Subprime fallout hits autos
As financing gets tougher and loan defaults rise, sales forecasts take a dip
Donna Harris and Jack Herman
Automotive News
August 27, 2007 - 12:01 am EST
The collapse of the subprime home mortgage market is infecting the U.S. auto industry.
Car and truck buyers, especially those with lower credit scores, often are finding it harder to get financing. Vehicle-loan delinquencies are rising among higher-risk customers. And as budget-squeezed consumers put off vehicle purchases, industry forecasters are cutting their sales predictions for 2007.
The mortgage mess and falling home values are weakening consumer confidence in a way that threatens other big-ticket purchases, industry executives say.
"Outside of a home, a car is one of the biggest things we purchase," Ford Motor Co. CEO Alan Mulally said last week. "When you look at all of the things that are happening right now in the United States, it's a watch item. It's something we really have to pay attention to."
Last week, the National Automobile Dealers Association scaled back its 2007 sales forecast, in part because of the battered mortgage market. In February, NADA chief economist Paul Taylor predicted that U.S. sales of new cars and light trucks this year would roughly equal the 2006 mark of 16.5 million. Now Taylor predicts 2007 sales could dip as low as 16.1 million units.
Dennis Graham, an analyst with the Plante and Moran consulting firm, says U.S. sales could fall below 16 million vehicles this year. That would make 2007 the worst year since 1998, when the industry sold 15.6 million cars and trucks in the United States.
At the same time, some lenders have raised interest rates on vehicle loans to subprime buyers. That can add up: A four-year, $20,000 loan at 7 percent costs the buyer about $880 more than the same loan at 5 percent.
"Customers who come in with their own financing, it used to be 4.9, 5.9 percent," says Matt Thompson, general sales manager of Watertown Ford in Watertown, Mass. "Now it's 'Can you beat 7 percent?' "
Lenders and dealers say the subprime crunch has had little effect on the cost and availability of inventory financing for dealerships.
"It's a different business," says David Cosper, vice chairman of Sonic Automotive Inc. and a former executive with Ford Motor Credit Co.
Subprime blues
The credit crunch caused by problems in the subprime home mortgage market is spreading to the auto industry. Here are some of the effects.
- Consumers are deferring vehicle purchases, causing some industry analysts to cut their U.S. sales forecasts for 2007.
- Subprime auto buyers often face higher loan interest rates and other obstacles to getting financed.
- Delinquency rates on subprime auto loans are rising.
- Industry leaders cite an overall decline in consumer confidence.
'Disaster at retail'
Dealers in markets where subprime mortgage problems are most acute report slumping sales at their stores.
Many consumers, the dealers say, are delaying vehicle purchases. Other customers are buying lower priced cars and trucks with fewer options and aftermarket products to pare their monthly payments.
Patrick Strickland, sales manager of Brandon Ford in Tampa, Fla., says the number of his customers who finance vehicles with home equity lines of credit has dropped by two-thirds in recent months. More customers have missed mortgage payments, Brandon says, making them harder to finance.
Thompson of Watertown Ford also cites greater difficulty getting customers financed over the past two months.
"My finance manager came to me and said, 'I don't know what the hell is going on here -- everybody we've been working with is having problems'," Thompson says.
Mike Jackson, CEO of AutoNation Inc., says the mortgage industry's troubles have created "a disaster at retail." AutoNation, the nation's largest dealership group, has a concentration of stores in California and Florida.
"To say there is no spillover from housing into automotive is ludicrous," Jackson says. "Retail sales are down 7 to 8 percent. That's almost a million units a year."
Jackson says "things could get ugly" if the Federal Reserve Board does not do more to reduce interest rates. This month, the Fed cut the discount rate by half a percentage point, to 5.75 percent.
The discount rate is the rate at which the Fed makes short-term loans to banks.
More delinquents
About 30 percent of subprime auto borrowers own homes, says Jack Tracey, executive director of the National Automobile Finance Association. The trade group represents subprime lenders.
Tracey says the subprime mortgage crunch and changes in federal law that make it harder for individuals to file for bankruptcy have caused delinquency rates on vehicle loans to spike.
According to an association survey of subprime lenders, 11.6 percent of vehicle loans were delinquent last year, up from 6.5 percent in 2005. Tracey says delinquencies are up again this year, although he did not cite figures.
Tom Wolfe, president of Wachovia Dealer Services, says his company is seeing an increase in loan delinquencies "correlated to the areas of the housing market most impacted by the subprime market." But Wolfe insists those problems are not causing Wachovia to tighten floorplanning credit for its dealer customers.
"We have been in the auto finance business for over 60 years and are in it for the long haul," Wolfe says.
Toyota Financial Services also has seen an uptick in delinquencies, even though most of its borrowers have good credit, says CFO John Stillo. The captive finance company is seeing just "the beginning" of the subprime mortgage fallout, Stillo warns.
"The housing market is such an important part of how people feel about the economy," Stillo says. "It keeps the ball rolling from a credit perspective."
Mark Rechtin, Bradford Wernle and Amy Wilson contributed to this report
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This story posted by LeaseTrader.com, the automotive service company that lets people transfer out of their Car Leases early. If you're looking to swap a lease or transfer out of your car lease, please visit www.leasetrader.com