Not Just Dodges and Fords

Orlando — Donald Steen just took possession of two Maseratis and a Maybach, ultra-luxury cars. And he recalls recently having a pricey Bugatti that sure was sweet.

Steen isn't a member of the super rich who buys expensive cars because he can. He is a bank official here, who gets them through repossessions — and keeps them only long enough to sell them off.

“It's not just vehicles like Dodges and Fords that are being repossessed,” he tells Ward's at the Consumer Bankers Assn. automotive conference here.

It's his job, as SunTrust Bank's assistant vice president and remarketing manager-consumer collections, to oversee the confiscation of vehicles when owners get too far behind on payments.

Repossessions hit a record 1.67 million units last year, up 12% from 2007, according to the Manheim Used Car Market Report.

Considering the financial setbacks many people suffered, including personal bankruptcy (up 33% year-over-year) and home foreclosures (more than 2.8 million in 2008), “the rise in auto repossessions could have been much worse,” says Tom Webb, Manheim's chief economist.

Still, the repossession industry has been busy, doing work that's not particularly rewarding.

“A repo is a lose-lose situation,” Steen says. “The customer loses. The bank loses.”

On a big-ticket item such as a car, it only takes a few missed payments of several hundred dollars before banks get nervous.

“If you get to the repo stage, get it done quickly, because a vehicle is losing 1% of its value a month,” Robert Friedman, a director with Deloitte & Touche LLP, tells conference attendees.

Some repossessions turn into dramatic events. “The repo people we hire have had guns drawn on them,” Steen says. “Cars are very near and dear to some owners.” They don't take it well when their cars are taken away.

Other times, a resigned owner will initiate the relinquishing of the vehicle. “Some people call up and say, ‘Hey, I lost my job and can't afford to keep the car,’” Steen says. “We arrange for them to drop it off.”

Lenders will try to work with delinquent borrowers to come up with a pay-back solution to avoid repossession.

“It's understanding the customer and realizing financial problems can create other problems, including marital problems,” says Steen. “If they agree to a payback, that's good. If they say, ‘Don't call again,’ and hang up, that's not good. It's unfortunate when we have to hire a repo agent.”

The happy-ending goal is to keep the customer in the car and the loan on the books, says Jerad Brown, director-loss prevention for Capital One Auto Finance in Plano, TX. “It can be a win-win.”

Sometimes it's a matter of readjusting the payment schedule, he says. “If a customer gets a paycheck on the first of the month, and the car payment is due on the 15th of the month, it can help to change the payment to a date that's closer to payday.”

But delinquencies shoot up when there is no paycheck.

“People with jobs can make payments on their cars, and those without jobs can't,” says Scott Hoyt, senior director-consumer economics for Moody's Economy.com.

He predicts auto loan delinquencies will peak next year and start to fall in 2011.

Some customers facing hard times are willing to work with lenders. Others aren't so cooperative.

“A lot of times, you can't get them on the phone because they don't want to talk to you, even though they should,” Friedman says. “A customer you can talk to is far easier than one you can't talk to.”

Collection department representatives who do make contact must assess the sincerity and intent of the borrower. “Are they promising to pay back or just giving excuses, however valid those may be?” Friedman says. “And are the promises being kept?”

Although the phone is a standard work tool of bill collectors, some banks are starting to contact delinquent debtors through alternative channels, including emails, text messages and websites.

In contrast, lenders sometimes resort to the old standby of sending door-knockers, who talk to relatives and friends in an effort to track down hard-to-find borrowers in arrears.

“We'll do what we can to find a customer,” Steen says. “People can be very transient. But if someone is behind on an auto loan, they're probably behind on other loans, too. Bear in mind, we're not the only ones trying to contact them.”

Regardless, 85% of the time his bank locates a vehicle targeted for repossession.

How a vehicle is remarketed post-repo mitigates financial firms' portfolio losses. Those can run up. Losses currently are about $10,000 per unit, Steen says. Most repos go to dealer auctions.

“We're strong proponents of conditioning vehicles — a lot of it cosmetic work — to make them front-line ready,” Steen says. “We'll spend $1 to make $3 back. But we don't want to fix a car with frame or flood damage.”

Nor is it wise to inundate an auction with a batch of same make-and-model vehicles, he says. “You don't want to drop off 1,000 Dodge Neons at one location, because it will bring the value of all of them down.”

There are lots of tough-luck stories in the repossession world.

One of them is when a mom, planning to pick up the kids from school, discovers her car gone, taken by a repo team, Steen says.

A stress-inducer for a lender is that, if a customer is behind on a car loan, the car insurance probably has been cancelled due to non-payment. And if that vehicle is stolen or in a major accident, all may be lost.