Study Says Recalls Don’t Hurt Residuals

High-profile vehicle recalls may keep some skittish lenders from expanding their portfolios. But historical data trends indicate recalls typically don’t hurt residuals.

That’s according to an ironically termed Black Book white paper entitled “Total Recall: Is There Additional Risk From Recalled Vehicles in Your Portfolio?”

It’s a timely question in this year of mass recalls. The simple answer: no.

“Recalls do not necessarily spell trouble for vehicle retention in the short term or several months following the recall period,” the study says. “And while there are never any guarantees, particularly in a recall environment that affects millions, the strength of a manufacturer’s brand can play a significant role in mitigation.”

A case in point of brand strength is Toyota, which recalled 9 million vehicles in late 2009 because of “unintended acceleration” gas-pedal issues on some models, including the popular Camry midsize sedan.

Data indicate the ’08 Camry at that time had a healthy monthly depreciation rate of 3% in early 2010, a few months into the recall and at a time of high public scrutiny aimed at Toyota.

“This particular vehicle’s retention rate held firm,” outperforming the segment’s overall depreciation rate of 3.5%, the study says, adding that “brand strength is important during and after a recall.”

General Motors recalled 11.3 million vehicles from January to May of this year, many involving highly publicized ignition-system malfunctions. The Chevrolet Cobalt is one of the affected vehicles.

Yet, ’05 and ’06 Cobalts “actually increased in value (1.4% and 1.1%, respectively) several months following the recall,” the Black Book analysis says.     

The study quotes Dave Colby, chief economist for a credit union organization, who says: “I really don’t see (the GM recall) as a significant factor impacting credit unions. Consumers will continue to look for monthly payments, (fuel economy) and vehicles that fit their needs.”

Such data trends help lenders find profit opportunities and evaluate risks involving factors such as supply levels, creditworthiness and loan-to-value levels.

Black Book says: “The psychology of a vehicle recall, particularly one garnering national headlines, has the propensity to keep auto lenders from expanding their portfolios with the vehicle in question.

“However, historical collateral data trends have shown that recalls typically do not adversely impact normal retention patterns of a vehicle, immediately after the recall is initiated as well as into the future.”

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