Hard One-Two Punch Hits Subprime Market

The subprime market is reeling from a one-two punch of declining used-car values and incentives drawing many would-be used car buyers into the new-car arena.

Subprime's downtrend, signs of which first appeared last summer, brought about a climactic $44.7 million fourth quarterly loss for the largest independent non-prime lender, AmeriCredit, Inc., and prompted a tightening of loan acceptance criteria through the volatile subprime industry.

Whether the hardships will persist this year remained unpredictable.

Westcorp, Inc., which managed to show a record $79.7 million profit last year, pointed one way to reverse the tide with a newly-implemented policy of sharply limited loans to subprime borrowers and high-risk prime customers.

Credit Acceptance Corp (CAC), also experiencing a substantial decline in loan performance, believes it's temporary. But CAC CFO Douglas W. Busk says, “It's impossible to determine whether external factors, such as economic conditions, may have contributed to the decline.”

AmeriCredit blames its hit on increased credit losses combined with depressed used-car auction prices.

“We have taken a number of steps to meet these challenges in an effort to turn our financial results around in 2003,” says the company's president and CEO, Michael R. Barrington. (See story on page 41.)

Loan originations are being reduced in the highest-risk subprime area by AmeriCredit, Westcorp and Credit Acceptance. AmeriCredit CFO Daniel E. Berce says the ongoing wave of 0%-driven loans on new vehicles is hurting used units, which in turn hurts their values at auction.

Berce forecasts a return to profitability this year, although the company predicts loan originations will taper off at about $6 billion for fiscal 2003.

Westcorp, Inc says its WFS Financial auto loan subsidiary boosted auto contract purchases 11% to $5.4 billion for 2002. That's despite “depressed wholesale used-car prices, negative seasonal credit trends and a $23.2 million increase in the level of our allowance for credit losses,” says Westcorp CFO Lee A. Whatcott.

He says stepped-up emphasis on “prime quality” contracts accounted for the profit showing, which amounted to $19.5 million in the fourth quarter on revenues of $1.2 billion. “When we saw auction prices falling as much as 15% over the past two years, we realized the need to bolster the quality of our contracts at our 7,500 franchised dealer clients,” he says.