Pain at Pump Linked To Defaults?

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COLORADO SPRINGS, Colo.-The growing pain at the pump could translate into growing pain in the portfolio.

A number of CU executives are concerned a sustained hike in gas prices will lead to members defaulting on auto loans, especially on gas guzzlers. For Bill Vogeney, SVP at the $3.1-billion Ent FCU, the concern is justified, based on evidence he has collected.

"I saw a direct correlation," Vogeney said. "On average, when gas goes up at least 25 cents in a calendar quarter, 70% of the time loan losses [at Ent] per auto loan type-regardless of direct or indirect, new or used-rose on average 50% within nine months as consumers felt the pinch of higher gas prices. It takes consumers a while to realize they can't afford the gas their big car is using."

Vogeney spotted seven calendar quarters in which gas prices rose by 25 cents or more at Colorado pumps, most of them coming in 2007 and 2008, and said Ent saw corresponding, increased losses both in numbers and magnitude.

"When we take a car back, these larger trucks and sport utilities hit the wholesale market as repossessions at the worst possible time. Prices are up for gas and prices for these vehicles in the wholesale market are down. The CU takes a larger loss due to falling values, a double whammy."

Whether that trend continues is uncertain, said Vogeney. There are fewer people gainfully employed coming out of this recession, he noted, but the automakers are not overloaded with sport utilities and trucks as they were during the last gas crisis, which drove down prices as credit unions attempted to sell their repos.

Vogeney believes Ent is better prepared now, having decreased its loans for SUVs and trucks, and increased its relationship with dealers that offer more fuel efficient cars.

At the $488-million Rivermark Community CU, Beaverton, Ore., Gayle Rust Gustafson, VP-financial services, is very concerned. "When gas prices were at their highest we had a record level of repos and a lot of them were voluntary-people just dropping off the cars."

As a result, Rivermark has cut back on its longer-term, high LTV loans on big cars. "That is where we take the biggest hit, when those big, old SUVs come back and the member has not paid much on it because he took an 84-month loan. Generally we lose about 50% of the loan balance there." Rust Gustafson added that she is worried about some CUs that are buying a great deal of longer-term auto paper since that is what manufacturers and banks are not competing on.

The $4.5-billion Peoria, Ill.-based CEFCU is paying attention to gas prices too, shared Keith Reynolds, community president of CEFCU San Jose (Calif.). "This is a legitimate concern. We certainly saw that a couple years ago and we amended some of our procedures on our less gas-efficient models, tightening up on loan-to-value on these cars. We wanted these borrowers to have skin in the game."

Credit Union Journal did speak with several CUs that were not concerned about the spike in gas significantly affecting loan losses, including Nancy J. Orlando, SVP of credit at the $4-billion Teachers FCU in Farmingville, N.Y. "We are not concerned at this time. People on Long Island need cars to get to work."

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