ATLANTA — In an interview with SubPrime Auto Finance News on Manheim's Mid-Year Used-Car Market Report, Tom Webb explained that repossessions are declining throughout the industry and that loans performed well given the big loss in unemployment. He also indicated that dealers are gaining better access to floor planning, while lenders are ramping back up their leasing business.

Repossessions Show Downswing

Touching upon repossessions initially, Manheim's chief economist pointed out that repossessions peaked in 2009, with recovery agents going after an all-time high of 1.9 million units.

"The pace of repossessions, which began to slow in late 2009, continued to taper off in the first half of 2010. We suspect that total repossession volume in 2010 will decline 11 percent to 1.7 million vehicles," Webb highlighted in the report.

Discussing the repo trends in more depth with SubPrime Auto Finance News, the Manheim executive explained that repo volumes are already down about 7.5 percent this year.

"Portfolios are performing better and some reduction in originations will drive repo volumes down, also," he noted.

Overall, he said, "Loans performed very well given the big loss in unemployment. This is the number one driver of defaults on auto loans. With the weakness in the credit market you would have expected defaults and delinquencies to be worse. But many consumers who are upside-down on their house loans moved from the mortgage being the first paid to it being second or lower priority. They moved the vehicle payment higher in priority."

Furthermore, for those consumers who had trouble paying, lenders, whenever possible, stepped up to help by deferring payments. However, Webb noted there are some limitations to how much this can occur in securitizations.

When repossessions have occurred, lenders have tended to find it worthwhile to segment their vehicles and perform strategic reconditioning and then certify vehicles to one or more levels to assure dealers of vehicles' quality. Also, with volumes being down at auctions, on average, repossessions and off-lease units have been bringing in higher prices.

Leasing Coming Back

These higher prices and the slightly loosening credit markets have also allowed lenders who previously pulled back on leasing to drive up this business.

"The combination of plunging new-vehicle sales and a tumbling lease penetration rates pushed new-lease originations to just 1.1 million units in 2009, a level not seen since leasing's infancy back in the early 1990s. The TALF program, the bailout of GMAC and the general improvement in the credit markets allowed leasing to pick up in the first half of 2010," Webb indicated. "According to monthly lease penetration rates from J.D. Power, new-lease originations in 2010 are set to grow by more than 33 percent."

And while many lessors saw significant losses on end-term leases thanks, in large part, to the weakness in wholesale prices in 2008, this trend has reversed.

With volumes down at auctions, leases that are coming to end-of-term are bringer higher prices and residuals are holding up well, Webb said.

So, will leasing penetration return to the highs of the late 1990s?

"When these vehicles come back, they should perform relatively well in terms of residuals as long as manufacturers and captives are not overly subventing the leases. This should be a good deal. Leasing is a good product for the lessor, dealer and customer. While lease rates are up substantially with the credit market improved and many players are back in the game, I'm not seeing a tremendous amount of stupid leasing. Of companies pushing product for a really low monthly payment to keep factories open. Low levels of leasing are profitable and it wouldn't make sense to go back to that route (of high penetration rates)," Webb told SubPrime Auto Finance News.

Ultimately, Webb sees volumes remaining low at auctions for a while, helping to bolster wholesale prices.

"Although new-lease originations have picked up recently, that will not forestall the large decline in off-lease volumes that the industry will experience in 2011 and 2012. The unit decline in off-lease volumes during this cycle will be slightly less than what occurred between 2002 and 2006, but the percentage of falloff will be greater. And it is important to note, in the last cycle, lower lease originations were solely the result of lower lease penetration rates, total retail, new-unit sales remained high. Thus, although off-lease volumes were down, the total supply of three- and four-year-old vehicles entering the market was little changed, they were just coming back as customer trade-ins as opposed to lessee turn-ins," Webb indicated in the report.

"In this cycle, there will be a substantial reduction in the potential supply of three- and four-year-old vehicles simply because overall new-vehicle sales have been so low recently. From 2008 through 2010, an estimated 35.2 million new vehicles will be sold. Contrast that to the 515 million new vehicles that were sold from 2000 to 2002. As such, the future residual performance of recently written lease deals should perform favorably," he added.

Dealer Floor Planning Gets Stronger

Moving on to touch upon dealer floor planning, basically, as sales have grown at dealerships, dealers' books have gotten stronger, thus increasing their credit worthiness and helping to open back up the floor planning faucet.

"In terms of wholesale financing, TALF didn't really help directly because the cost structure was not good for participants — too much of a haircut. However, as retail sales got better, there was better wholesale financing available. MAFS and ADESA's AFC (KAR Auction Services) have money to lend. They are either expanding credit lines or bringing on new dealers. There is money available now," Webb pointed out.

"TALF's ability to improve the retail finance market (and the overall credit market) put dealers in better financial shape, which in turn, means many wholesale lenders are once again seeking new-loan opportunities," he highlighted.

More Dealers Turned to BHPH

Finally, while dealers are having a bit easier time finding retail loans for their customers across the spectrum now, many got into or considered getting into the Buy-Here, Pay-Here business when the lending market was so tight.

"The BHPH model affords the dealer greater flexibility in working with customers and offers the potential for extra profit, but new entrants must quickly realize they are no longer just in the car business, they are also in the finance business. As such, it is important to have well-established collection practices and systems."

To purchase a full copy of the Manheim Mid-Year Market report, visit www.manheim.com/consulting.

For more coverage of the report from SubPrime Auto Finance News' sister site, Auto Remarketing, click here.