PHOENIX -

DriveTime Automotive Group is one example of how much the subprime auto finance market has bounced back since the deepest point of the last recession.

The company often caters to deep subprime customers as buyers attached to contracts with a rating of A+ had an average credit score of 556, according to its 2012 annual report filed with the Securities and Exchange Commission.

DriveTime retailed more than 10,000 additional vehicles last year than it did in 2009 (59,930 versus 49,500).

And DriveTime executive vice president and chief financial officer Mark Sauder alluded to the market his company is entering if it wants to enjoy a annual retail sales rise of 7 percent or more in 2013.

“The competition continues to be very strong with open access to credit, especially in the subprime sector,” Sauder said when DriveTime hosted a conference call after its annual report release earlier this month.

“I think you can see that in reading numerous articles out there that subprime auto finance is back very strong. The market is turning even more favorable,” Sauder went on to say.

CNW Research indicated that each month between September of last year and February of this year, approvals for subprime customers rose by at least 40 percent year-over-year.

While DriveTime’s business model is to sell vehicles to consumers with shaky credit histories, the subprime market is becoming ripe for franchised dealers, too. Lithia Motors entered 2013 with plenty of momentum in this particular consumer space.

Of the finance deals Lithia facilitated during the fourth quarter, 13 percent of those contracts went to subprime buyers,  a level company officials said was consistent with a year earlier.

But Lithia is looking for more, because the absolute number of contracts originated for subprime customers during the fourth quarter increased 26 percent year-over-year.

“We’re seeing more lenders enter into that subprime space again,” Lithia senior vice president and chief financial officer Chris Holzshu said during a conference call when the company released its fourth-quarter and full-year financial report.

“They realize there’s a high return rate on loaning money to subprime customers, because your vehicle is what you tend to pay first before all other bills. I don’t think that was proven pre-recession so we’re seeing a lot more entrants come into that market,” Holzshu continued.

“With that said, at 13 percent, we still feel like there are a lot of opportunities for that subprime business to recover. We think a more normalized level should be 18 to 20 percent, which means we have another lift in vehicle sales of 5 to 7 percent,” he went on to say.

“I think there’s still opportunity, and we’re going to continue to push to get as many lenders as we can into our stores in that space. We’re definitely seeing things move in the right direction.”

Another segment of Lithia’s business that often deals with buyers with less-than-perfect credit histories also is doing well.

Lithia highlighted the 38-percent year-over-year sales spike for its Value Auto segment. That’s the category Lithia rolled out a couple of years ago to move vehicles with more than 80,000 miles, units executives said often arrive in the company’s pipeline through trade.

Better Subprime Customers Nowadays

Manheim economist Tom Webb reiterated points made by all three major bureaus, Equifax, Experian and TransUnion — consumers are placing more priority on keeping up their vehicle loan payments over other monthly obligations.
And sometimes those loan holders who are considered to be subprime have more financial resources than borrowers in that category previously possessed.

“A lot of that subprime lending that has gone out recently, those borrowers are subprime simply because they have low FICO scores,” Webb said. “That’s how we define them. They are not subprime to the extent in the past, when they don’t have the great ability to pay.

“These are people who had their credit hurt during the recession. There were many of them who walked away from debt through foreclosures. Many of them didn’t have a significant decline in their income so their ability to pay is there. They just don’t have the credit score.”

Webb mentioned one other factor about recent activity.

“Even though some lenders have gotten a little more aggressive, I don’t think the loan-to-value ratios are ridiculous,” Webb said. “To that extent, certainly every borrower who drives the vehicle off the lot is upside down the minute they drive it off the lot. But I think they’ll be upside down for shorter periods of time because of the loan-to-value ratios are good, and used values are high.”

Delinquencies Under Control

As more subprime paper hits the streets, Experian Automotive is keeping a close watch on delinquency rates. Experian reminded lenders and dealers that despite a marginal rise in delinquencies for the first time since 2009, the auto lending market “is extremely healthy.”

Experian found that 60-day delinquencies rose from 0.72 percent in the fourth quarter of 2011 to 0.74 percent in Q4 of last year. The movement marked the first time since the fourth quarter of 2009 that either 30- or 60-day loan delinquencies experienced a year-over-year rise.

“Overall, our Q4 analysis shows that the auto lending market is extremely healthy,” said Melinda Zabritski, director of automotive credit for Experian Automotive.

“I will admit that I was anticipating to see delinquencies increase earlier than they did, so I was very pleasantly surprised that we continue to have such strong loan performance for our open book of business,” Zabritski continued.

“Because we have been steadily growing subprime now for a couple of years, I was anticipating that delinquencies would start to rise earlier in 2012, and they didn’t. Our delinquency rates stayed very low throughout the entire year.”

Reinforcing the point Webb made, Zabritski described how it’s encouraging for the entire auto finance market — and especially the subprime space — to see portfolios grow without any deterioration in credit quality or performance, even as average term lengths hit record highs well above 60 months.

To spot any underlying deterioration, Zabritski indicated that Experian is taking a slightly different approach this year when looking at delinquencies and other negative loan performance metrics.

“Looking at it from just national statistics, you paint a certain picture on how the entire country is doing,” Zabritski said. “But when you look at it by a state-by-state basis, you end up with some different stories.

“You end up with different parts of the country having a much stronger recovery than others. The same thing happens with subprime distributions. You have some states where there is more subprime being financed than there was pre-recession and others are still below,” she went on to say.
 

Editor's Note: This article appears in the May 1-14 print and digital versions of Auto Remarketing magazine as part of our coverage on the Subprime Resurgence. Stay tuned to this issue for more.

Nick Zulovich can be reached at nzulovich@autoremarketing.com. Continue the conversation with Auto Remarketing on both LinkedIn and Twitter.