Posted 5 years ago
“Keeping Them Sold” in Subprime Auto Finance – Part 1
By Kenneth Shilson
President, Subprime Analytics
At Subprime
Analytics, we measure success in Subprime Auto Finance by “keeping vehicles
sold” and subprime finance customers paying over the term of each contract.
Some operators measure performance strictly on how many vehicles they sell each
month, and not on collection performance metrics like static pool,
loss/liquidation, and default rates. I liken this to “flying an airplane
without an instrument panel” or buying a vehicle at auction without “looking
under the hood” as an analogy.
This
will be the first of five articles which will follow weekly on what keeps
subprime customers paying and the ways you can increase cash flow and get the
capital needed to grow your subprime auto finance portfolio.
The
last three years (2015-2017) have been the most competitive in history for the
subprime auto finance market. This fierce competition resulted in some very
aggressive underwriting which has translated into more defaults. Total
outstanding automotive receivables now exceed $1.1 trillion at March 31, 2018,
according to Experian. This makes auto financing the second largest consumer
market, only exceeded by student loans. The outstanding BHPH subprime
receivables are estimated to be approximately 6.4% of the total, or
approximately $80 billion! The unprecedented growth during the last three years
has been “fueled” by cheap money from auto bond securitizations issued by Wall
Street. The percentage of subprime auto loan securitizations considered deep
subprime (consumers with 550 credit scores and below) rose to 32.5% in 2017 –
up from only 5% in 2010. This represents an increase of more than 600%! The
risk associated with these securitizations was passed to investors who were
seeking higher returns on their investments. This may turn out to be “fool’s
gold” on many of these deals.
The
poor performance and loan losses from many of these deep subprime
securitizations have forced banks and private equity sources to shut down
funding for an increasing number of smaller subprime vehicle lenders, as they
shift funding emphasis to prime and near prime customers. That lack of funding
is causing many subprime lenders to close up shop and has caused a credit
tightening. This tighter credit availability will reduce competition in
subprime auto finance and create an opportunity for independent dealers and
their related finance companies to regain market share lost during the last
three years.
For
the last 20 years, Subprime Analytics, along with other contributors, has
prepared and published BHPH (subprime) benchmarks relating to independent
operators.
It
is important to compare the business models from the independent operators’
benchmarks with the subprime models funded by the auto bond securitizations.
The table below shows the important differences between them:
Business Model Comparison |
2017 Deep Subprime per Experian |
2017 Independent BHPH Benchmarks |
Difference |
Percent Difference |
Amount Financed |
$14,022 |
$11,951 |
$2,071 |
17% |
Used Loan Term |
55 Months |
44 Months |
11 Months |
25% |
Used Monthly Payment |
$394 |
$390 |
$4 |
1% |
Average Finance Rate |
20.3% |
20.5% |
0.2% |
1% |
Understanding
the differences in underwriting, and their impact on collections and
recoveries, risk, and cash flow is what we must learn from the deep subprime
securitization losses. In my articles, which will follow over the next several
weeks, I will explain each of the above in more detail so these mistakes are
not repeated.
A
complete copy of the 2017 benchmarks can be obtained by emailing me a request
to ken@kenshilson.com.
At
the NIADA/NABD Expo on June 19 in Orlando, I will discuss the subprime market
changes, what we learned from them, and what’s ahead in 2018 and beyond. Hope
you will attend!
Learn From Past Mistakes, Don’t Repeat Them!
Kenneth Shilson is President of
Subprime Analytics (www.subanalytics.com)
which provides computerized subprime auto portfolio analysis using
proprietary data mining technology. To date, the company has analyzed over 2
million subprime auto deals aggregating $20 billion. The company provides
portfolio analysis, profit and cash flow enhancement and other consulting
services to operators and capital providers nationwide. Mr. Shilson is the President
and Founder of NABD, which merged with NIADA on Jan. 1, 2018.