COLORADO SPRINGS, Colo.-The person who was first to make the call that the used car price bubble could burst, now says the downward slide in used values is starting, as well.
Bill Vogeney, EVP/CLO at Ent FCU, pointed out that Fitch Ratings expects auto loan losses to increase throughout this year and into 2014 due to softening used car values. The increase in new car sales and resulting trade-in is adding to the number of used cars on the market and bringing down values Fitch is projecting-something Vogeney predicted 18 months ago.
Black Book, Gainesville, Ga., also reported that used car values declined in May.
"This may catch some lenders off guard, because we have been benefitting from very low auto loan losses of late-borrowers are repaying and when we take a car back we get top dollar," pointed out Vogeney.
Looking inside Ent's own auto loan portfolio, Vogeney sees the same signs. "We looked at things year over year in December and metrics definitely show the used car market is softening by maybe as much as 12% to 15%."
Vogeney thinks the shift could drive up loss ratios on auto loans by 25% to 30% even with no increase in repossessions.
Going To 84-Month Terms
Extending term has been an issue too, as lenders have been going much longer on loans, as Experian pointed out. Jim Maloney, manager at the $927,000 Chester Upland School Employees FCU in Chester, Penn., said the credit union is extending terms this year out to 84 months.
"Sixty months used to be our max, and this is the first year we have ever done seven years. The members really like the lower payment," said Maloney. "But the determining factor is us going out to 84 months was requiring GAP insurance. We feel that balances the risk."
Vogeney concurs that CUs must take precautions in a sagging market for used car values. He said credit unions should examine their portfolios for any signs of change. "I think that credit unions that have been very consistent and careful in their lending won't have to do a lot. The credit unions that may have stretched over the last few years may want to look at their own metrics and analyses, see what they are getting for repossessed cars, and forecast what that might mean for future losses. Do they pull back little on maximum loan to value, or maybe a little bit on term? Do they need to increase their rates ever so slightly, specifically on the lower credit tiers?"
