Add used-car finance to the list of things to worry about -- a list that may, some lenders say, include the lower end of subprime lending.
“I’m afraid that healthy tree may now become infected,” Tom Webb, chief economist for Cox Automotive, said in a conference call about the used-vehicle market last week. Earlier this year, Webb had described auto finance as a healthy “tree” in a “forest” of otherwise bad economic news.
Webb cited a growing conflict on the used-car side: Some of the nation’s biggest auto lenders say they intend to minimize risk and maximize profits in auto lending, at the expense of volume.
At the same time, a flood of late-model used cars is hitting the market, so used-car auto finance volume must grow, he said.
Manage or grow?
Webb’s presentation suggested that under the circumstances, lenders may need to settle for higher used-car volumes and lower margins whether they like it or not. At the same time, he said higher used-car volumes are bound to depress used-car values eventually, even though used-car values have stood up better than expected so far.
“As I listen to lenders and investors, almost unanimously they are now saying we are at a point in the cycle where you, as the saying goes, ‘manage’ your book, you don’t ‘grow’ your book,” Webb said.
“Now, that could be wise advice. But we know what the coming volumes look like. Those volumes will need to be retailed,” he said. According to Manheim, off-lease volume is expected to grow from about 3.1 million in 2016 to 3.6 million in 2017 and more than 4 million units in 2018.
At a conference early last month for Wall Street analysts, executives for Capital One Financial Corp., JPMorgan Chase & Co., and Ally Financial Inc. all sounded a cautious note about auto finance, especially at the lower end of subprime.
Chris Choate, CFO for captive finance company GM Financial Co., sounded more optimistic in a separate presentation on June 23. While lender appetite for subprime loans may fluctuate, credit availability should be “fairly stable” overall, he said.
“If you look at the market data kind of month, by month, by month, by month, there are any number of smaller and larger players that mash on the gas and then pull back, and it kinds of ebbs and flows a decent amount,” he said. “And that includes Santander and Cap One and Wells Fargo and Chase Auto Finance and us and Ally and all the others, not just the small guys.”