ATLANTA — Manheim economist Tom Webb described performances
for both subprime financing companies as well as buy-here, pay-here dealers
during the first half of this year in upbeat terms this week.

And Webb believes the prospects for turning metal to buyers
with soft credit histories are positive well into 2014 and possibly beyond.

"The subprime market performed very well in the first half
of 2013," Webb said. "The strong performance of BHPH dealers has attracted
competition to the market, among both other used vehicle dealers as well as
from established lenders that until recently had avoided this higher risk
category.

"Our outlook for this industry segment is positive for the
next 12 to 24 months," he continued.

Especially to populate inventory at BHPH stores, Webb
mentioned that wholesale demand for lower-priced vehicles is continuing to heat
up in the auction lanes. He explained that demand is being fueled in part by
increased employment as more people are earning the income necessary for a
vehicle purchase.

"Dealers are creating additional demand by offering more
flexible financing to consumers at the low end of the market due to enhanced credit
availability from lenders," Webb said.

Finance companies also are stretching terms on units with
actual cash value at higher levels. During his quarterly conference call on
Monday, Webb reiterated data from Experian that showed 48.7 percent of all
used-vehicle retail contracts written during the first quarter had terms at 60
months or longer.

"Even being in the industry every day and talking to
dealers, the number just sort of surprises me," Webb said.

"The lenders will tell you that this is not a cause for
concern because it doesn't increase the frequency of losses," he continued. "But
it certainly will increase the severity of losses for all of those repos when
they occur."

When asked, Webb explained possibilities for strong
wholesale prices being a catalyst for finance companies extending terms longer.
The June Manheim Used Vehicle Value Index ticked up to 119.7, but came in 3
percent lower year-over-year. However, the latest reading was higher than every
month since September 2010.

"Right now with used-vehicle prices high, when there is a
repo the recovery rate is good. The severity of loss is small. That makes
lenders feel good, which makes them ease up their credit even more," Webb said.

"As they ease up the credit, that helps used-vehicle values
because the vehicles that are bought at auction are going to be subsequently
retailed with credit attached," he continued. "The dealers are buying at
auction based on the assumption that there's good retail credit available. It
sort of becomes a self-reinforcing cycle. But eventually the cycle turns and it
inverses direction where you start to see some significant severity of loss on
those repos, which makes lenders tighten and makes severity of loss on repos
get even worse."

Webb wrapped up his recent discussion about vehicle
financing with a cautious assessment.

"I would not be an alarmist about it, but some people are
concerned about the fact that we're now giving a longer-term loan with lower
down payments to people with lower FICOs. That's certainly not the recipe for
success. Some people call it a bubble. I don't believe so. But I think it's
quite safe to say that there is a bubble forming," Webb said.

"Judging from our history in the retail markets, we go
through cycles, and we certainly will go through another cycle," he continued. "But
I think this current cycle — and it's a very positive cycle in terms of the
used-vehicle market — is the availability of retail financing has a longer
option of playing out further, at least another 12 months and probably longer
than that before we see some restrictions."

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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