ATLANTA — When Manheim considered the buy-here, pay-here market when compiling its annual Used Car Market Report — Mid-Year Edition, chief economist Tom Webb discovered these stores have been especially impacted by high wholesale prices.

Webb insisted BHPH dealers have to be just as careful about the vehicles they stock as they are about evaluating the likelihood of default.

With wholesale prices at record levels, Manheim acknowledged that finding reliable units that could be financed at an affordable monthly payment can be difficult.

In the first half of 2011, Webb pointed out BHPH dealers often paid $2,000 more for the same type of vehicle they bought a couple of years ago.

"Unless dealers had the capital to buy these more expensive vehicles and carry the financing, they often ended up selling fewer units in 2011," he surmised.

"BHPH dealers are generally reluctant to lengthen loan terms to hold down monthly payments, fearing that defaults will increase," Webb continued. "Longer loans increase the likelihood of costly repairs and the probability of default-triggering events, such as the loss of income."

Manheim determined BHPH dealers typically retail out about 60 to 80 percent of the vehicles they repossess. The remainders are in such poor condition that these units, along with any vehicles taken in trade as a customer convenience, are usually disposed of in salvage auctions.

Meanwhile, Manheim stressed that as more potential buyers developed credit issues in the tough economy, dealer-provided financing is now even more of a necessity.

Webb pointed out that this year more subprime shoppers were able to obtain loans from financial institutions.

For well-run BHPH operations, Webb also noted defaults declined slightly during the last 12 months due to better collection efforts, a tighter screening of potential buyers, a higher credit quality of customers in 2010 and the modestly improving labor market.

No matter the underwriting or collection strategy, Webb maintained that it's the units BHPH dealers have in inventory that separate a successful store from one that struggles.

"BHPH dealers focus on affordability and mechanical soundness when selecting vehicles," Webb emphasized. "Mechanical breakdowns typically require BHPH dealers to assist their customers by absorbing all or some of the cost of repair."

Floor-Plan Access Improves for Financially Sound Dealers

In another segment of Manheim's report, Webb discussed the landscape of dealer floor planning.

Manheim pointed out access to floor-plan lines was a major problem for many independent dealers after regional banks withdrew en masse from the business in 2008 and 2009.

"The combination of bank failures and the recognition that lax lending policies contributed to past losses remains an impediment to obtaining floor-plan lines without personal guarantees," Webb explained.

Manheim conceded many used-vehicle dealers didn't survive the recession.

"And, though at a slower pace, that weeding out process continues," Webb interjected.

"This has been especially true for dealers who lost their floor-plan lines and now have to depend on their own capital to fund inventory," he continued.

"With used-vehicle prices at an all-time high, a fixed borrowing capacity means fewer units in stock," Webb went on to say.

The report stressed that independent dealers who made it through the recession and demonstrated operational and financial discipline have been able to rely on floor-plan financing from Manheim Automotive Financial Services (MAFS) and other lenders that "understand, and work exclusively with, dealers."

"These lenders have proven to be a reliable source of funds to dealers, even as others come and go," Webb asserted.

In the first half of 2011, MAFS said that it boosted receivables outstanding by offering new lines or expanding lines to more than 1,500 dealers. Nearly two-thirds of that number represented new customers for MAFS.

The average MAFS floor-plan line in the first half of 2011 was about $200,000, up more than 10 percent from pre-recession levels.

Since 2009, MAFS posted quarter-to-quarter increases in every important metric, including the number of borrowers, the size of average lines, units financed and total receivables.

Auto Asset-Backed Securitization Market Continues to Grow

In analysis about another financial segment of the industry, Manheim maintained that total auto asset-backed securitization issuance remained healthy at more than $37 billion in the first half of 2011.

The report showed this volume occurred even though there was more deposit-based funding from bank lenders.

"The ability of auto lenders to quickly resume their ABS funding, after the total freeze-up in that market in the second half of 2008, is a reflection that historically, even during recessions, these instruments have performed well," Webb explained.

"Their superior performance is the result of overcollateralization, strict reserve requirements and a term structure that is consistent with the underlying collateral," he continued.

"In addition, the indirect lending model, in which the vast majority of these loans are originated, incorporates a strong professional and mutually beneficial relationship between the dealership F&I office and the underwriting lender," Webb went on to mention.

Although auto lenders were able to tap the ABS market as early as 2009 in order to stay in business, Manheim acknowledged the terms were often onerous. One example Manheim shared was requiring heavy levels of upfront credit enhancement.

"Today, lenders are able to secure funds at adjusted rates and spreads that are comparable with pre-recession levels," Webb concluded.