The grim repo: Record defaults expected in '08

For Patrick Altes, business is brisk. His company repossesses vehicles in north and central Florida for banks and credit unions.

Altes seizes vehicles of all sorts. But lately he has been repossessing pricey brands such as BMW, Lexus, Hummer and big Ford trucks.

"When times were good, home builders and construction and concrete people bought brand-new Ford F-350 crew cabs and diesels," Altes told Automotive News. "Then the housing market collapsed. Now we're getting a lot of luxury vehicles from real estate salespeople and mortgage brokers."

The battered U.S. auto industry is poised to set a negative record in 2008: Most vehicles repossessed in a year — about 1.9 million.

That's bad news for the owners of those cars and trucks and the lenders who are losing billions of dollars from financing them. And it's bad news for dealers who could have trouble getting customers financed if they sell a large percentage of vehicles that are later repossessed.

Repos soar

Through September, repossessions of new and used vehicles rose more than 15 percent from the year-ago period, estimates Tom Kontos, executive vice president of customer strategies at ADESA Inc., a vehicle auction company. That increase in "repos" follows an 8 percent rise from 2006 to last year.

The home mortgage crisis, which led to Wall Street's meltdown, was built on a mountain of bad loans to home buyers with shaky credit. But Tom Webb, chief economist at Manheim, says reckless lending practices are not similarly to blame for the rising rate of auto loan defaults.

Instead, he cites high gasoline prices and a generally bleak economy.

"We've gone through cycles before where (auto) lenders made some pretty bad loans," Webb says. "This time, households have financial pressure. All of a sudden, they found they couldn't make their monthly payments."

More luxury vehicles

This year, newer, costlier vehicles such as luxury cars and full-sized SUVs make up a larger share of repossessed units, Kontos says. "These trends tell me that more repos appear to be coming from people with near-prime and prime credit" rather than subprime buyers, he says.

Adds Ralph Fisco, national remarketing manager at Toyota Financial Services: "This economic downturn knows no particular demographic boundaries."

Typically, lenders recover only about 40 to 60 percent of the loan balance when a vehicle is repossessed, Webb notes.

Through the first half of the year, GMAC Financial Services reported an average loss of $10,532 per repossessed new vehicle, up from $8,715 in the first half of 2007. For used vehicles, the average loss per repossession was $8,441, up from $6,925.

Says Mark Mathews, director of used-vehicle activities for General Motors: "It's rare that you get full dollar for dollar back when you get a repo and sell it."

In the second quarter of 2008, Ford Credit reported an average loss of about $10,000 per repossessed vehicle, up from about $7,000 in the year-ago quarter. Ford Credit spokeswoman Meredith Libbey attributed the increase to a larger number of repossessions of expensive SUVs and pickups.

When a vehicle is repossessed, lenders rather than dealers take the loss. But dealerships with a high percentage of repossessions could feel heat from lenders, says Dave Robertson, executive director the Association of Finance & Insurance Professionals.

"It stands to reason that if a lender sees a large number of cars being repossessed, it will be more circumspect in evaluating the current credit applications submitted by that dealership," Robertson says.

'I'm hurting'

Curiously, some repo men say they are losing business. They claim lenders are cutting consumers' payments on delinquent loans to avoid acquiring repossessed cars and trucks that would resell at a loss — if at all.

"I'm not getting rich," says Millard Land, who runs a repossession business in Houston. "As a matter of fact, I'm hurting. Clients are getting out of the financing business, and they are refusing to repossess cars because they are unwilling to take the loss."

Lenders contacted by Automotive News declined to discuss their delinquency policies.

Dealers often are reluctant to add repossessed cars and trucks to their used-vehicle inventories, fearing their owners may have abused the vehicles before walking away from them. "Most of the time, the vehicle is pretty used up because they know they are going to let it go back," says Kent Stevens, a Chevrolet dealer in La Center, Ky.

But Wes Lutz, a Dodge dealer in Jackson, Mich., says plenty of consumers are willing to take a chance on a repossessed vehicle. Such buyers, he says, seek to pay $5,000 to $7,000 for basic transportation.

"There are guys who just need transportation and want an average car," Lutz says. "They don't care about mileage. They care about price."

Both Manheim and ADESA say they are pinched for space to store large numbers of repossessed vehicles before they are sold at auction.

"We don't have to use outside space to nearly the degree we did at the beginning of the year," says ADESA's Kontos. "But inventories are still at elevated levels."

You can reach Arlena Sawyers at asawyers@crain.com

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