Lending Slowly Comes Back

CHICAGO — Unemployed and financially troubled Americans might beg to differ, but the recession ended June 30, 2009.

No declaration proclaimed it was over. But that was the turning point, says Mark Vitner, a senior economist at Wells Fargo Securities.

“We don't see a double dip (a second round to the recession) coming” although this summer “we expect the economy to slow,” he says at the Automotive Economic Forecast and Financial Forum here where a string of experts offer economic predictions affecting the industry.

Credit is not as tight as many feared it would be. “But it's still tight,” Vitner says. “Spending has come back much faster than income or consumer confidence.”

“Right now, we are just at the beginning of a recovery in terms of jobs,” says Ford Motor Co.'s chief economist, Ellen Hughes-Cromwick.

Consumer income should rebound in the 3% range, she predicts. “We've seen a lot of stabilization in the credit markets,” yet auto lenders have not regained a “normal appetite for consumer lending.”

Melinda Zabritski, director of automotive credit for Experian Automotive, outlines the impact of credit scores on retail financing.

Experian's rating puts super-prime consumers at 740-plus; prime in the 680-739 range; nonprime at 620-679; and subprime at 560-619. Deep subprime consumers, the least likely to get financed, are under 560.

About three-fifths of Americans rank as particularly creditworthy, meaning they are super prime or prime.

Super prime “held relatively stable” though 2009 at 36.8%, Zabritski reports. Prime-scoring customers totaled 23.9%; nonprime, 15.2%; subprime, 8.8%; and deep subprime, 15.3%

The problem with obtaining financing lies mainly with those who fall into the three subprime categories. Scores required to get a new-vehicle loan began to increase in 2007, Zabritski says.

Of vehicles financed in January and February of this year, 34.3% were new and 83% bought by prime and super prime customers.

Somehow, deep-subprime buyers managed to finance 1.3% of those new models, despite their distressed credit scores. Almost 15% went to subprime or nonprime customers, a percentage that was considerably higher before the credit freeze of 2008.

A point to consider: The aforementioned figures don't include car-loan applicants whom lenders rejected.

Average monthly payments haven't varied much. For new vehicles, super-prime and prime customers paid an average $467 per month. That handful of deep subprime buyers had an average monthly car loan of $458.

The big difference comes in interest rates. Super-prime new-vehicle buyers paid an average of 4.43%. Subprime customers were charged 10.8% and deep subprime 13.23% on average.

A similar span of rates applied to used-car buyers, from 6.06% for super prime to 18.09% for the deep subprime group.

The average loan term is now 62 months for new vehicles, 57 for used. Zabritski says 84-month loans, which were on the rise a few years ago, now are disappearing, but plenty of 72-month terms are issued, and originations continue to tighten.

In a perfect world, car loans would only go to consumers with sterling credit scores.

“But you lock out a large segment of the market” by giving loans only to the most qualified customers, says William Strauss, senior economist for The Federal Reserve.

As markets improve, more financial institutions “will be willing to lend,” Strauss says.

For the near future, though, there remains “a big portion of the population that won't be able to qualify for a new car,” says Tom Kontos, executive vice-president of customer strategies and analytics for the Adesa auto auction group.

Delinquency rates remain near all-time highs, keeping repossessions high.

Zabritski reports the worst delinquencies stem from 2006-2007 loan originations. In 2009's final quarter, 3.34% of financed customers were delinquent by 30 days, and 0.96% were 60 days late on paying loan installments.

Early in 2009, only 2.82% were 30-day delinquent and 0.79% fell into 60-day arrears. Those who are only 30 days behind have a much greater chance of coming back and ultimately making good on the loans, Zabritski says.

“Each lender will be a little different” with respect to repos, she says. Some subprime lenders definitely are “more aggressive.” In her tracking, Zabritski doesn't consider 90-day delinquencies. Why? Because the repo teams move in before that much time elapses.