to dominate the asset-backed debt market for the fourth straight year in 2012, according to Wells Fargo Securities LLC estimates.
Sales of the securities may jump 11 percent to $63 billion this year, accounting for about 55 percent of bonds tied to consumer borrowing, the bank said. About $57 billion of bonds tied to auto debt were sold in 2011, or 54 percent of new deals.
The strength of the auto lending market differs from that of mortgages, where offerings of bonds without government guarantees backed by such loans may total just $5 billion this year, compared with peak originations of about $1.2 trillion in both 2005 and 2006, according to JPMorgan analysts.
No `Blank Check'
Ally, based in Detroit, has told investors it won’t file for an initial public offering until issues tied to faulty home loans are resolved and that it won’t give a “blank check” to its mortgage unit, which has teetered near bankruptcy.
Mosser, the Chevy and Cadillac dealer, said his daughter is struggling to buy a $105,000 condo. While she’s putting 20 percent down and he’s going in on the mortgage with her, it has taken more than 30 days for the bank to approve.
“I could walk out of this dealership in 20 minutes with a brand-new, $80,000 Escalade,” he said. “And you’re going from a car loan, which is somewhat unsecured, to a home, a property, which is secured. It’s kind of crazy.”
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